On February 23, 2022, the Financial Services Culture Board and the Financial Services Skills Commission released a report entitled “Inclusion across financial services: piloting a common approach to measure”. The report examined responses to a pilot project on perceptions of inclusion in the financial services industry. You can read more about the report in our blog post. Following this report, on 20 April 2022, the Financial Conduct Authority (FCA) issued a policy statement on its proposed amendments to the Listing Rules (LR) and the Disclosure and Transparency Rules (DTR) with respect to diversity on boards of directors and management. committees, as well as the latest amendments to its manual.
In short, listed companies will be required to report and disclose information on the representation of ethnic minorities and women on their boards and in senior management. The measures should increase transparency on the diversity of company boards and their management teams so that investors and other market participants have a better understanding of the composition of management teams.
The new approach sets positive diversity targets for listed companies and will apply to accounting years from April 1, 2022. The rules set targets on a “comply or explain” basis to encourage appropriate consideration and offer greater flexibility to small businesses or those based abroad. The rules allow companies to choose how they collect employee data in order to achieve set goals.
The new rules build on recommendations from the Parker Review (published March 16, 2022 which discussed the ethnic diversity of FTSE 350 boards – see our article here) and the Hampton-Alexander Review (published February 24, 2021 which discussed the increase in the number of women in leadership positions in FTSE 350 companies). By making rules regulatory requirements, the FCA reinforces existing objectives.
Ultimately, these rules are meant to hold companies accountable and promote greater diversity in the most senior positions. It is hoped that the introduction of these new criteria will accelerate the dynamics of diversity and inclusion in the financial services sector, which still seems to lag behind other sectors.
Who will the new registration rules apply to?
The LRs apply:
- UK companies and overseas companies which hold equity shares (certificates representing the equity shares will suffice) and are admitted to the standard or premium section of the official FCA list.
- Includes: state-controlled corporations and closed-end investment funds.
- Excludes: shell companies and open-ended investment companies.
The changes to the LR do not apply to issuers of:
- miscellaneous titles;
- securitized derivatives;
- listed debt; and
- issued debt-like securities.
Changes to registration rules
With broad support, FCA has made the following changes (in addition to other minor changes):
- Tongue: The language used for ethnic minority targets has been changed so that “Other Ethnic Group” includes Arabic.
- Digital Disclosures:
- Companies can report on the basis of gender identity or sex, as long as they explain their approach and are consistent.
- The draft guidelines on self-identification have been deleted. Instead, the guidelines now confirm that a company can add to the categories included in the table to reflect the basis on which it collected data.
- Issuers that have senior management or board members abroad where local law prevents the company from collecting or publishing the relevant data may instead explain why it is not possible to make the required disclosures or complete the data in the relevant tables.
- Companies should include a description of their data collection approach: The guidelines confirm that the FCA expects all listed companies to have a consistent approach to data collection, and that the description should include the data source or method of collection. Where data is collected on a self-report basis, an explanation of the questions asked should be included.
- Comply or explain statement: This declaration must confirm whether the company has achieved the following objectives at a chosen date in its financial year and, if not, why:
- at least one board member is from an ethnic minority;
- a minimum of 40% of the board of directors are women;
- at least one of the leadership positions on the board of directors is held by a woman (this includes the positions of chairman, chief executive officer, chief financial officer or lead independent director).
- Start date: Modification of the start date from January 1, 2022 to April 1, 2022. Nevertheless, companies whose financial years begin before April 1, 2022 are invited to voluntarily declare their current financial year.
Changes reviewed but not implemented
The FCA has decided not to:
- expand LR reports to representation in other categories, including sexual orientation and low socio-economic background; and
- set requirements for the level below general management.
However, the FCA encourages issuers to report on broader aspects of diversity within their businesses.
Who will the new disclosure and transparency rules apply to?
DTR rules apply to:
- UK companies admitted to a regulated market in the UK; and
- various overseas listed companies.
Exemptions: “small” or “medium” enterprises.
Changes to the DTR
- Extend existing reporting requirements: Include the diversity policies of the main board committees. If such a diversity policy is not applied to a company’s board of directors, the board must explain why.
- Consider broader diversity characteristics: When reporting on board and board committee diversity policies, ie sexual orientation, ethnicity, socio-economic background and disability.
Other considerations discussed by the FCA
The FCA is currently reviewing responses to its discussion paper on “diversity and inclusion in the financial sector”, as well as its cost-benefit analysis survey and pilot inclusion data survey. A consultation is planned for later this year.
What does this mean for businesses?
As society broadly pushes for diversity at all levels, it is clear that the FCA is introducing new policies to accelerate the desired diversification, with particular emphasis on leadership positions which are routinely considered the least diverse group in the world. within financial services. The new rules put some pressure on companies to ensure that quotas are respected and that the gender and ethnic composition of management teams is transparent. However, the FCA has also taken into account the difficulties that small businesses and those based abroad may face in complying with all the new rules and has taken this into account in its guidance, so that the relevant context can be provided. .
It is hoped that the increased transparency will encourage companies to work towards the set targets. As diversity and inclusion increasingly become factors determining a company’s reputation, the new rules will allow companies to reflect on how women and ethnic minorities are currently represented and consider how to Other improvements can be made, with the benefit of looking to other companies as examples.
This is an ever-changing demand for all businesses, not just those in the financial services industry. However, for now, those required to comply with these above requirements should ensure they are familiar with the new FCA rules and take steps to comply with them, if they do not. have not already done.