On 20 April 2022, the Financial Conduct Authority (the “FCA”) published its final policy statement PS22/3 ‘Diversity and inclusion on company boards and executive committees’. The policy statement outlines the feedback the FCA received on its consultation paper on the same topic, published in July 2021 and revises the UK Listing Rules (“LRs”) and Disclosure Guidance and Transparency Rules (“DTRs”) to require listed companies to make certain disclosures in relation to the diversity of its directors and executive committees. The amendments to the LRs and DTRs are aimed at improving transparency and encouraging issuers to make steps towards greater diversity in practice, which is, in turn, expected to lead to improvements in corporate governance and decision-making.

Who is in scope?

The new requirements set out in the LRs apply to UK and overseas companies with a premium or standard listing (including closed-ended investment funds and sovereign-controlled commercial companies). Open-ended investment companies and shell companies, as well as debt issuers, are not in scope.

The amendments to the DTRs apply to overseas issuers with a premium or standard listing of equity shares, or certificates representing equity shares, on the main market of the London Stock Exchange, as well as UK-incorporated companies with equity or debt securities admitted to trading on any UK-regulated market. Overseas issuers of debt securities are not in scope.

“Comply or Explain”

Amendments to the LRs require in-scope issuers to include a statement in their annual financial report setting out whether they have met the following board diversity targets on a chosen reference date and, if they have not been met, the reasons such targets have not been met:

  • At least 40 percent of the directors are women;
  • At least one of the senior board positions (Chair, Chief Executive Officer, Senior Independent Director or Chief Financial Officer) is a woman; and
  • At least one director is from a minority ethnic background.

“Minority ethnic background” is defined by reference to categories recommended by the Office for National Statistics and excludes “White British or other White (including minority-white groups)”, but includes “Asian/Asian British”, “Black/African/Caribbean/Black British”, “Mixed/Multiple Ethnic Groups”, and “Other ethnic group, including Arab”.

Issuers must also set out in their statement:

  • The reference date used, and where this is different from the reference date used in respect of the previous accounting period, an explanation as to why; and
  • Any changes to the board that have occurred between the reference date and the date on which the annual financial report is approved that have affected the company’s ability to meet one or more of the targets.

In-scope companies are also required to publish numerical data on the biological sex or gender identity and ethnic diversity of their boards, senior board positions and executive management. There is a prescribed tabular reporting format for this data set out in the Listing Rules, although there is some flexibility for companies to reflect how they collect data. There is a specific exemption from reporting where board members or executive management members are located overseas and local data protection laws in that jurisdiction prevent the collection or publication of such data. In such circumstances, the company may instead explain the extent to which it is unable to make the relevant disclosures.

A listed company may also include the following information in its annual financial report:

  • A brief summary of any key policies, procedures and processes, and any wider context, that it considers contributes to improving the diversity of its board and executive management;
  • Any mitigating factors or circumstances that make achieving diversity on its board more challenging; and
  • Any risks it foresees in being able to meet or continue to meet the board diversity targets in its next accounting period, or any plans to improve the diversity of its board.

Amendments to the Disclosure Guidance and Transparency Rules

Disclosure Guidance and Transparency Rule 7.2.8A has been amended to encourage in-scope issuers to report on wider aspects of diversity by:

  • Expanding the requirement for issuers to include information in their corporate governance statements about an issuer’s diversity policy in relation to the remuneration, audit and nomination committees of its administrative, management and supervisory bodies, in addition to the bodies themselves; and
  • Listing additional examples of aspects to be reported on, such as ethnicity, sexual orientation, disability or educational and socioeconomic backgrounds. Previously only age, gender and professional background were listed.

Considerations for in-scope companies:

The final rules apply to accounting periods starting on or after 1 April 2022. To ensure compliance, in-scope companies should:

  • Consider whether to comply with the new requirements on a voluntary basis for the current financial year (issuers with a 31 December financial year end will need to include mandatory disclosures in their annual reports relating to the 2023 financial year, but the FCA encourages voluntary reporting for earlier periods);
  • Consider how they will approach reporting (e.g., whether using gender identity or biological sex) and relevant disclosure categories;
  • Assess how relevant data will be collected and how the process and nature of the data collection process will be disclosed (bearing in mind that any data collection must be conducted in compliance with existing data protection rules such as the UK General Data Protection Regulation).

A new dawn for diversity and inclusion?

The April 2022 policy statement is the first time diversity and inclusion targets have been set by the FCA and is a significant step in encouraging firms to consider the diversity of top management. However, there remains room for improvement and it seems likely that this will not be the end of the FCA’s drive towards greater diversity and inclusion. In 2021, the FCA published a joint discussion paper with the Bank of England and the Prudential Regulation Authority (“Diversity and inclusion in the financial sector –working together to drive change”), which the FCA indicated was the “first step” in setting out a new regulatory framework on diversity and inclusion. The FCA is continuing to look at how to improve diversity and inclusion in the financial services sector and a follow-up consultation paper is expected to be published later this year, setting out further proposals aimed at building upon and reinforcing existing legislation. The FCA has also noted its intention to review the April 2022 policy statement within three years (i.e., by the first half of 2025) to assess its impact and gauge whether the targets are still appropriate.