On 14 May 2024, the government and financial services regulators published their responses to the recommendations made by the Sexism in the City inquiry. Those hoping that the inquiry would quickly lead to solid commitments for reform to tackle sexism in financial services may be somewhat disappointed. While the inquiry certainly created momentum around the discussion, the current government does not intend to push forward legislative changes, and the two regulators (the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)) are still deep in review of their policy direction, although they have set some expectations about their priorities.

In this blog, we look at the background to the Sexism in the City inquiry, the current status in respect of the inquiry’s recommendations, and where this leaves financial services organisations.

What is the Sexism in the City inquiry?

Launched in July 2023, the House of Commons Treasury Committee’s inquiry was intended as a follow up to the Women in Finance inquiry from 2017. The 2023 inquiry set out to explore progress on issues affecting women in financial services, including the removal of barriers to entry and progression to successful careers, representation at board level, pay gaps, and misogyny and harassment. 

After months of reviewing written evidence, hearing oral evidence and holding focus groups, the Committee published its report on Sexism in the City on 5 March 2024. While the report noted some improvement for women in financial services since the 2017 inquiry, particularly on female representation in senior roles, it also expressed disappointment at the lack of progress on improving instances of non-financial misconduct (e.g. sexual harassment and bullying) against women and the generally poor culture continuing to cause challenges for women in the industry. The inquiry made a number of recommendations to government, and the two regulators, to accelerate change.

How have the government and regulators responded to the inquiry’s recommendations?

Two months after the Committee’s report, the response from HM Treasury, the FCA and PRA has been published. Whilst there is a broad agreement with the Committee’s comments and sentiments about the need for improvement, and various explanations about what steps have already been taken or are currently ongoing, the government and regulators largely stopped short of committing to prompt and significant changes in line with the recommendations.  

The key takeaways are:

  1. Tackling non-financial misconduct in financial services is the priority for the regulators. The regulators have been taking steps to tackle non-financial misconduct outside of this inquiry. In September 2023, theFCA and PRA launched a joint consultation on DEI in financial services, which included proposed amendments to the regulatory rules to crack down on non-financial misconduct, i.e., misconduct relating to the behaviour between people, rather than misconduct linked to the tasks people are required to do for their job. The consultation included a draft handbook containing updated wording on conduct rules, fitness and propriety and regulatory references, making clear that non-financial misconduct should be treated no differently to other types of misconduct. That consultation closed in December 2023 and the regulators are currently reviewing responses with a view to issuing a policy statement later this year. In addition to the consultation, earlier this year, the FCA sent a survey to its firms seeking insight into how they currently diagnose and resolve non-financial misconduct, with the intention that this informs its supervisory programme when the handbook comes into force. It is clear from the responses to the inquiry that this work around non-financial misconduct is a priority for the FCA, rather than DEI initiatives such as data reporting and target setting (on which see point four below).  
  2. No outright ban on non-disclosure agreements (NDAs) in harassment cases. Despite noting the Committee’s concern that NDAs can be used to intimidate and attempt to silence victims of discrimination and harassment, the government does not intend to take forward the inquiry’s recommendation for an outright ban of NDAs in harassment cases. Instead, the government highlights that there is guidance and existing legalities around which confidentiality provisions are valid and which are void and unenforceable, and that it has already committed to introducing legislation to clarify that NDAs should not be used to prevent the reporting of a crime or to discuss concerns with e.g., the police, lawyers, or support services (who have professional confidentiality obligations) although the timescale for this change is currently unknown. Although the government response also references the upcoming legislative changes in Higher Education from August 2024 which will prevent the use of NDAs in cases of sexual abuse, harassment or misconduct, bullying or harassment in that sector, there is no suggestion that the current government intends to extend this approach to financial services.
  3. Strengthening whistleblower protection remains under review. The inquiry recommended that the government strengthens whistleblowing legislation to provide greater protection and support in sexual harassment cases (albeit did not provide any detail as to exactly how that should be achieved). Although there is an ongoing government review into the UK’s whistleblowing framework and potential reform generally, the government response highlights how existing legislation provides legal protection for those who speak up against certain types of wrongdoing. The whistleblowing review was launched in October 2023 and although the research phase was expected to be concluded by the end of 2023, we do not currently have any timescale for a report on its findings.
  4. The extent of regulator involvement in data collection and diversity target setting remains unclear and under review. The regulators’ joint consultation from September 2023 included a number of proposals in relation to DEI, particularly around data collection and target setting.  Responses are still being reviewed, although as highlighted above, the FCA has indicated that tackling non-financial misconduct is a higher priority than these DEI initiatives.  This does not mean that the regulators’ proposals around DEI are being dropped altogether, but they are taking more time to consider the complexities, and regulated firms should not necessarily expect increased DEI responsibilities from the regulators any time soon. The Committee was keen to limit regulatory interference on DEI in favour of responsibility for improving diversity sitting with boards and senior management, something which the regulators agreed to carefully consider. We suspect some regulatory parameters will be in place in time though; while, the PRA agreed that there is a benefit to firms having autonomy in setting their own targets, it also noted the benefit of regulators setting consistent principles around targets and highlighted the importance of the regulator gathering data generally for industry-wide benchmarking and to build an evidence base to improve the effectiveness of regulatory intervention.
  5.  Changes to the Women in Finance Charter are unlikely. Established in 2016, the Charter is a commitment between the government and signatory firms to improve gender diversity in financial services. The Committee recommended changes to the Charter to place more focus on ensuring a pipeline of female talent (rather than a focus only on representation at senior management levels) and to strengthen the requirement to linking executive pay with performance against gender diversity targets have been rejected by the government. Whilst agreeing that there is a need to increase representation at all levels, and that linking executive pay to performance on diversity is an effective way to drive change, it considers these issues to be adequately addressed in the Charter and does not think expanding the Charter is the right approach.   
  6. No legislative change around family leave or flexible working. The government has also rejected recommendations for requiring the equalisation of maternity and paternity offerings, for more transparency about maternity and paternity policies, requiring equality impact assessments on flexible working policies and requiring roles to be advertised as flexible or part time as much as possible. It refers to existing Shared Parental Leave legislation, interestingly (and surprisingly) noting that take-up is consistent with predictions, and that changes to flexible working rules in April 2024 now allow requests from day one of employment. Whether to increase transparency of leave policies, and to mandate flexibility as a default wherever possible, were both subject to consultation in 2019 and a decision made not to take these proposals forward, with seemingly no appetite to reopen these issues again. The government notes how statutory provisions are a ‘floor not a ceiling’ encouraging firms to enhance rights where they can. It is however worth noting that under currently published documents from the Labour Party, they have promised to enhance the minimum statutory maternity and paternity leave requirements and make flexible working a default if elected.
  7. No anticipated changes to mandatory pay gap reporting. The government has rejected recommendations to mandate gender pay gap reporting for smaller employers (reducing the threshold from 250 employees top 50) and for financial services firms with a pay or bonus gap above a certain threshold. Noting that reporting itself does not improve pay gaps, it suggests that there are practical and statistical reasons why mandatory reporting for smaller organisations should not be introduced and does not consider additional reporting for certain subsets of employer to be fair or effective. Rather than increasing the burden on businesses through increased reporting requirements, it instead considers time would be better spent by employers assessing their own particular issues and what steps and interventions are needed to address them. Again, it is worth noting that addressing pay gaps is on Labour’s agenda and so a change in government may see a change in approach to the Committee’s recommendations.
  8. The impact on pay gaps arising from the removal of the bonus cap will be monitored.  Addressing the inquiry’s concerns that the removal of the bankers’ bonus cap may have a detrimental impact on gender pay gaps, both the FCA and PRA recognise that this is an important issue and expect firms to take steps to avoid adverse pay gap consequences from the increased flexibility and to operate remuneration policies consistently with principles of sound risk management. The regulators say they are working closely with each other and the Government Equalities Office (GEO) and Equality and Human Rights Commission (EHRC) to monitor compliance, although there is no commitment to a formal review after two years as recommended by the Committee.

What does this mean for regulated financial services firms?

Non-financial misconduct is the clear focus for regulated firms. We can expect a policy statement from the FCA and PRA in the second half of 2024 in response to their 2023 consultation and having factored in feedback from their 2024 survey. This policy statement is expected to include a copy of the final revised handbook incorporating updated rules on treating non-financial misconduct on a par with financial misconduct for the purposes of the conduct rules, fitness and propriety assessments and regulatory references. 

Whether the handbook amendments get published as original drafted, or are tweaked in response to the consultation, remains to be seen but significant changes do seem likely, with the regulators being committed to codifying their expectations in this area more clearly. Any new rules are expected to apply on a forward looking basis, likely from some time in 2025. Firms should anticipate revised rules on non-financial misconduct and look to embed necessary cultural change now as well as considering what steps or internal processes (including training) may need to be updated.

It does not seem, for the time being, that the regulators will be given any additional legislative powers to deal with non-financial misconduct. However, the new Worker Protection (Amendment of Equality Act 2010) Act is expected to come into force in October 2024. This legislation creates a new duty on employers to take reasonable steps to prevent sexual harassment of their employees and gives the tribunals power to uplift compensation awards by up to 25 per cent where this has not happened. This is not limited to financial services (i.e., it is a duty which will apply to employers across all sectors, as part of the government’s wider plans to improve the culture around prevention of sexual harassment at work) and is the responsibility of the ECHR to enforce, although the FCA and ECHR have a memorandum of understanding in respect of their common interests in this new legislation and will work together to share information on the impact in financial services.  

Otherwise, legislative reform on the pertinent issues raised by the Committee remains unlikely, certainly under the current government. That said, with a general election upcoming, there is scope for the legislative priorities to change under new leadership.

In respect of DEI, regulator-led requirements on DEI are less likely in the short term and we will need to wait for the policy statement later in the year to see what, if anything, is said on this. Firms should however continue to drive their own improvements to DEI.

What does this mean for non-regulated financial services firms?

Although not directly impacted by regulatory change, non-regulated firms should watch with interest what policy decisions the FCA and PRA make regarding DEI and non-financial misconduct and any other measures taken to address the issues raised in the Sexism in the City inquiry. Whilst not subject to the regulatory scrutiny, the approach expected of regulated firms will provide valuable guidance for non-regulated firms grappling with the same issues around recruiting, retaining and progressing female talent in the industry, and general improvements to workplace for culture for women.

Legislative changes will of course be relevant in any event, and non-regulated firms should note the comments above about forthcoming legislation on preventing sexual harassment and the potential for impact on employment rights arising from any change in government.