Diversity & Inclusion: FCA findings on firms’ approaches to D&I

On 12 December 2022, the FCA published the findings from its qualitative research in respect of the diversity and inclusion (“D&I“) strategies and practices that regulated firms (“Firms“) currently have in place to improve D&I within their workforce (“FCA Review“).

Though the FCA Review does not amount to regulatory guidance on D&I, it does provide a clear picture of what the FCA’s expectations are when it comes to D&I; hence, the FCA encourages all regulated firms to consider the FCA Review when developing their own D&I strategies and practices.

In terms of background, it is worth noting that:

  • The FCA together with the PRA and the Bank of England (the “Regulators“) kick-started the discussion on improving D&I within financial services firms back in 2021 with the publication of a discussion paper (DP21/2). This discussion paper mapped out different policy options that the Regulators are considering to implement – though the future D&I rules and guidance will apply to all regulated firms, the discussion paper clarified that there will be no one size fits all approach to D&I (see our blog post here). The FCA has incorporated this approach to its FCA Review by selecting a diverse sample of Firms in its review;
  • The FCA is expected to publish its consultation paper on D&I in 2023. The FCA Review should be viewed as the last step before the publication of the relevant consultation paper, feeding into the relevant policy recommendations;
  • There is a separate FCA workstream on D&I that relates to rules applicable to premium and standard listed companies in respect to D&I on company boards and executive management (PS22/3; and see our blog post here).

Key takeaways from the FCA Review

Methodology: The FCA Review is based on two sets of data:

  • The FCA has collected data from a sample of 12 Firms – selection was based mainly on gender gap differences and the diverse nature of the Firm (e.g. banks, asset management companies, payment services providers, etc.). The FCA Review relies primarily on this sample.
  • In addition, following the publication of DP 21/2, the FCA undertook a voluntary survey of Firms to understand the type of D&I data that Firms were collecting. The relevant findings have been incorporated as an appendix to the FCA Review. Given its voluntary nature, the sample is self-selecting and hence any conclusions out of it are potentially less robust. However, the findings of this data analysis appear to broadly confirm the findings of the primary data analysis conducted by the FCA.

Key findings (weaknesses):

  • Gender representation has so far attracted most of the attention in D&I, whilst ethnicity started to pick up more recently;
  • There is a suggestion that a ‘compliance approach, rather than a genuine commitment to diversity and inclusion’ is driving some strategies – the FCA gave the example of firms which have focused almost exclusively on gender representation at senior levels because there are external targets and expectations for it;
  • Firms tend to address D&I concerns through lateral hirings at the senior management level, hence D&I at the junior and middle management level is lagging behind;
  • Firms do not have holistic D&I strategy and practices in place that include clear identification processes of the problem and challenges, as well as systematic monitoring procedures;
  • Data quality was correlated to D&I performance – Firms with better diversity data tended to have a better understanding of their position and were better placed to decide which actions to take;
  • Firms’ existing D&I practices show an overreliance on measures such as training, network groups and allyship. Other practices include: supporting career progression for staff returning to work; encouraging parental leave for both men and women; setting specific business area targets; extending the reach of entry level recruitment beyond elite universities; diverse shortlists; diverse interview panels; and anonymised CVs;
  • Firms’ senior managers were accountable for D&I through their pay and bonuses; however, it was unclear how these accountability structures work in practice;
  • Firms that are members of international groups are applying international group-wide D&I policies which, however, are not tailored to UK circumstances or characteristics.

Next steps: Firms that were part of this review received written feedback letters from the FCA. The FCA plans to follow up with these Firms through its usual supervisory activities to assess how they have considered the FCA’s feedback.

In conclusion

The FCA Review does not in itself amount to new regulatory guidance. However, it does provide more clarity as to what the FCA expects from regulated firms in terms of D&I practices; and all regulated firms should take into consideration these findings when drafting their own D&I policies and structuring their D&I framework. 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 FCA also clearly views D&I as an essential part of its overall focus on improving decision-making and culture within firms. Firms should pay heed to the steer from the FCA on how it expects firms to engage with the D&I agenda.

Please reach out to us if you wanted to discuss this topic. HSF can provide support with managing D&I risk and developing your D&I framework.

HSF Resources


Clive Cunningham
Clive Cunningham
+44 20 7466 2278
Marina Reason
Marina Reason
+44 20 7466 2288
Kelesi Blundell
Kelesi Blundell
+44 20 7466 7477
Patricia Horton
Patricia Horton
Professional Support Lawyer
+44 20 7466 2789
Ioannis Asimakopoulos
Ioannis Asimakopoulos
+44 20 7466 3510

FCA publishes consultation paper on sustainability disclosure requirements and investment labels

The FCA published today their long-awaited consultation paper on sustainability disclosure requirements and investment labels (the “Consultation“). This follows the discussion paper published in November 2021, which we summarised here.

The Consultation builds on the core elements of the regime outlined in the discussion paper: sustainable investment labels, consumer-facing disclosures, detailed product-level disclosures and entity-level disclosures. In addition, the Consultation also proposes naming and marketing rules with broader applicability, a general anti-greenwashing rule and other specific obligations on distributors.

In this post, we summarise our key takeaways from the Consultation, together with a high-level overview of the FCA’s proposals.

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2022 Global Bank Review – Banking on People

We are excited to announce the launch of the 2022 Global Bank Review: Banking on People.

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.

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ESG for financial institutions – Top five trends in UK and EU regulation for 2023

Band 1 Firm, Chambers Global ESG Rankings 2022
Herbert Smith Freehills are ahead of the game. They do not have any competition in this field.
They did an extraordinary job. A really knowledgeable team on ESG standards.


As financial institutions get to grips with the opportunities and challenges presented by the constantly evolving ESG landscape, we set out below the top five trends that we are seeing in this space. Firms should take note of these trends as they are likely to influence the ESG agenda into 2023 and beyond.

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China’s green finance – key recent developments

“Green finance” is quickly gaining momentum in China. The rise of green finance was at first driven by environmental goals when the concept of “ecological civilisation” was brought up, and more recently by China’s objectives to achieve the peak of carbon emissions by 2030 and carbon neutrality (or more precisely, net-zero of all six types of greenhouse gas emissions) by 2060, the so-called “Dual Carbon goals”.

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MiCA – EU legislators agree rules to tame crypto “Wild West”

The European Parliament and Council reached a preliminary political agreement on the Regulation on Markets in Crypto-assets (MiCA) on 6 June 2022. With:

  • political agreement having already been reached in other pieces of legislation in the digital space (including the Funds Transfer Regulation (FTR) on 29 June 2022, the Digital Operational Resilience Act (DORA) earlier in March and crypto-related amendments to the Markets in Financial Instruments Directive (MiFID) and other product legislation in May);
  • the planned expansion of scope of anti-money laundering (AML) requirements to align the Fifth Money Laundering Directive (MLD5) with MiCA and capture additional crypto-assets; and
  • with the DLT Pilot Regulation having already come into force in June;

the EU’s push for first mover advantage and becoming a “standard setter” for crypto regulation is coming together.

This note summarises our understanding of where MiCA has landed following political agreement. As the agreed text of MiCA is not yet publicly available, some of the detail of the agreement may not be reflected below.

“We are the first continent to have a crypto-asset regulation. In the Wild West of the crypto-world, MiCA will be a global standard setter.”
Stefan Berger MEP

When will MiCA apply?

Following political agreement on MiCA, the final text will now be worked on by technical experts before it is put before the European Parliament and Council for approval. MiCA will enter into force following approval and publication in the Official Journal, expected to be towards the end of 2022. The majority of provisions will become applicable 18 months later, in mid-2024, except for the requirements related to stablecoins (referred to in MiCA as “asset referenced tokens” (ARTs)) which are expected to apply within 12 months of MiCA entering into force, likely to be end 2023/early 2024. Technical standards and delegated acts specifying certain elements of MiCA will need to be adopted before MiCA becomes applicable.

Grandfathering and transitional arrangements will be available e.g. crypto-asset service providers (CASPs) providing services before MiCA becomes applicable should be able to continue to do so for a further 18 months after MiCA starts to apply (potentially end 2025/early 2026) or until they become authorised.

MiCA overview

By way of a quick recap, MiCA introduces a sweeping set of rules that will regulate issuers and intermediaries of certain crypto-assets.

Crypto-assets in scope

The assets in scope are:

  • Tokens which are not stablecoins or e-money – this will capture utility tokens, crypto-currency, exchange tokens etc. Importantly this also now captures certain types of non-fungible tokens (NFTs) (see below)
  • Stablecoins – referred to in MiCA as ARTs. These are effectively crypto-assets whose value is pegged to one or more fiat currency or other value/rights. This includes algorithmic stablecoins that aim to maintain a stable value in relation to an official currency of a country or to one or several assets, via protocols, that provide for the increase or decrease of the supply of such crypto-assets in response to changes in demand
  • E-money tokens – crypto-assets that purport to maintain a stable value by referencing to the value of one official currency

MiCA excludes any crypto-assets which look like more traditional financial products and are caught by other regimes such as MiFID, the Second Electronic Money Directive, Capital Requirements Directive (deposits), securitisation regulation, Pan-European Personal Pension Product (PEPP) Regulation, etc.

Digital assets that cannot be transferred to other holders (e.g. those only accepted by the issuer or the offeror and are technically impossible therefore to transfer to other holders – e.g. loyalty schemes) and crypto-asset services provided in a fully decentralised manner without any intermediary, are not caught. Other exemptions apply to tokens which are not stablecoins or e-money. Conversely, more onerous obligations apply to stablecoins or e-money tokens which are deemed “significant” by the EBA.

Issuers and CASPs

MiCA applies to crypto-asset issuers and intermediaries, referred to in MiCA as crypto-asset service providers (CASPs). CASPs provide to third parties, on a professional basis, services in relation to crypto-assets (such as custody and administration (crypto wallet providers), operating crypto-asset trading platforms, exchange of crypto-assets for fiat currency, execution of orders, reception and transmission of orders, providing advice on crypto-assets, etc).

The requirements in MiCA apply in a tiered fashion to issuers and CASPs depending on the product (e.g. as noted above, significant ARTs and e-money tokens are subject to more onerous requirements; in addition there is also a concept of significant CASP) and the activity. Broadly:

  • Authorisation: Issuers of ARTs must have a registered office in the EU and will require authorisation under MiCA. CASPs are required to be authorised under MiCA unless they are already authorised under existing financial services legislation (e.g. banks, investment firms and payment institutions). Crypto-asset services can only be provided in the EU by an authorised CASP that has its registered office in the EU. Similar to MiFID, a CASP authorised in one EU member state may operate across the EU under a passport.
  • Other requirements: These include requirements relating to transparency and disclosure for the issuance and admission to trading of crypto-assets (for example, issuers will be required to publish an information document known as a “white paper”), organisational, conduct and prudential rules for CASPs and certain issuers, change in control and supervision arrangements. MiCA also establishes a market abuse regime for crypto-assets that are admitted to trading on a trading platform for crypto-assets, introducing requirements prohibiting certain behaviours that are likely to undermine users’ confidence in crypto-asset markets and the integrity of crypto-asset markets, including insider dealing, unlawful disclosure of inside information and market manipulation related to crypto-assets.

Areas of controversy

There were a number of points discussed during trialogues which were politically charged and caused much debate in the industry and the legislators including:

  • NFTs – This was a hotly debated topic with the co-legislators taking different stances on whether or not to include NFTs within the scope of MiCA. The latest position appears to be that NFTs which are non-fungible and unique will be excluded from the scope of MiCA. If they are fungible in any way or are not fully unique, they will be captured by MICA or other applicable product regime (depending on the nature of the token). The definition of NFTs will be clarified in the finalised text. Within 18 months, the European Commission will assess the position and, if necessary, publish a legislative proposal to create a separate regime for NFTs. In the meantime, individual member states would be free to regulate them at a national level.
  • ESG – How the high carbon footprint of crypto-currencies should be reduced proved to be contentious amongst the EU co-legislators. Following a call for a ban earlier this year on proof-of-work crypto mining (which would have effectively meant a ban on crypto-currencies such as Bitcoin which rely on proof-of-work consensus mechanism), this ultimately did not receive sufficient support in the co-legislators. A framework compromise has been agreed but the precise details remain to be confirmed. It is likely that the white paper will be required to include: (i) an independent assessment of the likely energy consumption of the crypto-asset where the proof-of-work model is used; and (ii) information on sustainability indicators including in accordance with the EU Sustainable Finance Taxonomy. CASPs are likely to have to publish this information on their website for every crypto-asset in relation to which they provide services. The European Securities and Markets Authority (ESMA) has been tasked with developing draft technical standards on the content, methodology and presentation of information related to principal adverse environmental and climate-related impact. The European Commission will, within two years, report on the environmental impact of crypto-assets and consider the introduction of mandatory minimum sustainability standards for consensus mechanisms, including the proof-of-work. The EU Sustainable Finance Taxonomy will likely be changed in due course (by Jan 2025) to include crypto-asset mining in the economic activities that contribute substantially to climate change mitigation.
  • Supervision of significant CASPs and stablecoins – there has been some debate between the co-legislators as to the supervision of significant CASPs (the threshold for a CASP to be significant has now been set at 15 million users) and in particular whether that would be by national competent authorities (NCAs) in the relevant Member State or if it would be by ESMA. Supervision is set to remain with NCAs although ESMA will have powers to intervene in order to prohibit or restrict the provision of crypto-asset services by CASPs if there are threats to market integrity, investor protection or financial stability. Stablecoins will be supervised by the European Banking Authority (EBA) and stablecoin issuers must be located in the EU.

What MiCA means for firms now

Once the final text becomes available, crypto-asset issuers and CASPs should waste no time in assessing what MiCA will mean for their businesses. At a high-level:

  • Existing financial institutions will be permitted to provide crypto-asset services without authorisation as CASPs if they notify NCAs before providing those services for the first time. These firms will need to understand the perimeter of MiCA and the MiCA obligations they will be subject to, and adapt their existing systems and processes accordingly.
  • The impact on businesses which are not currently authorised will be significant, although the onerousness of the obligations under MiCA will depend on the types of crypto-asset being issued and activities being carried on.  These businesses will need to consider whether their existing activities fall within the scope of MiCA and, if necessary, seek authorisation as a CASP or an issuer of ARTs. Grandfathering arrangements should apply. A simplified authorisation process may apply to crypto businesses which are already authorised under national law to provide crypto-asset services. These firms must not underestimate the time it will take to apply MiCA to their businesses, from assessing the extent to which MiCA applies to them, to applying for authorisation and implementing MiCA requirements into their systems and processes, from scratch.
  • Non-EU businesses should consider how the territorial scope of MiCA will impact on its current and future business models. Will they be able to continue operating without being based in the EU e.g. rely on reverse solicitation?



Marina Reason
Marina Reason
+44 20 7466 2288
Patricia Horton
Patricia Horton
Professional Support Lawyer
+44 20 7466 2789

Sustainability changes to MiFID – Practical implications for firms

There are now less than 2 months to go before the sustainability changes to EU MiFID apply. These will have far reaching consequences for distribution chains and suitability assessments, not just for EU firms but also (indirectly) for non-EU (including UK) firms. There will also be a number of challenges that firms will need to address as part of their implementation projects, not least the lack of suitable data to underpin compliance and limited product ranges that can be offered to clients with sustainability preferences. Continue reading