UK: Diversity and inclusion in the financial sector – driving change

In the next step in its drive to boost diversity and inclusion (D&I) in regulated firms, the Financial Conduct Authority (FCApublished Consultation Paper 23/20 at the end of September setting out its proposals on new regulatory framework in respect of D&I in the financial sector (FCA CP). At the same time, the Prudential Regulation Authority (PRApublished its own proposals (PRA CP18/23) for PRA-regulated firms (together, the Consultations).

The FCA and PRA are making these proposals on the basis that greater diversity and more inclusion can improve outcomes for consumers and markets, support prudent decision-making and lead to better risk management by reducing groupthink. Reducing groupthink is relevant to overall governance and leadership, but the FCA also link this to individual product design and the focus on consumer outcomes and higher standards under the Consumer Duty.

The Consultations build on feedback received on the discussion paper (DP) jointly published by the FCA, PRA and the Bank of England  in July 2021 (see our blog post here on the policy options that were considered). The regulators billed the responses received to the DP as largely positive, with most respondents endorsing regulatory action in this area. The Consultations also cover the regulators’ positions on non-financial misconduct (NFM) which, while providing a degree of clarity, do not fully resolve uncertainty in this difficult area. Whilst in some cases, there is an obvious answer, there are likely to be plenty of others where firms need to make fine judgement calls.

The Consultations are open for response until 18 December 2023, and the regulators propose to bring the final rules into force 12 months from publication of the subsequent policy statement(s), which are on the agenda for 2024.

D&I strategies and reporting

The FCA’s proposed requirements are set out in a new Chapter 29 in the Senior Manager Arrangement, Systems and Controls Sourcebook (SYSC 29). The proposals apply (on a solo entity basis) to firms which are not limited scope Senior Manager and Certification Regime (SMCR) firms as follows:

  • SYSC 29 will apply to firms with Part 4A permission which are at or above the ‘diversity and inclusion employee number’ (a new defined term in the FCA Handbook) of 251 or more employees (for the purposes of SYSC 29, the definition of ‘employee’ excludes individuals who do not predominantly carry out activities from an establishment in the UK)
  • SYSC 29 will also apply to dual-regulated firms (regardless of the number of employees) which are subject to either the Capital Requirements Regulation (CRR) sector or the Solvency II sector of the PRA Rulebook; and
  • notwithstanding the ‘diversity and inclusion employee number’ threshold, firms would be required to provide to the FCA the average number of employees by completing Part 1 of the new D&I report in the FCA’s RegData system.

For overseas firms, the requirements apply in relation to activities carried on from an establishment in the UK.

SYSC 29 will require larger firms to:

  • set out a D&I strategy which is ‘easily accessible and free to obtain’ and includes clear objectives and an action plan; firms’ management bodies will be responsible for overseeing their strategies (SYSC 29.2);
  • set targets to address under-representation in relation to each of the management body, senior leadership, and whole employee body and disclose the rationale for its targets; firms’ management bodies will again be responsible for overseeing their targets (SYSC 29.3)
  • report to the FCA their D&I data – a new template form is included alongside the FCA CP (SYSC 29.4);
  • make mandatory D&I data disclosures to be published in a manner that is ‘easily accessible and free to obtain’ and highlight significant changes to previous disclosures (SYSC 29.5); and
  • consider D&I as a non-financial risk and ensure that relevant functions, such as internal audit and control functions, treat it accordingly (SYSC 29.6).

The PRA’s proposals apply to PRA-authorised banks and insurance firms, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings (which are UK-headquartered financial holding companies and mixed financial holding companies). As with the FCA’s approach, the regulatory reporting and disclosure requirements apply only to firms subject to the CRR sector or Solvency II sector of the PRA Rulebook. The requirements then largely mirror those which the FCA is setting out, although the PRA proposes that D&I be allocated to the relevant senior manager functions, with this reflected in statements of responsibility and in accountability measures.

SYSC 29 and the proposed requirements on larger firms, particularly in respect of the collection, reporting and disclosure of data, are significant. Larger firms will be required to collect, report and disclose certain data about: age; sex or gender; disability or long-term health condition; ethnicity; religion; and sexual orientation. They may also on a voluntary basis report and disclose data on gender identity, socio-economic background, parental and/or carer responsibilities (and the FCA notes that it may consider moving to mandatory reporting on these characteristics at a later date).

In addition, there are disclosures and reporting requirements on culture and inclusion wherein the FCA specifies the questions to be asked of employees (see SYSC 29.5.19R). These are:

  • I feel safe to speak up if I observe inappropriate behaviour or misconduct;
  • I feel safe to express disagreement with, or challenge, the dominant opinion or decision without fear of negative consequences;
  • I feel as though my contributions are valued and meaningfully considered;
  • I have been subject to treatment (for example, actions or remarks) that has made me feel insulted or badly treated because of my personal characteristics;
  • I feel safe to admit an honest mistake; and
  • My manager cultivates an inclusive environment at work.

This data is to be disclosed and reported on an annual basis, with an explanation of the reasons for any gaps and how they will be closed.

The proposals in respect of reporting and disclosure of D&I will not be surprising to firms. The FCA has made clear that it wants to mainstream D&I into all of its regulatory processes, and in order to achieve this, the regulators need to build up a clear and consistent understanding of the current position across regulated firms. However, the amount of data proposed to be reported and disclosed is likely to represent a considerable administrative task for many firms. Some of the categories of data referred to may not be currently collected or monitored by certain firms and it is likely that the implementation of the necessary processes will require significant upfront investment from firms.

It is fair to comment that in addition to the administrative exercise, the reporting proposals will require a significant internal communication exercise which reassures employees/potential employees (and any representative organisations, including unions) about the collection and processing of sensitive personal data. Employees/potential employees are, of course, under no obligation to provide all the information which the FCA is asking firms to collect.

Firms should note that the rules will require the aggregation of some data where there is risk of the disclosure of information about an individual (because there are few individuals represented in the data set concerned, e.g. senior leadership or members of the management body).

As in other cost versus benefit analyses, the FCA appears to have under-estimated the likely costs for firms in meeting this proposed obligation. Notwithstanding this, given the emphasis placed on reporting and disclosure in the FCA CP, these proposals are likely here to stay, and firms should analyse their policies and processes now against the proposals and feedback to the regulators any specific challenges foreseen at this stage.

Measures not being adopted (for now…)

For those who have been following the journey of D&I within the financial services sector closely, the proposals that have been taken forward in the Consultations might seem less ambitious than anticipated. The FCA has repeatedly noted that the rate of meaningful change within firms has been too slow, and that faster and more measurable progress in D&I is needed. With that in mind, it is interesting that the FCA is not taking forward a number of policy options that were discussed as part of the DP, in particular, those falling within a category of measures seeking to address the ‘tone from the top’. Further detail on the policy options originally considered can be found in our blog post here, but in summary, the proposals that the FCA has benched for now include:

  • proposals on individual accountability, Senior Manager Function (SMF) approval, board recruitment, succession planning and talent pipelines;
  • mandatory D&I training – although firms continue to be required to provide suitable training as required in the FCA Code of Conduct Sourcebook (COCON 2.3);
  • additional rules and guidance on integrating D&I into firms’ products and services; and
  • linking remuneration to non-financial metrics such as D&I as a way of driving accountability and incentivising progress.

As addressed in more detail in our earlier blog, the DP considered whether, where the regulators have concerns that a proposed appointment would worsen or not address risks arising from a lack of diversity and groupthink, this could provide grounds for withholding SMF approval. However, this proposal apparently received a significantly negative response, with concerns being raised over the potential for tokenism and ‘positive discrimination’. Feedback to the DP also made the point that current levels of underrepresentation at senior levels could make it difficult to find suitably qualified and experienced candidates from diverse backgrounds, and many respondents have been clear that the final decision over appointments should remain with the firms themselves. In light of the strength of the feedback received, and in particular, the emphasis on this final point, that firms need to retain responsibility for the final decision on their SMF appointments, we are hopeful that the regulators have accepted that this is not a viable policy option.

However, none of the above should be taken to indicate a change of direction generally. The regulators have made clear that some proposals, for example, the amendments to the remuneration rules, may be introduced at a later date. The tone from the top remains a key focus for the FCA, not least because most respondents to the DP apparently agreed that it was essential in tackling D&I related issues.

Non-Financial Misconduct

The FCA is planning to embed NFM in its Handbook as follows:

  • The Code of Conduct (COCON): The scope of COCON is to be expanded to make clear that it covers ‘serious instances of bullying, harassment and similar behaviour towards fellow employees…’. Additional guidance explains the types of behaviour which the FCA expects will indicate a breach of COCON, and what conduct is not in scope because it relates to an employee’s personal or private life.
  • Fit and Proper Test for Employees and Senior Personnel (FIT): The FCA explains that bullying and similar misconduct within the workplace is relevant to assessing fitness and propriety, and that similarly serious behaviour in a person’s private or personal life is also relevant. The regulator gives examples of NFM, such as sexual or racially motivated offences. The FCA also clarifies that conduct that could damage public confidence is likely to mean that the person is not fit and proper.
  • Threshold Conditions (COND): The guidance on the suitability threshold condition contained will be extended to include, for example, offences relating to a person or group’s demographic characteristics (e.g. sexual or racially motivated offences) and tribunal or court findings that the firm, or someone connected with the firm, has engaged in discriminatory practices.

A detailed definition of NFM is proposed to be incorporated into COCON, with the current drafting referring to conduct in relation to an individual (B) either employed by or providing services to or performing an activity for an in-scope firm that:

a) has the purpose or effect of (i) violating B’s dignity; or (ii) creating an intimidating, hostile, degrading, humiliating or offensive environment for B; (b) is offensive, intimidating or violent to B; (c) is unreasonable and oppressive to B; or humiliates, degrades or injures B.

NFM: Any more clarity?

Financial services firms have been looking to the regulators for clarity in respect of NFM for some time now. The cases which have gone through Enforcement have involved criminal convictions in relation to behaviour which is, by any standard, unacceptable. However, this did not provide assistance in the vast majority of practical examples of behaviour that firms will be faced with when making conduct assessments.

In that context, the clarifications and guidance which are proposed to be added to the FCA Handbook to make clear that serious instances of bullying and harassment are within scope of the conduct rules are to be welcomed, even if this clarification is overdue. They come a full year after the SRA, for example, published its equivalent (and more detailed) guidance in relation to sexual misconduct in the legal profession.

However, given the high profile publicly stated view that ‘non-financial misconduct is misconduct, plain and simple’, it is interesting that it is subject to a threshold of being ‘serious’ in the conduct rules, which does not apply to other types of misconduct.

Further, the ‘simplicity’ of the assessment is complicated by the fact COCON explicitly does not cover matters which arise in a person’s private or personal life whereas the assessment of fitness and propriety will need to take private matters into account. So, for example, misconduct by an individual towards a colleague at a social event which has been organised privately will be excluded from COCON. However, if the social event is organised by the firm with clients present, then it will be within COCON. But in either scenario, misconduct may still be relevant to a fitness and propriety assessment.

A question on many people’s minds will be whether the NFM guidance proposed for FIT sufficiently mitigates the issues in the FCA’s case highlighted by the Upper Tribunal in Frensham v The Financial Conduct Authority [2021] UKUT 0222 (TCC). While the Upper Tribunal upheld the FCA’s prohibition in that case, the Upper Tribunal was clear that the FCA had failed to sufficiently link Frensham’s conviction for a non-financial offence in 2016 to the consumer protection and integrity objectives.

The proposed amendments to FIT seek to bridge the gaps identified in Frensham. They make clear that a fitness and propriety assessment may consider misconduct that takes place outside of work, and list the reasons that misconduct outside of the regulatory system may be potentially relevant. However, one could question whether the approach to the issue of linking NFM to the FCA’s objectives goes much further than just asserting that the link exists, which was the approach criticised by the Upper Tribunal in Frensham. If anything, the FCA doubles down on this, with the inclusion of the provision in guidance that conduct which is inconsistent with the FCA’s statutory objectives is likely to show that the person concerned is not fit and proper, even if that misconduct does not have such great effects that it measurably prejudices the FCA’s statutory objectives by itself. It also states that misconduct in a person’s private or personal life may be relevant to their fitness or propriety, even in circumstances where there is little or no risk of misconduct being repeated in work, with the justification that behaviour which is disgraceful or morally reprehensible or otherwise sufficiently serious may damage public confidence in the financial system and financial services industry in the UK.

There are still only a limited number of examples given of the specific types of misconduct that may mean a person is not fit and proper, i.e. fraud and violence or sexual misconduct in certain circumstances.

While the amendments go some way to providing clarification and guidance, they will not answer every question. Any consideration of NFM by a firm is going to require a large degree of interpretation and judgement – including as to whether misconduct is sufficiently serious for the conduct rules to apply. It will inevitably remain heavily dependent on the facts of the case in question and the evidence available. This is a burden which will fall on firms. Notwithstanding the FCA’s reference to the fact that certain matters may be better investigated by other authorities – for example, the Police – there is no such carve out for firms in assessing behaviour against the conduct rules and fitness and propriety standards. Like the reporting and disclosure proposals, the FCA’s view as to the likely costs for firms here seems likely to be a gross under-estimate.

In conclusion

Achieving a more diverse and inclusive financial services industry is an important part of the ESG priority the FCA has set out in its Business Plan for 2022 to 2025. The Consultations only reiterate the strength of the regulators’ view that greater diversity and inclusion can improve outcomes for consumers and markets by reducing groupthink, supporting healthy work cultures, unlocking diverse talent, and improving understanding of and the provision for diverse consumer needs.

In some ways, the proposals are unsurprising: the FCA has repeatedly made clear that it wants to amalgamate D&I with its business-as-usual regulatory processes, which is exactly what the proposals seek to do. For the time being, the measures are not as wide-ranging as we might have expected following on from the DP. However, it is likely that this is just one step in the journey for both the industry and the regulators themselves.

As firms commence reporting to the regulator and making disclosures on their progress in advancing D&I, D&I will remain front of mind both for the regulators and their overseers in government and the Treasury Select Committee.

Firms will similarly need to show that D&I is a priority and continue to grapple with the difficult judgements that arise in practice in this area.

Hywel Jenkins
Hywel Jenkins
Partner, London
+44 20 7466 2510
Tim Leaver
Tim Leaver
Partner, London
+44 20 7466 2305
Cat Dankos
Cat Dankos
Regulatory Consultant, London
+44 20 7466 7494
Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819
Phoebe Fox
Phoebe Fox
Associate, London
+44 20 7466 2805

UK: Government to review SMCR rules as part of Edinburgh Reforms

Our Financial Services Regulatory team have prepared a series of webcasts examining the sweeping reforms to the UK financial services sector recently announced by the Chancellor of the Exchequer, Jeremy Hunt – known as “the Edinburgh Reforms.”

The webcasts explain:

• what the key proposals are;

• who they might impact;

• next steps and timing;

• and the potential significance and impact.

The reforms include the Government’s plans to review the Senior Managers & Certification Regime (SMCR) in the first quarter of 2023 and partner Clive Cunningham discusses these changes. The Government Call for Evidence will look at the legislative framework of the regime and determine the consensus on the regime’s effectiveness, scope and proportionality.

The Regulators’ review will involve the FCA and PRA review of the regulatory framework taking into account the Government Call for Evidence. This review is potentially significant for all firms and individuals subject to the SMCR. Given the implementation of the SMCR was costly and burdensome for many firms, this is an important development for those in the financial services sector to watch and be aware of.

The webcasts can be viewed here.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278

Hong Kong: Authorised institutions to implement the new Mandatory Reference Checking Scheme by May 2023

On 5 May 2022, the Hong Kong Monetary Authority (HKMA) announced its endorsement of the Guidelines on the Mandatory Reference Checking Scheme (respectively, Guidelines and MRC Scheme) issued by the Hong Kong Association of Banks and the DTC Association – just one year after issuing the Consultation Conclusions Paper (covered in our previous bulletin).

The MRC Scheme has been launched as an effort to curb the “rolling bad apples” phenomenon in the banking sector in Hong Kong, by enhancing the disclosure of the employment history of prospective employees taking up regulated roles among authorised institutions (AIs). The MRC Scheme will be launched in two phases, and AIs are given 12 months (ie. up to 2 May 2023) to put in place the necessary internal controls, policies and procedures, for the implementation of Phase 1 of the MRC Scheme (Phase 1).

Scope of Phase 1

Phase 1 covers the following senior management positions within AIs in Hong Kong:

  • directors, chief executives and alternate chief executives approved under section 71 of the Banking Ordinance (BO);
  • managers notified to the HKMA under section 72B of the BO;
  • executive officers approved under section 71C of the BO; and
  • responsible officers approved under the Mandatory Provident Fund Schemes Ordinance and the Insurance Ordinance.

Summary of the MRC Scheme

An AI recruiting a job candidate within the scope of the MRC Scheme (Recruiting AI) should first obtain written consent (in the form of the template annexed to the Guidelines) from the job candidate for the employment reference checking. It should then request the former and current employers of the candidate (limited to AIs only) for employment references covering the past seven years. In turn, an AI that receives the employment reference request (Reference Providing AI) should make the required disclosures within one month of receiving the request from the Recruiting AI.

The Recruiting AI can request further information within 15 working days of the receipt of the employment reference, which should be given by the Reference Providing AI within another 15 working days.

A job candidate should generally be given the opportunity to be heard by the Recruiting AI, especially if the employment reference contains negative information. The Recruiting AI should then take into account all information received to make the employment decision.

Employment information to be disclosed in the reference

A Reference Providing AI should provide information on the relevant job candidate’s previous employment records over the past seven years, including:

  • the candidate’s full name and date of birth;
  • whether the candidate’s employment had been or would have been terminated due to a misconduct matter (ie. a breach of legal or regulatory requirements, an incident which cast serious doubts on the candidate’s honesty and integrity, a misconduct report filed with the HKMA, or internal or external disciplinary actions arising from conduct matters);
  • whether the candidate is the subject of an ongoing internal investigation in relation to a misconduct matter (subject to considerations such as secrecy, privilege, commercial impact, etc.)1; and
  • other information, including any other misconduct matters or ongoing investigations which are deemed serious or material in nature but did not result in (or would not have resulted in) the termination of the candidate’s employment (also subject to similar considerations above).

The information provided by the Reference Providing AI should be true, fair, complete and capable of substantiation (although the supporting documents are not required to be provided to the Recruiting AI), and should follow the form of the MRC Information Template annexed to the Guidelines.

Where are difficulties likely to arise for AIs?

For Recruiting AIs, there are likely to be two key challenges:

  • firstly, deciding whether to onboard a candidate pending (and conditional upon) the results of the employment reference, or to hold off on onboarding until the results are received. If the candidate is onboarded and the employment reference is not satisfactory, the Recruiting AI may then need to terminate his/her employment. However, if the onboarding is delayed until a satisfactory employment reference is received, that could mean a delay of one to two months in onboarding, and potentially the loss of the candidate to another role in the meantime; and
  • secondly, how to assess any unsatisfactory information in the employment reference. The Guidelines make clear that this is a matter of discretion for the Recruiting AI. However, if the Recruiting AI decides to proceed with the employment and the candidate engages in further misconduct, the decision to employ the candidate may be considered by a regulator in assessing the Recruiting AI’s approach to recruitment. As explained in the Guidelines, Recruiting AIs should document the reasons for hiring a candidate about whom negative or inconclusive information is received.

For Reference Providing AIs, several challenges will also arise:

  • the Guidelines have left room for interpretation on the level of detail that should be disclosed in the employment reference and the degree of reasonable assessment that should be made by Reference Providing AIs. The Reference Providing AI will need to determine how much information to provide, knowing that any negative information could lead to the candidate not being able to take up new employment; and
  • bearing in mind that the reference period is seven years, Reference Providing AIs will need to think about whether they have sufficient information to respond to requests that go back several years, and in particular in circumstances where an employee may have left employment as part of a mutually agreed separation or by resignation to avoid being terminated. This is an important consideration because Question 8 of the MRC Information Template requires the Reference Providing AI to confirm whether the candidate’s employment would likely have been terminated if they had not resigned or left employment before termination was possible.

Next steps

While most AIs will already have in place internal controls and procedures on employment references, internal investigation, document retention and data protection and confidentiality, AIs should gain a thorough understanding of the Guidelines, with a view to identifying any gaps within their existing systems and making any changes needed to implement Phase 1 in May 2023, in line with the requirements of the Guidelines. In particular, AIs will need to ensure that they have appropriate systems in place for responding to reference requests that they receive.

Phase 1 will be reviewed after two years (i.e. in around mid-2025), and the approach and arrangements for Phase 2 of the MRC Scheme – which has a much broader coverage than Phase 1 – may be refined before its launch.

___________

1 If the Reference Providing AI opts not to disclose any ongoing internal investigation in the employment reference, it will be under an obligation to provide an update to the Requesting AI (provided that the candidate remains employed by the Requesting AI at the time) if:

the investigation completes within 12 months from the request for the employment reference; and
the investigation concludes that the candidate’s employment with the Reference Providing AI would have been terminated.
If the Reference Providing AI discloses any ongoing internal investigation in the employment, the Requesting AI may request for an update on a quarterly basis for up to 12 months following the employment reference request.

Ben Harris
Ben Harris
Executive Counsel, Sydney
+61 29322 4929
Ellie Cheung
Ellie Cheung
Associate, Hong Kong
+852 2101 4179

Global Bank Review 2022: Banking on People

A sign of the times or just business as usual?

Surveying the current landscape of the financial sector in late 2022, it is hard to avoid the sense of an industry once again facing a severe squeeze. One thing is certain: global finance is currently facing mounting pressure to invest long-term for a low-carbon, high-tech world in the decades to come, while bracing itself for intense economic headwinds and volatility on the immediate horizon.

Those conflicting pressures can be seen in almost all aspects of the industry, but perhaps none more so than in the life blood of finance: its people. Against this backdrop, ‘Banking on People’ delves deeper into the people-centric strategic issues banks are grappling with, including the industry’s ability to attract and retain talent; the risks and reward of AI-assisted banking; the rise of activism; and the increased regulatory scrutiny on culture and conduct, as well as featuring insights from bank GCs on the evolving role of in-house legal teams.

You’ll find all of these challenges and more explored in this edition of the Global Bank Review, our sixth annual review drawing on a wealth of sector experience from across our network. Getting through the squeeze will require insight, judgement, and a keen grip on a changing risk environment. We hope this edition helps you navigate the journey.

Read our report here.

The report covers:

  • All change – The evolving role of banks’ in-house legal teams. Read more.
  • #CustomerIsKing – Banks strive to stay relevant and satisfy regulators in the social media age. Read more.
  • What lies beneath – Cyber threats and manager liability. Read more.
  • Power plays – Have social shifts upended the old-age bargain banks make with staff? Read more.
  • Ghosts in the machine – the rewards and risks of AI-assisted banking. Read more. 
  • Calm under pressure – The chair’s strategic role as activists target AGMs. Read more. 
  • Unchartered territories – A time for brave leadership. Read more. 
  • Non-financial misconduct – Where to draw the blurry line? Read more. 

 

Global Bank Sector Chairs

Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Simon Clarke
Simon Clarke
Partner, London
+44 20 7466 2508
Tony Damian
Tony Damian
Partner, Sydney
+61 2 9225 5784

 

AI fairness in UK financial services

With the ongoing development and growing application of artificial intelligence, analytics and automation there is increasing public and regulatory interest in ensuring that any potential risks stemming from these technologies are mitigated. A key area of concern is around ‘bias’ and AI fairness. This whitepaper – prepared in collaboration with UK Finance  – explores ideas of AI fairness and what these mean for financial services firms, with a focus on the key overlapping regulatory considerations.

We see today growing scrutiny of the use of artificial intelligence (“AI”) and algorithms, and a greater awareness of the potential for these technologies to exacerbate some consumer risks.

Questions touching on AI ethics and fairness are becoming more mainstream. In recent years we have seen greater public consciousness of what was once a relatively obscure academic issue. This includes the close attention paid to the use of an algorithm to determine 2020 A-levels by the Office of Qualifications and Examinations Regulation (or “Ofqual”).

There is no doubt that law makers and regulators around the world are taking note and working to update their own approaches. In the UK, policy makers at the Office for AI are working on an AI policy whitepaper, while the Department for Digital, Culture, Media and Sport has consulted on changes to data protection law to account for AI challenges. On the regulatory front, the Digital Regulatory Cooperation Forum is considering the approach of UK regulators to algorithm-related issues and the Equality and Human Rights Commission has included AI guidance in its strategic plan for 2022-25. And in financial services specifically, the AI Public Private Forum has produced its long-awaited report, with a discussion document from the Bank of England and FCA signposted as a next step.

This is all taking place within the wider context of a greater public awareness of social justice issues. These can be complex at times, with an interaction between current practices and the legacy of historical injustices, which can still be felt today.

Nonetheless, AI holds the promise to enable a leap forward in the provisions of financial services, not only in efficiency improvements for firms but also in real benefits for customers. The roll out of AI into more financial sector applications has the potential to bring more personalisation of products and services for consumers, to enable greater financial inclusion and to permit more effective protection against fraud and other economic crime.

It is therefore no surprise that questions of AI fairness and bias are front of mind. It will take time for UK Plc to work through all of the complexities so that consumers and society can enjoy the benefits of AI technology, with confidence that it is being used fairly and ethically. We hope that this whitepaper will be a helpful contribution to the debate.

Download your copy here.

You can also access our webinar on this topic here.

Recommended Reading

Key Contacts

If you would like to discuss any of the developments highlighted above may affect your scheme or organisation speak to your usual HSF adviser or contact one of our specialists.

Karen Anderson
Karen Anderson
Partner, London
+44 20 7466 2404

Jon Ford
Jon Ford
Senior Associate, London
+44 20 7466 2539

Miriam Everett
Miriam Everett
Partner, London
+44 20 7466 2378

Sian McKinley
Sian McKinley
Senior Associate (Employed Barrister)
+44 20 7466 2996

UK: FCA publishes final rules on diversity-related disclosures by listed companies

The Financial Conduct Authority (FCA) has published a policy statement (PS22/3) setting out rule changes that will require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level for financial years starting on or after 1 April 2022.

Under the new Listing Rule requirements, premium and standard listed companies will have to include in their annual report a statement confirming whether they have met specified board diversity targets as at a reference date, chosen by the company, in the financial year. The targets are that:

  • the board comprises at least 40% women;
  • at least one of the Chair, CEO, CFO or Senior Independent Director is a woman; and
  • at least one member of the board is from a minority ethnic background (that is one of the ethnic background categories recommended by the UK Office for National Statistics, other than a white ethnic group).

Companies not meeting these targets will be required to explain why they have not done so.

In addition, premium and standard listed companies will be required to include tabulated data in their annual report on the gender identity or sex (at the company’s choice), and the ethnic diversity, of members of their board and executive management. Companies are also required to explain their approach to collecting the data and apply it consistently.  In changes from the FCA’s original proposals:

  • the Listing Rules will allow companies some flexibility in how they collect and report on this data, reflecting potential privacy concerns raised during the consultation process; and
  • there is a specific exemption from reporting where board members or management are situated overseas and local laws in that jurisdiction prevent collection or publication of such data.

The rules note that companies may also choose to include a brief summary of key policies, procedures and processes and any wider context that they consider contribute to improving board or executive management diversity, any mitigating factors, any foreseen risks in relation to meeting the targets and any plans to improve board diversity.

The final rules also expand the disclosures required in the corporate governance statement in relation to a company’s diversity policy under DTR 7.2.8AR (see our corporate update 2016/23). The description should cover any aspects of the policy concerning ethnicity, sexual orientation, disability and socio-economic background (in addition to age, gender and educational and professional background, mentioned previously). Companies will also need to disclose how their diversity policy is applied to their key board committees.

Whilst the new disclosure requirements apply for financial years starting on or after 1 April 2022, the FCA is encouraging companies to include these disclosures in their annual report on a voluntary basis ahead of this date. The FCA is of the view that, since companies can choose their own reference date against which to make these disclosures, companies could put in place the necessary processes to collect and report on this data sooner, for example for financial years starting on or after 1 January 2022.

The rules will be reviewed in three years’ time, at which point the FCA will consider whether to revise the nature or level of the targets and whether to consider targets on other aspects of diversity.

The policy statement also notes that the FCA is currently considering the responses to its discussion paper on ‘Diversity and inclusion in the financial sector’ together with the responses to its recent diversity and inclusion pilot data survey and cost benefit analysis survey. The FCA expect to publish a consultation paper in 2022.

A Spotlight on D&I in the Financial Services Sector

In the second of our Diversity and Inclusion Podcast Series, Christine Young, Hywel Jenkins and David Palmer discuss the key points for regulated firms in light of the regulators’ increasing focus on diversity and inclusion.

Key Contacts

If you would like to discuss any of the topics covered in this podcast speak with your usual HSF adviser or contact one of our specialists.

Christine Young
Christine Young
Partner, Employment, London
+44 20 7466 2845
Hywel Jenkins
Hywel Jenkins
Partner, Disputes, London
+44 20 7466 2510
David Palmer
David Palmer
Senior Associate, Employment, London
+44 20 7466 3846

UK: tribunal orders re-engagement overseas of unfairly dismissed trader in light of negative regulatory reference

The recent tribunal ruling in Jones v JP Morgan Securities plc illustrates how a financial services employer’s position on providing a regulatory reference could influence the likelihood and nature of a tribunal order to re-engage an employee who has been unfairly dismissed.  It is also flags the possibility of an order being made to procure re-engagement at an associated employer overseas.

The tribunal held that the claimant had been unfairly dismissed for alleged gross misconduct: it found that the employer did not have a genuine belief in misconduct having occurred and that the procedure adopted was also unfair.  This finding did not change the employer’s position that it would provide a regulatory reference stating that it did not consider the claimant to be a fit and proper person.  The claimant sought a reinstatement or re-engagement order (see box below).

Reinstatement was found to be impracticable as the relevant team had reduced in size and there was no longer a role available.  The claimant therefore sought re-engagement in an available comparable role at an associated employer in Hong Kong, arguing that he was unable to get a regulated financial services job elsewhere in the UK because of the employer’s negative regulatory reference.

In deciding whether to make such an order a tribunal must consider the wishes of the claimant, whether it is reasonably practicable for the employer to comply with the order, and whether the claimant contributed to the dismissal. In this case the tribunal rejected the employer’s contention that the claimant did not actually want to be re-engaged and was seeking it only as a tactic to circumvent the compensatory caps.  Its conclusion that the claimant’s request was genuine was supported by findings that his entire career had been structured around working for the employer’s group, that he bore the employer no ill-will, and that his stop-gap work had been chosen to enable him to leave on short notice.  The tribunal found that the employer could easily procure the Hong Kong role in the associated company and had not presented any evidence that certification requirements would be a problem there. It concluded that, if re-engagement was not awarded, the claimant would never work in a regulated role in the financial services sector again and therefore the order sought was the only way that the unfair dismissal could be “made right”.  An order was made requiring re-engagement within 3 months and a day, by 10 March 2022, along with payment of £1.5 million in compensation for lost earnings.

Together with Fotheringhame v Barclays Services Ltd in 2019 covered in our blog post here, this case highlights the risk for financial services employers of claimants obtaining reinstatement or re-engagement orders and/or substantial levels of compensation for unfair dismissal, notwithstanding – or because of – regulatory concerns.  It may be appropriate for an employer to consider carefully whether facts established at a tribunal hearing could and should justify revisiting their assessment of the individual.

The facts also flag the need for an individual to be able to appeal a firm’s determination that the individual lacks fitness and propriety, a mechanism that is not currently available from regulators, given the impact that reference will have on their future career prospects.

Reinstatement / re-engagement orders

Orders for reinstatement or re-engagement after an unfair dismissal finding are very rare, not least as claimants rarely wish to return to their former employer in these circumstances.  Claimants are more likely to seek such an order where they face significant difficulty finding other employment, or where the individual is a high earner whose unfair dismissal compensation would be reduced by the statutory limits – both of which may be more common in the financial services sector.

Where a reinstatement or re-engagement order is made, a tribunal will also require payment of the original remuneration package from dismissal until the date of ordered reinstatement or re-engagement.

An employer cannot be forced to comply with a reinstatement or re-engagement order but, if they refuse, the tribunal will substitute a basic and compensatory award and will also make an additional award of between 26 and 52 weeks’ pay (unless compliance with the order would have been impracticable).  Although these awards will be subject to the statutory caps (on weekly pay and compensatory award), the caps are lifted to the extent necessary to ensure that the amount of the compensatory award plus additional award are at least as much as the lost remuneration that would have been payable had the reinstatement/re-engagement order been complied with. Where there has been a considerable delay between dismissal of a high earner and the tribunal hearing and consequent date reinstatement/re-engagement is ordered, the financial compensation could greatly exceed the usual cap on unfair dismissal compensation.

 

Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819
Christine Young
Christine Young
Partner, London
+44 20 7466 2845
Nick Wright
Nick Wright
Senior Associate, London
+44 20 7466 7524

UK: tribunal orders bank to carry out and publish equal pay audit within 6 months, notwithstanding existing equal pay review process

The employment tribunal in Macken v BNP Paribas has recently given its remedy judgment in relation to successful claims of sex discrimination and equal pay brought by a female banker, following a two year covid-related delay to the remedy hearing.  A substantial compensation award was made, including aggravated damages in part due to the lack of genuine apology, and the tribunal also ordered an equal pay audit to be carried out (and published).  Notably, this was notwithstanding measures the employer had already taken to review pay as part of a remediation programme established in consultation with the FCA.

Compensation

The award of over £2 million compensation included significant amounts for past and future losses of earnings (on the assumption that M would remain employed and receive PHI payments until age 65), loss of congenial employment, personal injury and injured feelings.  £15,000 was also awarded for aggravated damages, on the basis that some of the managers’ discriminatory conduct was “spiteful and vindictive”, that they had not apologised for their discriminatory behaviour and had not been disciplined in any way.  A 20% uplift of over £300,000 was also applied for failure to deal with grievances in accordance with the Acas Code of Practice on Disciplinary and Grievance Procedures, in the form of a failure to carry out the necessary investigations to establish the facts and to approach the grievance impartially.  However, the tribunal did not accept the claimant’s contention that the employer’s without prejudice offer prior to hearing the appeal against the grievance was also inappropriate.

Recommendations

M asked the tribunal to make recommendations that the employer put in place training and changes to various processes.  The tribunal concluded that it did not have power to make these recommendations as they would not have the required impact of obviating or reducing the adverse effect on M herself (given she would be remaining off work on PHI).  It rejected the contention that improvements to policies affecting colleagues at work would alleviate M’s anxiety or depression.  In any event the recommendations had already been put in place by the employer.

The suggested recommendation for an apology was also rejected, the tribunal agreeing that this was owed from a moral perspective but noting that, for an apology to be effective, it needs to be “genuine and heartfelt” rather than ordered.  The failure to apologise was instead taken into account in the award for aggravated damages.

Equal pay audit

Where there has been an equal pay breach, the tribunal is obliged to make an order for an equal pay audit unless one of the exceptions applies, namely that:

  • a compliant audit has already been done in the last 3 years,
  • it is clear, without an audit, if action is required to avoid further breaches,
  • there is no reason to think there may be other breaches,
  • the disadvantages of an audit would outweigh its benefits, or
  • the small or new employer exemption applies.

Following the liability decision in 2019, the employer had established a remediation programme in consultation with the FCA, including the preparation and annual review of job descriptions to sit within a new hierarchy of job levels, an annual equal pay review of fixed remuneration between those with similar roles in the same business line, a review of recruitment, performance review and assessment processes, and additional discrimination training for managers.  The employer did not intend to adopt pay transparency but would ensure employees had transparency of their own job level and the levels of colleagues they worked with.

The employer therefore sought to argue that it clearly understands what action is needed to prevent equal pay breaches without an audit, pointing to its voluntary annual equal pay reviews and remediation programme and claiming that historical anomalies had already been corrected.  It further argued that there was no reason for thinking there might be other breaches.  The tribunal rejected these arguments, noting that the employer’s pay practice fell significantly short of the recommendations in the EHRC statutory code of practice, in particular because “it chose to have an opaque pay system in common with other financial sector organisations” and therefore there were likely to be others in the same position as M.  The remediation programme was clearly moving in the right direction, but the tribunal felt it had to recognise that “significant cultural shifts take many years” and it was notable that the employer had chosen to retain an opaque pay system, albeit with the introduction of increased transparency around its job hierarchies.  The tribunal considered that it had not been given sufficient information about the methodology of the employer’s equal pay review, nor about how the employer would ensure that discrimination was avoided in relation to bonuses (which were not included in the review), to justify not requiring an audit.  It also rejected the employer’s argument that the disadvantage of an audit, of duplicating the work already being done in the review process, outweighed the benefit, given that the employer could decide to do just the audit and not its voluntary review.

The employer was therefore ordered to produce an equal pay audit, suitably anonymised, for the calendar year 2021 by 30 June 2022.  This is to cover base pay, pension contributions, discretionary bonuses and any other allowances (but not benefits in kind) for everyone employed for any part of 2021 (pro-rated for those only present for part of the year or working part-time).  The report will need to include the reasons for any identified difference in pay and for any potential equal pay breach identified, as well as a plan to avoid equal pay breaches occurring or continuing.  Once the tribunal is satisfied with the audit (and the tribunal can order £5,000 for each occasion of failure to comply with its orders), the audit has to be published on the employer’s website for at least 3 years and the employer must inform all current and former employees covered by the audit where to obtain a copy.

The potential for reputational damage and triggering of further equal pay claims as a result of publication of an audit is clear;  the ability of competitors to see pay information will also be concerning.  The case is a stark reminder that the risks of opaque pay systems will not necessarily be obviated by voluntarily putting in place an equal pay review process.

Anna Henderson
Anna Henderson
Professional Support Consultant, London
+44 20 7466 2819
Christine Young
Christine Young
Partner, London
+44 20 7466 2845

 

UK: regulators propose new diversity and inclusion requirements for financial services

The FCA, PRA and Bank of England (the regulators) have published a discussion paper (DP21/2) which aims to kick-start discussion on how the financial services sector, with the help of the regulators, can “accelerate the pace of meaningful change” in improving diversity and inclusion (D&I) within financial services firms.

The policy options being considered in DP21/2 include:

  • regular reporting of diversity data to the regulators;
  • the use of targets for representation;
  • measures to make senior leaders directly accountable for D&I in their firms;
  • linking remuneration to D&I metrics;
  • having a D&I policy, training on D&I and undertaking a diversity audit; and
  • the regulators’ approach to non-financial misconduct, and considering D&I in Senior Managers approvals and assessment of threshold conditions.

The discussion paper also focuses on the importance of data and disclosure in order to enable firms, regulators and other stakeholders to monitor progress.

DP21/2 is relevant to all regulated firms, including payment services and e-money firms, credit rating agencies and financial market infrastructure firms (FMIs). The regulators recognise that D&I will look different for different firms and will not apply a one size fits all approach to D&I.

The proposals in the discussion paper are potentially far-ranging, addressing people-related policies and practices, governance arrangements, accountability, remuneration arrangements, approach to customers and disclosure. Given the importance of the issues raised, the potential for significant change and the level of regulatory scrutiny being proposed, firms should actively engage in this discussion, which is open for response until 30 September 2021.

For more a detailed overview of the policy options proposed in DP21/2, please see our Financial Services team’s briefing here.

Update: February 2022

In February 2022 the Financial Services Culture Board (FSCB) and the Financial Services Skills Commission (FSSC) published a report setting out the findings of their survey of employees at 13 member firms in 2021, to help financial services firms measure perceptions of inclusion in their organisations. This recommended four actions firms can take to help improve inclusion:

  • measure inclusion as well as diversity ensuring different views can be gathered and assessed
  • develop and demonstrate a culture of listening to employee feedback and listening to and valuing feedback
  • maintain and demonstrate fair and transparent processes and systems
  • demonstrate strong leadership on inclusion.

Following the discussion paper outlined above, the PRA and the FCA have stated they intend to consult on more detailed proposals and publish a policy statement in 2022.