UK Regulators Scraps Mandatory DEI Rules Amid Pushback

UK financial regulators have resolved to drop their draft compulsory rules to promote greater diversity and inclusion (D&I) in the financial services industry, after vigorous opposition from the industry. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) took this decision after sounding out the industry in 2023. Together, the regulators announced that they would not be pursuing any new rules at the moment, instead waiting for possible new laws to come before taking the matter up again.

The action represents a change in the UK regulatory approach to D&I, as the PRA and FCA had originally considered bringing in rules forcing financial institutions to report on their diversity and inclusion strategy. Yet following receipt of significant input from industry participants, both regulators recognised concerns expressed regarding the added burden that regulations could place on financial institutions. To these they responded with the decision to hold back from further regulatory intervention, instead actively backing voluntary industry initiatives that advance diversity and inclusion without the need for reporting requirements.

Both the PRA and FCA reiterated that D&I efforts are a crucial part of enhanced governance, risk management, and competitiveness in the financial services industry. But they also recognized that adding new requirements could create more regulatory burdens for companies and possibly counteract wider efforts to cut back on regulatory burdens. Sam Woods, chief executive of the PRA, said that although diversity and inclusion are central priorities, adding more requirements could prove to be counterproductive when there is a desire to cut the regulatory burden for financial firms. The FCA seconded this view, doubling down on the UK's overall move toward more streamlined regulation within the financial space.

This choice to move away from requiring D&I regulations also reflects a wider political and industry movement. Within the United States, for example, there has been increasing resistance to diversity, equity, and inclusion (DEI) initiatives, particularly in the wake of President Donald Trump's re-election to office. A number of executive orders throughout his presidency unwound protections for minority groups, disability rights, and low-income programs, prompting major Wall Street firms to reassess their own DEI commitments. This political change has created concerns about rising workplace inequality and bias.

Legal analysts are of the view that such international trends, coupled with a fierce industry pushback, might have prompted the PRA and FCA to drop their proposed regulations. Osborne Clarke LLP partner Noline Matemera added that the holdup in implementing the rules had been reflective of the wider pushback against D&I regulations, and that this change could be indicative of a diminished emphasis on diversity and inclusion in UK financial services going forward.

Apart from the D&I decision, the regulators also upheld a postponement of a review of scrapping the bankers' bonus cap, which had been flagged up in the embattled "Sexism and the City" report. The review, which was initially anticipated earlier, will now be pushed back to the 2026/27 financial year to provide firms with sufficient time to prepare their remuneration policies in the wake of the cap being lifted. This lag highlights the regulatory emphasis on providing companies with extra time to adapt their practices to shifting regulatory requirements.

The UK's response to D&I regulation differs from other nations, where tougher steps have been taken to enhance corporate responsibility for issues related to diversity. This difference has triggered arguments regarding the role of regulation in driving corporate culture and the need to promote inclusive places. Although the PRA and FCA decision marks a move towards industry self-action, it has questions as to whether or not these voluntary initiatives will prove sufficient to encourage proper change within the industry.

In addition, the FCA also dropped another plan to include a "public interest" test on revealing investigations of regulated companies. The proposal has been greeted by lawmakers with derision, citing fears that it would result in public "naming and shaming" of companies under scrutiny. Therefore, the FCA has concluded that it will retain its existing system of making cases public only on exceptional occasions. But the FCA has said it will continue to look at other means of enhancing transparency, including increasing disclosures on unregulated firms that are active in the financial markets and releasing more information on anonymous cases.

In short, the UK's senior financial regulators have opted not to go ahead with mandatory diversity and inclusion reporting requirements, acting on industry fears of further regulatory burdens. This ruling is part of a wider movement towards simplifying regulation while still encouraging voluntary attempts to enhance diversity in the industry. While regulators recognize the significance of D&I, they have chosen not to enforce new regulations but to concentrate on initiatives driven by industry. The action also tracks with international trends, such as political pushback against DEI initiatives in the US, and suggests that the future of diversity initiatives in the financial sector is uncertain.