FCA Announce New Rules for Board Diversity

After publishing a consultation paper in July 2021 which reviewed diversity and inclusion on company boards, the FCA have now announced the official new rules which will apply to certain listed to listed companies (including closed ended companies, such as VCTs and investment trusts) for accounting periods starting on or after 1 April 2022.

What are the new rules?

1) A company must, in the annual accounting publications, report on whether or not it has met the following diversity targets:

• 40% of individuals on the board to be women;
• one of the senior positions on the board to be held by a woman; and
• one individual on the board to be from a minority ethnic background.

The report must be in the form of a "comply or explain" statement with reference to a specific date during the relevant accounting period.

2) Alongside the new statement, companies must also publish numerical data on the sex or gender identity and ethnic diversity of their board and senior executive management and an explanation of the company’s approach to collecting the data required for the statement.

3) The Disclosure Guidance Transparency Rules (DTRs) will now require companies to include a description of the diversity policy as it applies to the board. The diversity policy must now also cover the company’s remuneration, audit and nomination committees, as well as an extension of the diversity criteria to include age, gender, education, professional backgrounds, ethnicity, sexual orientation, disability and socio-economic backgrounds.

Do they apply to my company?

I read the consultation paper in July 2021, are the final rules different from the original proposals?

Very slightly, and predominantly in how the diversity categories are defined:

• The original targets on gender included individuals identifying as women within the targets.  The new targets relate only to women (without reference to individuals self-identifying as women).  However, for the numerical disclosures, companies may report either on the basis of sex or gender identity.  New guidance has been added to allow a company to add to the categories included in the table to reflect the basis on which it has collected data.
• The language used for the targets on ethnic diversity has also changed. It now refers to a board member from a minority ethnic background (instead of a non-white ethnic minority background). Government guidance offers a list of ethnic groups which would be considered from a minority ethnic background (https://www.ethnicity-facts-figures.service.gov.uk/style-guide/ethnic-groups).

Am I obliged to meet the new diversity targets (at point 1) above)?

In short, no. The FCA does not expect an immediate re-structuring of company boards, nor does it require all new entrants to the market to abide by these targets. That is why the diversity report has been labelled as a "comply or explain" statement, providing companies with the opportunity to explain to the shareholders why the targets may not have been met. For example, the FCA has accepted that it may be difficult, particularly for small boards, to meet the targets, in which case an explanation will likely suffice.

However, a "comply or explain" statement will now be mandatory, as will compliance with points 2) and 3) above.

Is there any additional guidance from the FCA?

Yes (https://www.fca.org.uk/publications/policy-statements/ps22-3-diversity-inclusion-company-boards-executive-managment) and we have provided a very short summary below but the link offers greater detail.

The FCA has stated that there will be a further review of the rules after 3 years.

The FCA have suggested that companies may also wish to include the following information in the annual financial reports:

• a brief summary of key policies which contribute to improving executive management diversity;
• any mitigating factors which make achieving board diversity more challenging;
• any risks identified in meeting board diversity targets; and
• any plans to improve diversity.