As we await the outcome of the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) consultation on diversity and inclusion (D&I) which closed in December 2023, we look at what steps firms with 251 or more employees can now be taking in anticipation that the proposals on diversity targets will likely go ahead in 2025, largely in their current form.
Targets – the proposals
The concept of setting targets to achieve a change in demographic at the top of an organisation is not new. The regulators’ proposals go further, as they would require firms to set stretching diversity targets to address underrepresentation throughout the firm. As well as having a wider D&I strategy overseen by the board, the expectation is that in-scope firms will have at least one target for:
- the management body (normally the board);
- senior leadership; or
- the entire employee population as a whole (including board and senior leadership).
Firms should apply targets relevant to the diversity profile of their employee population, taking account of data available for the locations in which they operate.
Targets are proposed to be public
Under the proposals, diversity targets will need to be disclosed publicly, as will annual progress made towards them. Firms will be required to reassess and adjust targets regularly to ensure they remain ambitious yet attainable.
Potential tension with employment law
When taking steps to achieve targets, there can be a tension between regulatory requirements and employment law. This received very little coverage in the FCA/PRA consultation papers.
Equality legislation only provides very limited circumstances in which it is permissible to appoint an individual to a role because they have a particular protected characteristic, such as gender or race. This will remain the case even where, for example, a firm has set itself stretching targets to increase the number of employees of a particular gender or race.
Positive action to assist underrepresented groups
Under the Equality Act, where employers reasonably believe there is underrepresentation or disadvantage based on data or evidence, they are allowed to take “positive action”. Such action must be proportionate and the requirement for it should be regularly reassessed. There are limited circumstances where it is legally permitted for employers to take “positive action” in recruitment/promotion, or to take general “positive action”.
General positive action relates to practices which fall outside recruitment and promotion, which include strategies such as specialised training, mentoring or support programmes. It can also encompass targeted advertising, inviting applications from the targeted group, and offering specific training opportunities. This is also permitted in limited circumstances. Positive action is very different from “affirmative action” or “positive discrimination”, which involve mandatory quotas and could potentially result in less qualified candidates being selected, both of which are unlawful in the UK. Positive action is voluntary and therefore at the employer’s discretion.
Positive action where there is a tiebreak
During recruitment or promotion, “positive action” can be taken only if the following requirements are met:
- where there are two or more candidates of equal merit, an employer can take a protected characteristic into consideration if the individual is equally qualified as any other candidate for the appointment or promotion (the “tiebreak” provision);
- the employer does not maintain a general policy of always preferring individuals with certain protected characteristics; and
- any measures taken by the employer are proportionate means of achieving the objective of addressing the disadvantage or underrepresentation in the workplace. Whilst statistical evidence is not always required to demonstrate the underrepresentation of people with a specific protected characteristic, it is important that employers have reliable data or evidence to justify the use of positive action during the recruitment or promotion process.
In practice, during recruitment or promotion, it is unusual for there to be a genuine “tiebreak” permitting positive action. The FCA and PRA do not give recognition to the significant tension employers must manage, as they strive to meet targets whilst also complying with equality legislation. Appointing an individual of an underrepresented characteristic, where they are not the strongest candidate, in order to improve progress towards targets will never amount to positive action. This would be unlawful discrimination – it is less favourable treatment of the employee who does not have the protected characteristic.
Getting target management right
Handled well, targets can generate positive change as part of increasing the diversity of employees in a firm and improving the sense of inclusion.
A careful internal communications strategy will be required to educate staff on the meaning and purpose of the firm’s targets, ensuring that they are not seen as quotas but as part of a broader D&I strategy.
Firms should consider their decision-making processes and how targets can inform but not dictate the best decisions for the business.
Mitigate discrimination risks
Some actionable steps to consider include:
- establishing open communication and alignment between in-house employment lawyers, HR and D&I, thereby ensuring a compliant and consistent approach;
- ensuring that targets are part of the broader D&I strategy;
- tailoring targets to the firm’s specific underrepresentation issues;
- using targets as benchmarks for measuring progress, rather than as quotas that must be met without regard to merit;
- keeping clear records of decisions on appointment and promotion;
- making decisions based on merit, with targets informing strategies to encourage applications from underrepresented groups;
- ensuring training on D&I makes clear that discrimination is unlawful; and
- regularly reviewing targets and D&I strategies to ensure they are fair, lawful and effective in promoting D&I without discriminating against any group.
