UK finance sector flags data concerns over FCA’s mandatory DE&I disclosures proposal

Industry agrees FCA should condense the number of DE&I characteristics proposed, but is at odds on which firms should be in scope for reporting.

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The UK finance sector has highlighted data security and usage concerns in responses to the Financial Conduct Authority’s (FCA) proposal to amend DE&I disclosure rules.

In December, the financial watchdog concluded a consultation on more comprehensive mandatory DE&I reporting requirements for large UK firms.

The existing rules, which came into force in April 2022, require listed companies to report on a comply-or-explain basis against targets on female and ethnic minority representation on boards and executive management as part of their financial reporting.

Under the proposed new rules, firms with more than 250 people would have to disclose on age, disability, ethnicity, religion, sex and sexual orientation across their entire workforce.

Additionally, companies would be encouraged to report on voluntary demographic characteristics including gender identity, parental and/or carer responsibilities, and socioeconomic background.

Data concerns

The Diversity Project – which counts 110 members with more than £13.3 trillion ($16.8tn, €15.4tn) assets under management – said the FCA should be clear on how it will store and review the data collected, as well as explaining how it will be considered from a supervisory perspective.

The NGO added that the regulator should prioritise mandatory reporting on gender, ethnicity and socio-economic background if it wants to condense the number of categories.

The Association for Financial Markets in Europe (AFME) also flagged data issues on behalf of its members. While acknowledging that data can be a good tool to support DE&I strategies, it said there was a “strong concern” that the proposals could lead to “overemphasis” on it.

AFME added that there were concerns over some of the individual demographic characteristics in relation to how they are defined, how they will be used, and identifiability risks in smaller firms where it may be more challenging to keep data anonymous.

The organisation said the limitations of data “must be acknowledged” and that a firm’s culture should be set within a broader context of “holistic DE&I strategies, cultural change and the global industry”.

It suggested that less frequent reporting – instead of the FCA’s proposed annual disclosures – may be “more appropriate” to avoid “unnecessary pressure on firms to evidence constant positive trends”.

UK Finance echoed this in its submission, which also supported a more comprehensive approach. It highlighted the potential for “unintended consequences” from a “quantitative, target-focused approach” to DE&I, noting that some members had questioned whether the FCA’s proposal is the best way to deliver progress on this.

The trade association also called on the FCA to be clear on how sensitive information will be protected in line with GDPR.

Scope and metrics

In relation to the scope of mandatory reporting, the Diversity Project argued that all firms, irrespective of size, should be expected to implement a DE&I strategy. Smaller firms should also be required to report on certain metrics in a phased approach, it said.

UK Finance disagreed, recommending that the threshold be increased to firms with more than 750 employees for data collection, disclosure, target-setting and DE&I strategies.

It also warned that the plan to make more DE&I characteristics mandatory to report on in the future is likely to cause survey fatigue and concerns around data security, which could lead to “low disclosure rates and risks to psychological safety”.

Both AFME and UK Finance have asked for religion to be removed as a mandatory characteristic for reporting, with AFME also arguing that disability should be a voluntary metric.

Separately, addressing criteria not covered in the FCA’s proposal, ShareAction said firms should be required to disclose their ethnicity pay gap.

Responding to the consultation on behalf of several UK pension funds – including Brunel Pension Partnership, Church of England Pensions Board, and Nest – the NGO argued that, to tackle the lack of representation of ethnic minorities across financial services, ethnicity pay gap reporting “should be a mandatory disclosure for larger employers for results to be seen universally”.

It noted that some investment firms, including State Street, M&G, Bridgewater, the Pension Protection Fund and PwC, are already producing ethnicity pay gap reports on a voluntary basis.