Overview

On 23 February 2022, the Financial Services Culture Board and the Financial Services Skills Commission published a report entitled "Inclusion across financial services: piloting a common approach to measurement". The report looked at responses to a pilot on perceptions of inclusion in the financial services sector. You can read more about the report in our blog post. Following on from that report, on 20 April 2022, the Financial Conduct Authority (FCA) published a policy statement on its proposals to amend the Listing Rules (LR) and Disclosure Guidance and Transparency Rules (DTR) in relation to diversity on boards and executive committees, along with final amendments to its handbook.

In short, listed companies will be required to report information and disclose against targets on the representation of ethnic minorities and women on their boards and within executive management. The measures are anticipated to increase transparency on the diversity of company boards and their executive management teams so that investors and other market participants will have a clearer understanding of the composition of senior leadership teams.

The new approach sets positive diversity targets for listed companies and will apply for financial accounting periods starting from 1 April 2022. The rules set targets on a "comply or explain" basis to encourage proper consideration and offer greater flexibility for smaller companies or those that are based overseas. The rules allow companies to choose how they collect data from employees in order to meet the targets set.

The new rules build on the recommendations in the Parker Review (published on 16 March 2022 which discussed the ethnic diversity of FTSE 350 boards – see our article here) and the Hampton-Alexander Review (published on 24 February 2021 which discussed increasing the number of women in senior positions in FTSE 350 companies). By making the rules regulatory requirements, the FCA is reinforcing existing targets. 

Ultimately, these rules aim to hold companies to account and promote increased diversity in the most senior positions. It is hoped that the introduction of these new benchmarks will increase the momentum for diversity and inclusion in the financial services sector, which still seems to be lagging behind other sectors.

To whom will the new Listing Rules apply?

The LR apply to:

• UK companies and overseas companies that have equity shares (certificates representing equity shares will suffice) and are admitted to the standard or premium section of the FCA's Official List. 
  • Includes: sovereign-controlled companies and closed-ended investment funds.
  • Excludes: shell companies and open-ended investment companies. 

The LR changes do not apply to issuers of:

• miscellaneous securities;
• securitised derivatives;
• listed debt; and 
• issued debt-like securities. 

Amendments to the Listing Rules

With broad support, the FCA has made the following amendments (in addition to other minor amendments):

• Language: The language used for the targets in relation to ethnic minority background has been amended so that "Other ethnic group" includes Arab.
• Numerical disclosures: 
  • Companies may report either on the basis of gender identity or sex, provided that companies explain their approach and are consistent. 
  • Draft guidance on self-identification has been removed. Instead, the guidance now confirms that a company may add to the categories included in the table to reflect the basis on which it has collected data.
  • Issuers who have executive management or board members overseas where local law prevents the company from collecting or publicising relevant data can instead explain why it is not possible to make the required disclosures or complete the data in the relevant tables.
• Companies must include a description of their approach to collecting data: The guidance confirms that the FCA expects all listed companies to have a consistent approach to data collection, and that the description must include the source of the data or method of collection. Where data is collected on a self-reporting basis, an explanation of the questions asked must be included.
• "Comply or explain" statement: This statement should confirm whether the company has met the following targets at a chosen date within their accounting period and, if not, why not:
  • a minimum of one board member is from a minority ethnic background;
  • a minimum of 40% of the board are women;
  • at least one of the senior board positions is held by a woman (this includes Chair, Chief Executive Officer, Chief Financial Officer or Senior Independent Director roles).
• Commencement date: Change to the commencement date from 1 January 2022 to 1 April 2022. Nevertheless, those companies whose financial years begin before 1 April 2022 are encouraged to report on their current accounting period voluntarily.

Changes consulted on but not implemented

The FCA has decided against:

• extending LR reporting to representation on other categories, including sexual orientation and lower socio-economic background; and
• setting requirements for the level below executive management. 

However, the FCA does encourage issuers to report on wider aspects of diversity within their companies. 

To whom will the new Disclosure Guidance and Transparency Rules apply?

The DTR rules apply to:

• UK companies that are admitted to a UK-regulated market; and
• various overseas listed companies. 

Exemptions: "small" or "medium" sized companies.

Amendments to DTR

• Expanding existing reporting requirements: To include the diversity policies of key board committees. If no such diversity policy is applied to a company's board, they must give an explanation as to why not. 
• Considering wider diversity characteristics: When reporting on board and board committee diversity policies i.e. sexual orientation, ethnicity, socio-economic background and disability. 

Other considerations being discussed by the FCA

The FCA is currently reviewing responses to its discussion paper on "Diversity and inclusion in the financial sector", together with its cost benefit analysis survey and inclusion pilot data survey. A consultation is expected later this year. 

What does this mean for companies?

As society is broadly pushing for diversity at all levels, it is clear that the FCA is introducing new policies to speed up the desired diversification, with a particular focus on senior positions which are routinely considered to be the least diverse group within financial services. The new rules put some pressure on companies to ensure that quotas are met and that the gender and ethnicity composition of senior leadership teams are transparent. However the FCA has also considered the struggles that smaller companies and those based abroad may face in complying with all of the new rules and has built allowance for this into its guidance, so that relevant context can be provided. 

It is hoped that the increased transparency will encourage companies to work towards the targets set. As diversity and inclusion are increasingly becoming something by which a company's reputation is determined, the new rules will allow companies to reflect on how women and ethnic minorities are currently represented and consider how further improvements can be made, with the benefit of looking to other companies as examples.

This is an ever-evolving demand on all companies, not just those in the financial services sector. However, for now, those that are required to meet these requirements above should ensure they are familiar with the new FCA rules and take steps towards compliance, if they have not done so already.