Diversity “most institutions not compliant” with CRD

Introduction

In July 2016, as HM Treasury published the 72 signatories to its Charter for representation of women in senior management in financial services, the UK Government announced a new review on women in senior leadership and the European Banking Authority (EBA) reported on compliance with diversity requirements in CRD IV. The EBA directed competent authorities to follow up on the lack of diversity policies and, on 12 August 2016, the Prudential Regulation Authority (PRA) issued a letter reminding firms of the PRA’s rules on diversity within firm’s management body and the important role that diversity plays in promoting good governance, and the obligations on firms in this area.

The European Commission has now issued its report to the European Parliament and the Council on the results achieved under the diversity benchmarking which underlines the fact that “most institutions are not compliant” with CRD.

Our view

The continued pressure at both national and international level adds yet further weight behind the need to effect change both for economic and risk-management benefits. They come at the same time as the:

• forthcoming introduction of gender pay gap reporting by large employers, and
• publication of the 72 signatories to HM Treasury’s Charter for representation of women in senior management in financial services.

For an outline of the helpful guidance aimed at Board level appointments from the Equality and Human Rights Commission see here.

We think that the mathematics of the 33% female board representation and the transparency of gender pay gap reporting will expose very publicly which companies are well advanced in developing their pipeline of female senior management talent and from which a greater number of female executive directors can be drawn.

The Hampton-Alexander review

In July 2016, the UK Government announced a new review on women in senior leadership aiming “to help deliver the new progress for greater female representation in business, backed by government support”.

The review team, led by Sir Philip Hampton, Chair of GlaxoSmithKline and Dame Helen Alexander, Chair of UBM undertook a new review on improving female representation in leadership positions of British business, broadening the ambition to the entire FTSE 350 and raising the target to 33% of women on boards by 2020.

The review was focussed, in particular, on the talent pipeline and in November 2016 issued its report. The main recommendation was for 33% representation of women for FTSE 100 executive pipeline by 2020.

Further details in relation to the report are available here.

EBA report on the benchmarking of diversity practices

The legislative background

CRD IV introduced requirements that:

• institutions take into account the diversity of the management body when recruiting new members (Article 91)
• the nomination committee (which is required for significant institutions) should set a target for the representation of the under-represented gender and prepare a policy on how to increase the number of the under-represented gender in the management body (Article 88)
• where such a committee does not exist, the management body should consider setting such a target as part of the diversity policy, and
• institutions adopt a policy promoting diversity in the management body (Article 91(10)).

Competent authorities are required to collect the information disclosed on the policy on diversity, as well as the extent to which these objectives and targets have been achieved and use it to benchmark diversity practices. This they must in turn provide to the EBA which uses the information to benchmark diversity practices at the EU level.

The EBA’s report deals with benchmarks at the EU level, and is based on figures aggregated by Member States.

Findings of the report

The report finds that:

• Despite the legal requirements, only a limited number of institutions have already adopted a diversity policy (in the UK, this was around 15% of those sampled - 15% being at the very lower end of the scale when comparing jurisdictions).

• The policies adopted differ significantly between Member States, particularly regarding the aspect of gender diversity targets - only around two thirds of institutions that have already adopted a diversity policy promote gender diversity as part of their policy.

• Not all institutions with a diversity policy have a policy on gender diversity - the report notes that institutions must implement diversity policies under CRD IV and competent authorities should follow up on this as part of the ongoing supervisory review.

• With regard to gender diversity, some institutions have set a target percentage for the under-represented gender. However, in many cases, even when a policy was adopted, the target was set at 0% within the adopted policy.

• In most cases, the targets for gender diversity have not been met.

• Most frequently, institutions did not indicate a timeline within which they intend to achieve their target or any target outlined under a future policy.

• Institutions’ diversity policies should actively facilitate a diverse composition of the management body.

• The actual level of diversity in the composition of the management body in institutions differs significantly between Member States, particularly regarding gender diversity.

• The representation of women within the management body is (with 13.63% in the management function and with 18.90% in the supervisory function) very low. Within smaller institutions that have a more limited number of members of the management body, diversity within the management body is lower (however, the smaller an institution’s management body, the more difficult it is to achieve a broad range of diversity within the management body and small investment firms are typically run by the owner, which, by nature, makes it impossible to achieve a diverse composition of executive directors).

• More than two thirds (69.42%) of institutions have only executive directors of one gender. Institutions, but also Member States, should consider additional measures that would promote a more balanced representation of both genders.

Diversity concerns regarding the age of directors only exist for a limited number of institutions. The same holds true for the aspect of geographical provenance, which can mainly be a concern for large, internationally active banks. Diversity with regard to educational and professional background is linked to the management bodies’ collective fit and properness, and is, therefore, already better developed in many institutions than other diversity aspects.

The PRA’s response

In its letter of 12 August 2016, the PRA noted that:

• There is a risk that group-think undermines good governance in firms, leading to decisions which impact the safety and soundness of firms being arrived at without sufficient consideration of a broader range of viewpoints and perspectives.
• The publication of the EBA Report showed that just 15% of UK firms surveyed had a policy on promoting diversity on the management body. The rule on establishing a policy to promote diversity on the management body applies to all Capital Requirement Regulation (CRR) firms. Significant firms with a nomination committee must also decide on a target for the representation of the underrepresented gender on the management body, and have a policy to meet this target.
• All CRR firms ‘must put in place a policy promoting diversity on the management body’. This is a requirement for all CRR firms from the General Organisational Requirements chapter of the PRA Rulebook. Firms must explain on their website how they comply with this requirement.

The PRA concluded that “Firms should consider diversity when recruiting members to the management body” and made it clear that they are interested in how they have promoted diversity of the people who perform senior management functions.

The European Commission’s response

In December 2016, the European Commission issued its report to the European Parliament and the Council on benchmarking of diversity practices under the CRD.

The Commission notes that “It has been widely acknowledged that weaknesses in governance arrangements and in the monitoring of management decisions contributed to less prudent risk taking behaviour from the part of institutions in the run-up to the financial crisis of 2007-2008. To address this, the Capital Requirements Directive (CRD) aims to strengthen the ability of the management bodies of credit institutions and investment firms (hereafter referred to as ‘institutions’) to exercise effective oversight and decision making through a series of measures, including by ensuring that the composition of management bodies is sufficiently diverse.”

Having reviewed the benchmarking results, the Commission concludes that “…there is still considerable room for improvement both with regard to having diversity policies in place and achieving greater diversity of the management bodies of institutions. As regards compliance with CRD provisions, the benchmarking revealed that most of the sampled institutions are not at the moment compliant with the requirement of putting in place a policy promoting the diversity of their management bodies. The degree of ‘significant’ institutions’ compliance with the CRD requirement to set a gender representation target could not be assessed; however, the benchmarking revealed that most of the institutions that had set a gender diversity target, be it on a voluntary or on a compulsory basis, have not yet met it and/or have not set a timeline for doing so. Although these results can be at least partly attributed to the rules being recent, they highlight the need for both institutions and supervisors to make further efforts to ensure that the required diversity policies are properly put in place.”

Next steps

The EBA will continue to monitor the development of diversity in management bodies and issue periodical benchmark studies.