FCA rule changes – Disclosure of diversity on listed company boards

The FCA has published its final rules to increase the disclosure of diversity on listed company boards and executive committees (PS22/3). The rules are broadly the same as those set out in the consultation but with some changes to reflect concerns about data collection and reporting. The aim of these proposals is to increase transparency for investors and companies by establishing better, comparable information on the diversity of companies’ boards and executive management.

The rules apply to financial years beginning on or after 1 April 2022, so the first reporting will be in 2023. The FCA is, however, encouraging companies to consider reporting earlier on a voluntarily basis. The FCA will review its policy in three years’ time to consider whether the targets remain appropriate, both in terms of the levels and their focus.

The FCA also notes that is it still considering responses to its discussion paper on Diversity and inclusion in the financial services sector and expects to publish a consultation paper in 2022.

Listing Rule changes

These rule changes apply to UK and overseas companies with equity shares, or equity shares represented by certificates (including global depositary receipts), admitted to either the premium or standard listing segments of the FCA’s Official List or considering admission to such listings. This includes closed-ended investment funds and sovereign controlled companies but excludes open-ended investment companies and shell companies. The rules do not apply to issuers of listed debt and debt-like securities, securitised derivatives or miscellaneous securities.

Board diversity targets

These companies must disclose annually, in their financial report, whether they meet specific board diversity targets on a ‘comply or explain’ basis at a specific reference date (chosen by the company). The targets are:

• at least 40% of the board are women;
• at least one senior board position (Chair, CEO, CFO or SID) is a woman; and
• at least one board member is from a minority ethnic background (which is defined).

If a company has not met all of these targets, it must give the reasons for not meeting them.

Companies must state what the chosen reference date is and explain if it differs from year to year. They must also describe 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.

Data

Companies must also publish:

• numerical data on the ethnic background and gender identity or sex of the individuals on the board, in senior board positions (Chair, CEO, CFO and SID) and at executive management level in a standardised table format; and
• an explanation of the company’s approach to collecting the data used for the purposes of making the board diversity and numerical data disclosures.

Additional rules and guidance have been added relating to the collection and reporting of the data to ensure that companies have some flexibility in how they collect the data to allow them to comply with privacy and data protection laws. Companies will be able to explain why they may not have been able to collect some of the data in certain situations.

The FCA’s initial proposals included guidance on self-identification for the purposes of data collection and reporting. In light of significant numbers of concerns raised by individuals and interest groups, this has been removed. As a result, companies have more flexibility to decide how to collect data from their employees and can report either on the basis of sex or gender identity, provided that their approach is explained and applied consistently.

Policies and procedures

New guidance provides that companies may also want to include the following 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 which make achieving diversity on its board more challenging (for example, the size of the board or the country where its main operations are located); and
• any risks it foresees in being able to meet or continue to meet the board diversity targets in the next accounting period, or any plans to improve the diversity of its board.

DTR changes

The changes to the corporate governance statement in DTR 7.2.8A apply to certain UK issuers admitted to UK regulated markets and, through the Listing Rules, to certain overseas listed companies, subject to existing exemptions for small and medium companies.

The requirement for the corporate governance statement to include details of the diversity policy applied to their board has been extended so that it must also cover the remuneration, audit and nomination committees. In addition, the policy must take into account wider diversity characteristics (such as ethnicity, sexual orientation, disability and socio-economic background).

Additional guidance has been added that companies may, where they consider it appropriate, include numerical data on the diversity of the board and board committees in their description of the results in the reporting period.