Clifford Chance

In March 2025, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) announced that they would not pursue their proposed rules on diversity and inclusion (D&I) in the financial services sector.

Originally introduced in September 2023, these proposals outlined new requirements for firms within their scope, including:

• the development of publicly available D&I strategies;
• the collection, reporting and disclosure of certain D&I data;
• setting targets to address under-representation; and
• conducting staff surveys on inclusion matters, such as whether employees feel safe to speak up and challenge dominant behaviours.

The regulators' rationale behind the reforms was to "improve outcomes for consumers and markets by reducing groupthink, supporting healthy work cultures, unlocking diverse talent, and understanding and providing for diverse consumer needs". For further details on the proposals, please see our previous briefing here.

These proposals were accompanied by other suggested changes to the FCA Handbook, designed to clarify expectations regarding non-financial misconduct and better integrate these considerations into fitness and propriety assessments, Conduct Rules, and the suitability criteria for firms operating in the financial sector (Threshold Conditions).

However, in a reversal of approach, on 11 March 2025, the FCA and PRA published letters (see the FCA letter and PRA letter) to the Treasury Select Committee stating that they do not currently plan to implement new D&I rules, although they continue to prioritise their work to tackle non-financial misconduct.

Context to the decision

The decision to halt the proposed D&I rules appears to have been influenced by several key factors.

Firstly, the regulators cite the "broad range of feedback received" from the consultation process. While the "vast majority" of respondents to the September 2023 consultation papers agreed that the regulators have a role to play in D&I issues, it was ultimately recommended not to proceed with the data collection proposals. The announcement follows the "Sexism in the City" report from the Treasury Select Committee published in March 2024, which raised concerns about the proposals, including the risk of a "tick box" compliance exercise and the cost burden on firms¹. The regulators seem to have taken into account the report's recommendation to "drop their plans for extensive data reporting and target setting".

Secondly, there has been a shift in the UK towards reducing regulation in favour of economic growth. On 14 November 2024, in a letter to the FCA, the Chancellor wrote: "Growth is the defining mission of this government and is the only route to improving the prosperity of our country and the living standards of working people". A recently released Treasury policy paper entitled "New approach to ensure regulators and regulation support growth" highlights business complaints about duplicative and complex regulation. The Chancellor has also urged watchdog leaders to "tear down regulatory barriers" hindering economic growth. Around the same time, the Business and Trade Secretary, and Minister for Women and Equalities, accused the FCA of "regulatory overreach" and urged a rethink of the D&I proposals, fearing that they would distract regulated firms from focusing on economic growth. Against this backdrop, the regulators' concerns to "avoid additional burdens on firms at this time" may form part of a broader effort to boost growth.

Thirdly, since the initial D&I proposals were published, a new UK Government took office in July 2024 with a fresh legislative agenda on D&I. This includes proposals to enhance gender pay gap reporting, with a requirement to put in place gender action plans, and the introduction of mandatory ethnicity and disability pay gap reporting. The FCA acknowledged in their letter: "We also recognise 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." A week after the regulators' announcement, the Government published its consultation on ethnicity and disability pay gap reporting, indicating that this should include not just pay but also workforce composition and action plans. This would have overlapped with the regulators' proposed rules. The proposed rules would also have covered mandatory reporting on age and sexual orientation (and voluntary reporting on gender identity, socioeconomic background, parental responsibilities and carer responsibilities), which are not addressed in the Government's proposals.

Despite the feedback, challenges and criticisms received, many had continued to believe that the regulators would persist in introducing new regulatory rules on D&I and would respond to the consultation with a final policy statement by the end of the year.

Implications for UK business

The regulators' decision may come as a surprising turn of events to firms, many of whom continue to retain inclusion as an important item on their agenda. However, as many firms maintain their own codes of conduct that cover their values related to these areas (breach of which may result in disciplinary action), in practice, the same standards may still be expected internally.

There is significant overlap between D&I issues and non-financial misconduct, which we understand the regulators remain committed to addressing. The non-financial misconduct proposals (now expected to be published in a policy statement by the end of June 2025) were initially published as part of the 2023 consultation process that had an overarching focus on D&I. We expect the regulators will continue to use existing (and forthcoming) provisions on non-financial misconduct to tackle behaviours that can be seen to undermine D&I, such as harassment, which ties in with recent legislative developments in this area.

UK businesses will continue to be subject to other regulation regarding D&I data and actions. Existing duties related to D&I under current law remain in place, and they are, or soon will be, subject to new and proposed laws in these areas (such as the Government's work on gender equality action plans, and on disability and ethnicity pay gap reporting, mentioned above). On 7 April 2025, the Government published a call for evidence on existing equality legislation and potential equality law reform, which will help shape the Equality (Race and Disability) Bill. The proposals range from increased pay transparency to further combating harassment. Since October 2024, there has been a duty to take reasonable steps to prevent sexual harassment in the workplace, which will be extended by the Employment Rights Bill to take all reasonable steps to prevent sexual harassment in the workplace. Firms may also be required to provide D&I data due to other sectoral or regional benchmarks, including the EU Pay Transparency Directive set for 2026 implementation: please see our earlier briefing here. Depending on their geographic focus, firms may also need to consider globally divergent approaches to D&I law and regulation, including the approach to targets at and below board level. For more information, please see our Board Diversity Tracker here.

Additionally, the FCA has indicated that it will continue to support voluntary industry initiatives on D&I. This may involve collaborative efforts with industry bodies and leveraging existing frameworks to encourage companies to voluntarily adopt D&I practices.

Looking ahead

The FCA has stated that it will outline its "next steps" on non-financial misconduct by the end of June 2025. The additional time is intended to ensure that their approach is both proportionate and aligned with planned legislation. In the meantime, the Employment Rights Bill will continue its passage through Parliament, the equality law reform call for evidence will close on 30 June 2025, and according to the FCA's April Regulatory Initiatives Grid, formal engagement is planned with firms following the Treasury's commitment to consult on reforming the certification regime by replacing it with something more proportionate (which may be relevant for non-financial misconduct proposals). Once the final proposal is announced, it will be clearer which of the planned legislation may have most impacted the approach.

Looking to the future, it is possible that the regulators may face pressure from NGOs and interest groups regarding their regulation of D&I issues, similar to campaigns in recent years advocating for stronger climate-related financial regulation. In a globally turbulent time where societal expectations and economic goals are rapidly evolving, we expect ongoing scrutiny as firms await the next announcement on non-financial misconduct and watch to see where the regulators will position themselves on D&I going forward.

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¹ The September 2023 consultation papers estimated the total costs of the proposals to be £561 million as a one-off for all firms, and £317 million in ongoing annual costs.