Employers in the United Kingdom’s financial sector are facing several new potential regulatory changes that could shape workplaces for years to come. The latter half of 2023 saw the Financial Regulatory Authority (FCA) and the Prudential Regulatory Authority (PRA) launch consultations focused on addressing non-financial misconduct and strengthening diversity and inclusion (D&I) initiatives. The year also saw the FCA and PRA remove a nearly decade-old banker’s bonus cap originally introduced at an EU level and the UK Parliament finalize a law giving employers a new duty to prevent sexual harassment.
Taken together, financial services employers have much to prepare for in the coming months. Below is a rundown of the proposed and pending changes and implications for the UK’s financial sector employers.
The FCA and PRA proposals are a mark of the regulators’ increasing focus on fostering healthy workplace environments, promoting good conduct, and reducing the risks of groupthink within financial firms. They also reflect growing recognition that non-financial misconduct, such as harassment and bullying, can undermine a firm’s stability, decision-making processes, and reputation, and that building workplaces with a range of voices and perspectives can lead to a broader talent pool, and thus, better outcomes for markets and consumers alike.
At a high level, the core proposals unveiled by the regulators in September 2023 seek to (1) better integrate (expressly) non-financial misconduct within the Conduct Rules and fit and proper assessments; and (2) introduce (mainly for larger firms) requirements in relation to D&I strategies and D&I targets, and related data reporting and data disclosure. The consultations closed in December 2023, and the FCA and PRA are expected to issue a policy statement, containing final regulatory requirements, later in 2024. Expectations are that some form of the proposals will take effect in 2025.
Non-Financial Misconduct
By better integrating non-financial misconduct into relevant rules relating to conduct and fitness and propriety, the FCA is seeking to ensure that financial firms have the confidence to address and tackle bullying, harassment, and similarly serious behavior that poses a risk to healthy firm culture.
In relation to the Conduct Rules, the FCA proposes to “expand the scope of COCON to make clear that it covers serious instances of bullying, harassment, and similar behavior towards fellow employees and employees of group companies and contractors” (emphasis added). Relevant factors to reaching the threshold of seriousness include repetition of the behavior, the duration of the behavior, the impact to the victim, the seniority of the alleged perpetrator, and the difference in seniority between the victim and the alleged perpetrator. Other relevant factors include whether the behavior is related to a protected characteristic (such as sexual orientation, age, or religion), and whether the behavior would amount to a criminal offense or gross misconduct.
While the FCA proposes that behavior related to an individual’s personal life will remain outside the scope of the Conduct Rules, the regulator has reiterated that actions outside of work may still be relevant to an individual’s fitness and propriety since it may, among other things, indicate that the individual may not have the qualities and abilities needed for a role, or show a propensity for behavior that runs the risk of recurrence at work. The FCA is also of the view that someone who engages in behavior that damages public confidence in the UK financial system is likely not fit or proper for a role. The FCA proposes to explain “in more detail how non-financial misconduct forms part of the [f]it and [p]roper test” and (again) that bullying and similar misconduct is relevant to fitness and propriety.
D&I Strategies, Targets, and Reporting
On the subject of D&I, the regulators have proposed that dual-regulated CRR and Solvency II firms, and other large, regulated firms with more than 251 employees—excluding limited scope firms—(large firms), must develop an evidence-based D&I strategy. According to the proposals, that strategy must contain D&I objectives and goals, a plan for meeting those objectives and goals and measuring progress, a summary of arrangements to identify and manage any obstacles, and ways to ensure adequate knowledge of the strategy among staff.
A firm’s board would be responsible for the D&I strategy, meaning that they must understand and help drive it, and firms may need to publish the strategy on their website.
The regulators have also proposed that large firms be required to set D&I targets and report and disclose data related to D&I metrics to the regulators and the public at large. Under these proposals, firms would need to set D&I targets to address underrepresentation, with an expectation that there would be at least one target for each of the board, senior leadership, and the general employee population. They would also have to collect and report to the FCA and PRA annually certain employee demographic data that will help produce industry-wide analysis.
Certain demographic characteristics, such as age, sex or gender, disability or long-term health conditions, religion, and sexual orientation, would be subject to mandatory reporting. Reporting on characteristics like gender identity, socioeconomic background, parental responsibilities, and carer responsibilities would be voluntary.
To add to the above, the regulators have further proposed that large firms be required to disclose a version of its reported demographic data to the public “to increase transparency and scrutiny, as well as facilitate comparisons between firms on D&I performance”. However, the rules in the United States appear to be moving in the opposite direction, so multi-national employers will need to stay abreast of the competing requirements.
Banker’s Bonus Cap Removal
Effective October 31, 2023, the PRA and FCA removed the cap on bonuses that can be paid to material risk takers at banks, building societies, and PRA-designated investment firms. The move was met with mixed reaction, being welcomed by professionals in the banking industry (who believe it will allow the UK financial services industry to be more globally competitive) and criticized by trade unions and campaigners (who consider it inappropriate at a time when there is a cost-of-living crisis).
The change is facilitative rather than mandative, meaning that affected firms are not required to make any immediate changes to their pay practices. However, they will have the freedom to structure pay unhindered by the bonus cap.
However, while the bonus cap has been removed, firms will still be required to (1) set appropriate ratios between the fixed and variable components of total remuneration; (2) ensure that the fixed and variable components remain appropriately balanced; and (3) ensure that the level of the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components, including the possibility to pay no variable remuneration component.
Given concerns about the potential effect on the gender pay gap, absent the cap, the regulators have also said that they expect firms to take care to avoid adverse impacts on pay gaps when using this increased flexibility. Further, employees previously subject to the bonus cap will likely have contractual arrangements in place that are reflective of the cap and so firms would need to consider whether any contractual amendments are required, such as in relation to any role-based allowances.
Sexual Harassment Prevention
Beginning October 26, 2024, employers in the financial sector—like all UK employers—will have a new statutory duty to take “reasonable steps” to prevent sexual harassment of their employees. Employment tribunals will also now have the power to increase any compensation award by up to 25% if an employee makes a successful claim for sexual harassment and an employer is found to have breached the new duty.
Although there is not yet any available guidance on what might constitute “reasonable steps” to prevent sexual harassment, employers should take action now and may wish to take the following steps:
The new sexual harassment prevention duty, removal of the banker’s cap, and potential non-financial misconduct and D&I proposals will require careful consideration and adaptation by financial firms. However, with diligent preparation and close collaboration with trusted legal counsel, financial sector employers will be primed to navigate these changes effectively.