City of London watchdogs have unveiled plans to bring diversity targets within financial regulation, including proposals to link managers’ pay to inclusion and introduce gender and ethnicity goals for boards.

Managers could be asked to report on the diversity of their employees or face pay cuts, according to a discussion paper published on Wednesday by the Bank of England and Financial Conduct Authority.

The paper is the next step in the regulatory authorities’ efforts to promote equality in financial services, which they said had been too slow. Progress on diversity was crucial to ensuring future economic stability, they added.

“Groupthink and overconfidence are often at the root of financial crises,” said Sir Jon Cunliffe, deputy governor for financial stability at the Bank of England and chief executive of the BoE’s Prudential Regulation Authority, which supervises banks and insurers.

Nikhil Rathi, FCA chief executive, said: “We are concerned that lack of diversity and inclusion within firms can weaken the quality of decision-making. We look forward to an open discussion on how we should use our powers . . . to the mutual benefit of firms and their customers.”

The proposals included linking senior leaders’ pay to diversity goals as part of non-financial performance assessments in order to “incentivise progress”. The regulators said they would not be “prescriptive” about implementation, but noted “poor performance in [diversity] could be grounds for [salary] adjustment”.

Companies could also be asked to set targets to increase the number of under-represented groups on boards and for management positions below board level, as well as for customer-facing roles.

Yvonne Braun, executive sponsor for diversity and inclusion at the Association of British Insurers, said it was a “thoughtful” and “serious” paper. “We are going to have a better and more innovative sector if it is more diverse,” she added.

The paper noted that targets already exist among banks and investment houses to increase female representation. It cited one study in 2020 that revealed that more gender equality on boards significantly reduced the frequency of misconduct fines.

“We would welcome views on whether there is a case for applying such a requirement to a wider range of firms and for underrepresentation in relation to other characteristics,” said the regulators.

The proposals form part of a discussion paper from the FCA and BoE with a deadline for feedback in September. Companies have also been asked to take part in a voluntary survey in the autumn, which will gather information on how firms collect and categorise diversity data. The regulators will develop joint recommendations in a consultation planned for early next year.

The paper’s proposals also included extending assessments of senior managers under the FCA’s “fit and proper” test to cover conduct relating to diversity; and expanding guidance on what might constitute non-financial misconduct — which can trigger sanctions — to include sexual harassment, bullying and discrimination.

Companies could be asked to gather data on new metrics, including protected characteristics of its staff and socio-economic background. Regulators have asked for feedback on what extent such a proposal could create “unnecessary burdens”.

The paper comes on the heels of intensive new climate-related disclosure rules for companies in the UK stock market.