FCA and PRA shelve new rules on diversity and inclusion, with update on non-financial misconduct expected this June

Diversity and inclusion

As we wrote about here, the FCA and the PRA consulted in parallel on proposed rules and expectations aimed at improving diversity and inclusion in regulated firms. We were expecting an update on next steps in Q2 this year. On 12 March 2025 both regulators wrote to the Treasury Committee in similar terms. While acknowledging that an appropriate focus on D&I in the culture of regulated firms can deliver improved internal governance, decision-making and risk management, they have decided not to issue new rules on D&I for the time being.

They give these reasons for deciding not to publish new rules on diversity and inclusion:

• There is an active legislative agenda in this area including gender action plans and in respect of bringing in disability and ethnicity pay gap reporting
• The consultation responders wanted the PRA to align their regulatory approach with related government initiatives to avoid duplication and unnecessary costs
• There is a growing emphasis on reducing regulatory burdens on firms, and adding new requirements in this area could be seen as in tension with that approach

The latter point has been played out in the UK press with suggestions that the FCA's approach has been anti-growth and at odds with the Government's stated aim to grow the economy. This also comes at a time when many US headquartered firms are considering the impact of US executive orders on their group wide diversity initiatives and taking steps to row back from some of them. The FCA and PRA's decision not to move forward with new D&I rules for now may make it easier for UK branches of US headquartered firms to align with the approach taken by their US parent or (depending on your perspective) harder for UK branches that wish to maintain their commitment to D&I to distance themselves from the approach of their US parent.

Update on approach to non-financial misconduct

The FCA have stated in their update that while work to tackle non-financial misconduct "continues to be prioritised", the FCA want their approach to be proportionate and aligned with planned legislation. The FCA do not specify what legislation they are referring to, but we presume this is the Employment Rights Bill, which – among other things – includes proposals to strengthen employers' duty to prevent sexual harassment of their workers (from a duty to take reasonable steps, to a duty to take all reasonable steps), make express provision confirming that disclosure of a concern about sexual harassment amounts to a protected disclosure for the purposes of whistleblowing protection, and require employers to prevent harassment of their workers by third parties. They are therefore going to take "some further time to get this right". They say that they will set out next steps by the end of June this year. To read more about the proposals to date please see our client alert from October 2023 here: Non-financial misconduct – new proposed FCA and PRA guidance.

Transparency of enforcement investigations

In their update the FCA have announced that given the lack of consensus they will not be taking forward their proposal to shift from an exceptional circumstances test to a public interest test for announcing investigations into regulated firms. However, they will be proceeding with the following:

• Reactively confirming investigations already in the public domain
• Public notifications which focus on the potentially unlawful activities of unregulated firms and regulated firms operating outside the regulatory perimeter
• Publishing greater detail of issues under investigation on an anonymous basis 

They have committed to publishing their final policy by the end of June.

What does this mean for employers?

With employers facing considerable changes ahead when the Employment Rights Bill comes into force in the next couple of years regulated firms are likely to be breathing a sigh of relief that they don't also have to grapple with new D&I regulatory obligations for now. The PRA's letter states that they do not intend to return to the question until after the substantive implementation of any new legislation in this area. While gender equality action plans are included in the Employment Rights Bill so may come into force in late 2026, the Equality (Race and Disability) Bill, which is the Bill that contains the provisions on disability and ethnicity pay gap reporting, is yet to be published. It therefore seems unlikely that the FCA and PRA will revisit this issue during the current Parliament.

Firms will need to wait until June this year to discover what the final rules on transparency of enforcement investigations will state, and for an update on the next steps the FCA will be taking to tackle non-financial misconduct. The FCA note that tackling non-financial misconduct "can help to improve outcomes for markets and consumers and reduce harm", but we will have to wait to see how they will approach this with respect to the conduct of employees.

The FCA's announcement can be found here, and the PRA's letter can be read here.