New diversity and inclusion rules will not be introduced into the UK’s financial sector by regulators, the Prudential Regulation Authority and the Financial Conduct Authority have stated.
The new DEI rules for financial firms would have imposed extra “regulatory burdens” and costs, said the two regulators. Campaigners in the sector have expressed disappointment at the decision.
Rather than lay down their own rules, the PRA and FCA said they would support voluntary industry initiatives to improve DEI in the City.
In a letter to Meg Hillier, the chair of parliament’s Treasury committee, PRA head Sam Woods, a deputy governor at the Bank of England wrote that the PRA would “remain alert to the risks of groupthink” within the existing supervisory framework instead of asking companies to report what measures they were taking to improve representation of women and minorities in their organisations.
Woods wrote: “We continue to think that an appropriate focus on diversity and inclusion in the culture of the firms we regulate can deliver improved internal governance, decision-making and risk management.” He added that such focus “can support both safety and soundness – through reduced risk of groupthink – and the competitiveness of UK financial services over the medium to long term”.
The FCA has also stated that plans to “name and shame” UK firms over non-financial misconduct announced in February 2024 are to be scrapped. Instead, it will retain its existing stricter “exceptional circumstances” test.
The plans had been strongly criticised within the City and by government officials who, over the past year, said the regulator’s proposals are driving business abroad at a time when the government is trying to boost growth.
Ministers have also pushed many of the country’s regulators to present more pro-growth proposals. On Tuesday, Sir Keir Starmer said he had decided to axe the Payment Systems Regulator by merging it with the FCA.
Nikhil Rathi, chief executive officer of the FCA, said: “Considerable concerns remain about our proposal to change the way we publicise investigations into regulated firms, so we will stick to publicising in exceptional circumstances as we do today.”
Woods said that the government’s new rules over sexual harassment and ethnic pay gap reporting meant it was unnecessary for the sector to have its own new regulations. He wrote: “Many of those who responded to our consultation wanted us to align our regulatory approach with related initiatives, to avoid duplication and unnecessary costs.”
The House of Commons Treasury committee has previously said “well-run firms” should already be collecting and reporting DEI data.
“We do not currently plan to publish new rules on diversity and inclusion, and do not intend to return to this question until after the substantive implementation of any new legislation in this area,” Woods wrote.
‘Not part of the Trump backlash’
Natasha Adom, partner at employment law specialist GQ Littler said the UK context made the regulators’ decision very different from U-turns in the US around DEI. She said: “Some may see this as a sign of Trump’s anti-DEI backlash hitting the UK public sector, but the reality is that the legal and political landscape is very different here in the UK than in the US.
She added: “The UK government recently proposed imposing new DEI measures on employers, like mandating ethnicity pay gap reporting on employers for the first time. Perhaps it is not surprising that the regulator has opted to pause this work to see how those proposed legislative changes pan out. So, putting Trump aside this is not an entirely unexpected announcement.”
However, the decision was “the first big example of the public sector rowing back from DEI,” said Adom.
Reboot, an advocacy group championing DEI in the financial services sector, said the PRA/FCA decision was disappointing.
It stated: “While we acknowledge the increasing pressures regulators face from various industry stakeholders, this move marks a significant setback for progress at a time when DEI is needed more than ever. Throughout 2024, we observed growing resistance to DEI initiatives, driven by geopolitical instability, rising populism, and financial pressures fuelling ESG fatigue. The FCA’s decision risks reinforcing this trend, despite clear evidence that employees across the sector overwhelmingly support greater action.
Reboot said it had written to the FCA urging it to maintain momentum on DEI, warning that a reversal of its consultation could undermine progress.
‘Diversity is not woke’
It said: “Diversity is not just a ‘woke’ issue–it is about better decision-making, stronger risk management, and fostering a financial sector that truly serves society. The FCA’s decision is a setback, but it must not become the defining moment for DEI in financial services.”
The Lloyd’s Market Association also expressed disappointment with the decision, stating that inclusion was crucial to the future success of the market.
At the FCA, Rathi said yesterday: “We continue to prioritise our work to tackle non-financial misconduct, which we believe can help to improve outcomes for markets and consumers and reduce harm. But it is important that our approach is proportionate and aligned with planned legislation, so we are taking some further time to get this right and will set out next steps by the end of June this year.”
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