The Financial Conduct Authority has issued a Consultation Paper, which proposes new disclosure rules with a view to improve diversity and inclusion for listed companies.

The Proposals for the Listing Rules

The Consultation Paper (CP21/24) was published in July 2021 and the consultation period will run until 20 October 2021. The FCA issued a press release on 28 July 2021 setting out the “consultation on proposals to improve transparency for investors on the diversity of listed company boards and their executive management team” with a view to making changes to its Listing Rules.

The FCA has proposed the requirement of a ‘comply or explain statement’. Companies would need to set out whether they had achieved certain diversity objectives or else have to explain why these have not been met. The proposed targets would be as follows:

  • At least 40% of the board should be women (including those self-identifying as women);
  • At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Chief Financial Officer (CFO) or Senior Independent Director (SID) should be a woman (including individuals who self-identify as women); and
  • At least one member of the board should be from a non-white ethnic minority background (as defined by the Office for National Statistics).

As part of this disclosure obligation, companies would also be required to give information on the make-up of their board and most senior level of executive management, in terms of gender and ethnicity.

These new proposals would apply to UK and overseas issuers with equity shares (or certificates representing equity shares), with a premium or standard listing, but they would exclude open-ended investment companies (OEICs) and shell companies.

The Proposals for the Disclosure and Transparency Rules

Currently, companies are already required in their corporate governance statement to address their application of their diversity policy and explain where a diversity policy is not in place. The FCA now also proposes changes to its Disclosure and Transparency rules, requiring companies to include in this disclosure:

  • How the diversity policies apply to the key committees of board, specifically remuneration, audit and nominations; and
  • Which areas of diversity the diversity policy responds to other characteristics, such as ethnicity, sexual orientation, disability and socio-economic backgrounds.

Across the Pond

Shortly after the Consultation Paper was published, it was reported that companies listed on the Nasdaq, the USA’s second largest stock exchange, were to be subject to binding new diversity rules. The requirement in each company will be for two “diverse directors” which includes an individual who identifies as a female and another who is either an underrepresented minority or LGBTQ+.

What this Means for Businesses

The Consultation Paper follows a Discussion Paper issued by the FCA in July 2021, which had sought views on diversity and inclusion in the financial services sector. The new proposals are made by the FCA with the aim to “increase transparency by establishing better, comparable information on the diversity of companies’ boards and executive committees”. There is clear ambition on the part of the FCA and indeed the UK Government to make progress on diversity and inclusion in corporate life and to encourage greater transparency in this area.

This consultation is still ongoing and if approved the FCA is likely to make any changes for accounting periods commencing on or after 1 January 2022. However, the FCA is encouraging companies to make disclosures on a voluntary basis before then.