Diversity and Inclusion: FCA’s Policy Statement (PS22/3) in Financial Services

Diversity and Inclusion (“D&I”) has been a longstanding “hot topic” for discussion and debate within Financial Services. The Financial Conduct Authority (“FCA”) has recently published its highly anticipated Policy Statement, “(PS22/3) Diversity and Inclusion requirements for Boards and Executive Management”, following a Consultation Period which closed in October 2021.

The Policy Statement marks the first requirement by the FCA for firms to formally report on D&I data within their annual financial reports. However, in its announcement, the FCA noted that this statement serves as the “starting point” for scrutiny and consideration of D&I within listed companies.

The new requirements come into effect imminently, with in-scope firms being required to make specific disclosures in their annual report from financial years starting on 1 April 2022.

Which firms do the requirements apply to?

According to the FCA announcement, the following firms will now have to adhere to PS22/3:

Companies that fall under the scope of the new FCA Listing Rules – this includes “overseas issuers with equity shares, or certificates representing equity shares, admitted to the premium or standard segment of the FCA’s Official List, excluding open-ended investment companies and ‘shell companies’ but including closed-ended investment funds and sovereign controlled companies”.
“Certain UK issuers with securities admitted to the UK regulated markets” who must adhere to the FCA’s corporate governance rules; and
“Certain overseas listed companies subject to existing exemptions for small and medium companies” that fall under the new Listing Rules.

The new rules will not apply, as it stands, to “issuers of listed debt and debt-like securities, securitised derivatives or miscellaneous activities”.

What are the key new requirements?

The FCA has issued two new Listing Rules (LR 9.8.6R(9) and LR 14.3.33R(1)) which will require in-scope firms to include a statement and disclosure within their annual financial report which addresses whether they have met the specific D&I benchmarks. This statement will be implemented on a “comply or explain” basis on a chosen reference date within the firm’s accounting period.

The stipulated benchmarks include:

“At least 40% of the board are women.
At least one of the senior board positions (Chair, Chief Executive Officer (“CEO”), Senior Independent Director (“SID”) or Chief Financial Officer (“CFO”)) is a woman.
At least one member of the board is from a minority ethnic background (which is defined by reference to categories recommended by the Office for National Statistics (“ONS”)) excluding those listed, by the ONS, as coming from a White ethnic background).” (PS22/3)

In-scope firms will be required (in LR 9.8.6R (10) and LR 14.3.33R (2)) to fill in a standardised table which records the numerical data on the stipulated benchmarks, and to provide an explanation as to how this data has been collected. The FCA has provided further guidance (in LR 9.8.6I G and LR 14.3.36G) on its expectations of this explanation, including “a consistent approach to data collection”. (PS22/3)

The “comply and explain” basis means that these benchmarks are not formal requirements, but targets. The requirement is for in-scope firms to publish their numerical statistics in respect of the benchmarks. If an in-scope firm does not meet the benchmarks, they are required to provide an explanation as to why this is the case. This approach allows in-scope firms to provide relevant context around their approach to D&I.

The FCA has further provided guidance (in LR 9.8.6IG and LR 14.3.36G) on how in-scope firms can provide additional context, including but not limited to, providing summaries of key policies, any mitigating factors within the stated period and any anticipated risks or challenges that may limit the firm’s ability to meet the benchmarks in the next reporting period.

What does this mean for Firms?

Whilst PS22/3 is only applicable to in-scope firms, it is clear these new requirements indicate the Regulator’s direction of travel and, with the changes being the “starting point”, it is highly possible that other firms will be brought within scope in due course.

Moreover, firms should remain cognisant of the other areas that the term “diversity” encapsulates. Gender, race and ethnicity have been at the centre of D&I discussions, however, there is growing focus on other key areas, such as social-mobility, disabilities, and LGBTQ+. The new PS22/3 requirements may just be the tip of the iceberg and further benchmarks may be on the horizon.

As such, it remains imperative for all firms, regardless of the current scope, to review their current Board and Executive Management composition and diversity profiles, as well as their broader approach, policies, and procedures in respect of D&I and wider firm culture. They will also need to review their contingency and succession planning arrangements.

Whilst the current requirements are targeted at top level employees, there will also be a knock-on effect for all employees, and firms should consider their recruitment strategies, internal training and development programmes, and wider culture to ensure that these are geared towards, and facilitative of, increasing and enhancing D&I (and not solely focused on meeting defined benchmarks).

How we can help?

We have extensive experience in supporting firms, across the financial services sector, in relation to D&I and culture. We also has a dedicated Financial Services Non-Executive Director (“NED”) Programme which covers key issues relating to D&I and culture.

For more information or support, please contact Richard Barnwell or Shrenik Parekh.

For more information regarding our Financial Services NED Programme, please contact Sasha Molodtsov.