On 20 April 2022, the FCA issued a Policy Statement on Diversity and inclusion on company boards and executive management (PDF 644KB). This introduces new Listing Rules to require issuers to include a statement in their annual financial report setting out on a “comply-or-explain” basis whether they have met specific board diversity targets. Corporate governance rules are also expanded to encourage issuers to consider broader aspects of diversity in their reporting on board diversity policies.

The new rules represent a significant step in expanding regulatory policy around Diversity and inclusion (D&I). It is the first time such targets have been set by the regulator and the requirement for disclosure in annual reports across the UK economy will bring the issue of board diversity to the fore.

The policy follows consultation from July to October 2021 and is the result of the FCA's focus on speeding up the pace of change around D&I in financial services. Through the new measures, the FCA aims to:

  • Improve transparency for investors and other market participants on the diversity of company boards and their executive management to increase engagement and inform investment decisions
  • Create a positive reporting benchmark to encourage progress (through the use of diversity targets on a "comply or explain basis") and broader scrutiny and consideration of diversity and inclusion both at senior level and throughout impacted companies
  • Improve considerations of broader diversity aspects within diversity policies and related disclosures

The FCA hopes that investor pressure will, in practice, encourage issuers towards greater diversity, with potential further benefits for corporate governance and decision-making.

Applicability and timeline

The new rules apply to UK and overseas issuers with equity shares, or certificates representing equity shares, which are standard or premium listed issuers (per the FCA's Official List), excluding OEICs and `shell companies' but including closed-ended investment funds and sovereign controlled companies.

The rules will not apply to issuers of listed debt and debt-like securities, securitised derivatives or miscellaneous securities.

The corporate governance rules apply to certain UK issuers with securities admitted to UK regulated markets and, through the Listing Rules, to certain overseas listed companies subject to existing exemptions for small and medium companies.

In-scope companies are required to make disclosures in their annual reports for financial years starting on or after 1 April 2022.

New requirements

On a “comply-or-explain” basis, all in-scope issuers must add a statement to their annual financial report which sets out whether the following three targets have been met:

  • At least 40% of the board are women
  • At least one of the following senior board positions is staffed by a woman - Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)
  • At least one board member is from a minority ethnic background, defined by reference to the categories recommended by the Office for National Statistics, excluding those listed as coming from a White ethnic background

The statement should also set out the reference date used 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. Where the reference date is different to the date of publication of the statement, issuers must explain why.

Numerical disclosures are also required (using the standard format set out in Annex 2 of the Policy Statement) on:

  • Sex or gender identity and ethnic diversity of the board, senior board positions (Chair, CEO, SID and CFO) and other executive management

Issuers must also explain their approach to collecting data and maintain a consistent approach to doing so. Guidance is provided on how data may best be collected.

Additional disclosures encouraged

The Policy Statement also encourages issuers to disclose the following information to the extent that it provides further context:

  • A brief summary of any key policies, procedures and processes, and context which contribute to improving the diversity of the board and executive management
  • Mitigating factors or circumstances which make achieving board diversity more challenging (for example, the size of the board or the country where its main operations are located)
  • Any risks foreseen in being able to meet or continue to meet the board diversity targets in the next accounting period
  • Any plans to improve the diversity of the board

Measuring success and next steps

The FCA identifies the following measures of success:

  • The fullness and clarity of the data that the new measures generate. The FCA will assess whether the dataset being provided by in-scope companies is comparable and meaningful
  • Feedback from investors and other stakeholders about whether the data is useful. As part of this process, potential improvements will be considered

Over time, the FCA will assess whether the policy is making it easier for investors to compare issuers' board and executive management diversity as part of their investment and stewardship decisions and whether the data shows that diversity is increasing. Where issuers decide to publish numerical data on the diversity of their board and relevant board committees, this may inform further broadening of the scope of disclosure requirements.

Although the new policy is a significant step in encouraging firms to consider the diversity of their senior management, there is still room for further improvement, or a ramping up of the targets to be reported against. The FCA will review the policy in three years' time to consider whether the levels of targets remain appropriate and whether further targets for other aspects of diversity should be considered.

Broader work on D&I

Alongside this Policy Statement, the FCA has also been considering ways to improve diversity and inclusion in the financial services sector to advance its objectives of consumer protection, enhancing the integrity of the financial system and promoting effective competition.

The Discussion Paper `Diversity & inclusion in the financial sector' (PDF 829KB) was published jointly with the Bank of England and PRA in July 2021 and was the first step in setting out a new regulatory framework on diversity and inclusion. A follow-up consultation is expected in 2022 building on feedback to the DP, the D&I pilot data survey and the cost benefit analysis survey. Resulting proposals are expected to apply broadly across the financial sector so are likely to be relevant for all authorised financial services firms.


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