Enforcement transparency & DEI proposals shelved by UK financial services regulators

The FCA and PRA have announced that plans to impose stricter rules for diversity, equity and inclusion (DEI) across firms in the financial services sector are to be abandoned, whilst FCA proposals to increase transparency surrounding enforcement investigations within the sector will also be dropped.

Whilst regulators cited a multitude of reasons for decisions to axe the respective proposals, a key influence is the increased pressure on regulators by the UK government to relieve the regulatory burden on firms and streamline rules to boost economic growth and competitiveness. This article explores the decision by the financial regulators to scrap recent proposals.  

Enforcement Transparency Proposals

However, the FCA has announced that, due to the industry’s opposition to certain aspects of the proposals, it will not progress its proposal to shift from an exceptional circumstances test to a public interest test when determining whether to announce investigations into regulated firms.

The FCA will, however, proceed 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 (where doing so protects consumers or furthers the investigation)
• Publishing greater detail of issues under investigation on an anonymous basis (i.e. via a regular bulletin such as Enforcement Watch).

The final policy is set to be published by the end of June 2025.

Indeed, initial proposals were met with widespread and unprecedented criticism from across the sector and by MPs, with many concerned naming firms subject to investigation could cause undue and irreversible reputational damage and potentially market destabilisation.

However, the UK government’s call for regulators to reduce regulation, eliminate duplication, and unburden firms to boost the economy and competitiveness and align with their strategic agenda was also a likely factor in the decision to abandon proposals.

For instance, a recent report by the House of Lords Financial Services Regulation Committee, on the FCA’s consultation paper CP24/2 (Part 2), noted that:

“the proposals risk positioning the UK as an international outlier in a manner that appears misaligned with the FCA’s secondary competitiveness and growth objective.” Therefore, it is highly likely that the regulator has ditched the proposal to avoid the risk of reducing the UK’s attractiveness as a place to do business, and to align themselves with the Government’s agenda.

FCA and PRA DEI proposals

The FCA and PRA jointly consulted on proposals aimed at boosting diversity in financial services back in September 2023.

However, regulators have announced “in light of […] expected legislative development and to avoid additional burdens at this time, the FCA and PRA have no plans to take the work further”. In letters to Dame Meg Hillier, dated 11 March 2025, the FCA and PRA’s respective CEOs stated:

“there is a very active policy and legislative agenda, including on employment rights, gender action plans and disability and ethnicity pay gap reporting. Many of those who responded to our consultation wanted us to align our regulatory approach with such initiatives, to avoid duplication and unnecessary costs.”

Therefore, whilst acknowledging that a focus on DEI the culture of firms could strengthen internal governance, decision-making and risk management, regulators confirmed they “do not currently plan to publish new rules on diversity and inclusion.”

Currently firms with over 250 employees are required to publish annual statistics on their gender pay gap. Under proposed rules, they will also be required to publish statistics on ethnicity and diversity pay gaps, and to publish and implement action plans to address them. This is in addition to the existing duty upon employers to protect employers from discrimination and, since the implementation of the The Worker Protection (Amendment of Equality Act 2010) Act 2023 in October 2024, employers’ duty to take reasonable steps to prevent workplace sexual harassment.

Again, the regulator’s mention of reducing regulation and aligning its aims with existing legislative measures echoes the UK government’s call to streamline financial regulation and promote economic growth.

Non-financial misconduct approach 

Elsewhere, whilst the FCA stated it will “continue to prioritise [it’s] work to tackle non-financial misconduct” it has acknowledged the importance of ensuring its “approach is proportionate and aligned with planned legislation”.

The ‘planned legislation’ is likely a reference to the Employment Rights Bill. This bill includes proposals to strengthen employers' existing duty to prevent workplace sexual harassment under The Worker Protection Act 2023, by making express provision confirming that disclosure of a concern about sexual harassment amounts to a protected disclosure for the purposes of whistleblowing protection and requires employers to prevent harassment of their workers by third parties.

Considering the evolution of the legislative landscape since the initial consultation, the regulator stated it will take “some further time to get this right and will set out next steps by the end of June this year”.

The FCA’s decision to focus on ensuring its approach is aligns with existing regulation again meshes with the UK government’s demand that regulation is scaled back.

What does this mean?

Ultimately, firms are by no means ‘off the hook’- they will still be subject to new and proposed laws which will bring about considerable changes and an increased legislator burden, especially following the implementation of the Employment Rights Bill in the next couple of years.

However, many firms are likely to be relieved that this will be no new regulatory DEI obligations to meet, for now.

The PRA's letter, for instance, makes clear that they will not revisit the issue of DEI and related proposals until new implementation of legislation in this area. As the Equality (Race and Disability) Bill, which details provisions on disability and ethnicity pay gap reporting, has not yet been published, it’s unlikely the FCA and PRA will revisit the issue during the current Parliament.

Firms must also wait until June 2025 for the final rules on transparency of enforcement investigations to be revealed, and an update on the FCA’s next steps to tackle non-financial misconduct.

Although, many feel the decision by UK regulators to axe certain proposals is less an attempt to streamline to align with plans of the UK government, and more of a setback in terms of improving the culture of firms within the financial services, especially following the revelations of the Sexism in the City Inquiry, for instance.

Baroness Helena Morrissey, chair of the Diversity Project, for instance, criticised the decision by regulators to drop proposals around DEI and postpone their guidance to firms on non-financial misconduct:

“The arguments the regulators made in both the 2021 discussion paper and 2023 consultation paper around the linkage with good firm cultures remain just as strong today and, of course, in the meantime we heard strong evidence of pockets of poor culture and behaviours through the Treasury Committee’s Sexism in the City review.”

Reboot, an advocacy group supporting diversity in financial services, also criticised the FCA’s decision. Whilst it acknowledged increasing pressures faced by regulators from various industry stakeholders, the group stated that “this move marks a significant setback for progress at a time when DEI is needed more than ever.”

“Throughout 2024, we observed growing resistance to DEI initiatives, driven by geopolitical instability, rising populism and financial pressures fuelling ESG fatigue. The FCA’s decision risks reinforcing this trend, despite clear evidence that employees across the sector overwhelmingly support greater action.”

Reboot also cited its Race to Equality 2024 report, which found 84% of employees believed ethnicity pay gap reporting should be mandatory, and 87% said companies should be required to disclose their data alongside action plans.

As regulatory bodies withdraw from direct intervention and rely on existing regulatory and legislative measures to assuage the UK government’s growth agenda, it is unclear whether this will be sufficient to tackle very real issues within the sector, such as those revealed during the Sexism in the City inquiry, and prevailing instances of misconduct, both financial and non-financial.

How regulators will balance any future need for regulatory intervention, or adaptation in the regulatory approach to key issues, with the demands of external stakeholders such as the UK government, is yet to be seen- as is the effects the decision to scrap recent proposals will have upon firms and the sector as a whole.