Primary Market Bulletin 44

In light of concerns that there was a lack of standardised and mandatory transparency about diversity on listed company boards, we recently introduced new Listing Rules in PS22/3 to require in-scope companies to disclose in their annual financial report whether they meet specific board diversity targets relating to sex or gender and ethnicity on a 'comply or explain' basis. Alongside this, we have also introduced a requirement for in-scope companies to publish standardised data on the composition of their board and most senior level of executive management by sex or gender and ethnic background.

To encourage a broader consideration of diversity at board level, we also introduced an amendment to the corporate governance rules within our disclosure guidance and transparency rules (DTRs) to indicate that, pursuant to existing reporting requirements on board diversity policies by in-scope companies, consideration should be given to wider diversity characteristics. This includes ethnicity, sexual orientation, disability, and socio-economic background.

The new rules are intended to increase transparency with better, more comparable information on the diversity of companies’ boards and executive management. This should in turn provide improved data for companies and investors to assess progress in this area, and inform shareholder engagement and investment decisions, enhancing market integrity and promoting greater diversity and inclusion.

The companies in scope of our new Listing Rules are UK and 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 

We are not applying the new Listing Rules to issuers of listed debt and debt-like securities, securitised derivatives, or miscellaneous securities. 

DTR 7.2.8A R applies to certain UK issuers with securities admitted to UK regulated markets and to certain overseas listed companies, subject to existing exemptions for small and medium companies (see DTR 1B.1.7 R for full guidance on which companies are exempt). 

The new Listing Rules and amended DTR came into force for accounting periods beginning on or after 1 April 2022. The first annual financial reports including disclosures subject to this rule will be published from April 2023. 

To help listed companies, their directors and advisers, we are taking the opportunity to remind companies of our rules, guidance and expectations, including by providing some steps to help companies get ready for making the relevant disclosures. We also set out our supervisory strategy for monitoring and enforcing compliance with the new rules.

LR 9.8.6 R (9) and LR 14.3.33 R (1) require companies in-scope to provide a statement in their annual financial report on a ‘comply or explain’ basis, setting out: 

a. Whether the listed company has met the following targets on board diversity as at a chosen reference date within its accounting period: 

(i) at least 40% of the individuals on its board of directors are women 

(ii) at least one of the following senior positions on its board of directors is held by a woman: 

(A) the chair

(B) the chief executive

(C) the senior independent director 

(D) the chief financial officer 

(iii) at least one individual on its board of directors is from a minority ethnic background 

b. In cases where the listed company has not met some or all of the targets in (a): 

i. the targets it has not met

ii. the reasons for not meeting those targets

c. The reference date used for the purposes of (a) and, where this is different from the reference date used for the purposes of reporting this information in respect of the previous accounting period, an explanation as to why. 

d. Any changes to the board that have occurred between the reference date used for the purposes of (a) and the date on which the annual financial report is approved that have affected the listed company’s ability to meet one or more of the targets in (a). 

LR 9.8.6 R (10)  and LR 14.3.33 R (2) require companies in-scope to also disclose in their annual financial report numerical data on the ethnic background and the gender identity or sex of the individuals on the listed company’s board and in its executive management as at the reference date used for the purposes of LR 9.8.6 R (9)(a) and LR 14.3.33 R (1)(a), which should be set out in the format of the tables contained in LR 9 Annex 2 and LR 14 Annex 1 and contain the information prescribed by those tables. 

LR 9.8.6 R (11) and LR 14.3.33 R (3) require companies in-scope to provide an explanation of their approach to collecting the data used for the purposes of making the disclosures in LR 9.8.6 R (9) and (10) and LR 14.3.33 R (1) and (2). LR 9.8.6 I G and LR 14.3.36 G provide guidance on our expectations of what this should cover. 

LR 9.8.6G (R) and LR 14.3.34 R state that where individuals on a listed company’s board or in its executive management are situated overseas, and data protection laws in that jurisdiction prevent the collection or publication of some or all of the personal data required to be disclosed under LR 9.8.6 R (10) and LR 14.3.33 R (2), then a listed company may instead explain the extent to which it is unable to make the relevant disclosures.

The scope of DTR 7.2.8A R is extended so that:

a. The company's disclosure on its diversity policy must include the diversity policy applied to its remuneration, audit, and nominations committees. 

b. The policy must cover aspects such as ethnicity, sexual orientation, disability, and socio-economic background (in addition to the aspects of age, gender, or educational and professional backgrounds). 

c. If the company does not apply a diversity policy, the corporate governance statement must contain an explanation as to why this is the case.

In the case where a listed company has not met the targets under LR 9.8.6 R (9)(a) and LR 14.3.33 R (1)(a), there are requirements under LR 9.8.6 R (9)(b) and LR 14.3.33 R (1)(b) to set out the targets not met and provide the ‘reasons’ for not doing so. Companies should provide clear and meaningful explanations as to why they have not met targets. 

You are reminded of the guidance contained in LR 9.8.6H G, LR 9.8.6I G, LR 9.8.6J G and LR 14.3.35 G, LR 14.3.36 G, LR 14.3.37 G in relation to the requirements under LR 9.8.6 R (9) to LR 9.8.6 R (11) and LR 14.3.33 R. 

In instances where individuals on a listed company’s board or in its executive management are situated overseas, and are not able to provide personal data required to be disclosed under LR 9.8.6 R (10) and LR 14.3.33 R (2) due to data protection laws in that jurisdiction, LR 9.8.6G R and LR 14.3.34 R state that a listed company may instead explain the extent to which it is unable to make the relevant disclosures.

Companies should provide clear and meaningful explanations as to the extent they are not able to make the relevant disclosures.

The FCA is responsible for monitoring, and where necessary, enforcing compliance with the new Listing Rules and amended DTR which cover diversity related disclosures, and for determining an appropriate supervisory approach. 

The UK Corporate Governance Code (the Code) applies to all companies with a premium listing, whether incorporated in the UK or elsewhere, on a comply and explain basis, through LR 9.8.6 R (5), and LR 9.8.6 R (6). The Code refers to diversity in board composition and senior management in some of its Principles and Provisions.

The Financial Reporting Council (the FRC) which is responsible for setting and maintaining the Code, regularly reviews how premium listed companies have reported in line with the Code with a view to improving the quality of disclosures. As part of this, the FRC publishes periodic reports about board diversity and diversity related reporting by listed companies. This may extend to requirements covered by DTR 7.2.8A R.

The supervisory approach extends to identifying cases where regulatory intervention may be needed to make sure listed companies comply with the new requirements and improve the quality of their disclosures so that they are providing sufficient, decision-useful diversity and inclusion information for investors. 

As part of our supervisory work, we intend to conduct periodic reviews of annual financial reports to determine whether listed companies are meeting their disclosure requirements under the new Listing Rules and amended DTR. If a listed company’s disclosures do not appear to meet the requirements, we may ask the company to take corrective action, for instance enhancing their disclosures in subsequent annual financial reports. 

Recognising that many listed companies will be applying these requirements for the first time, we also aim to identify areas of concern and disseminate examples of good practice through our periodic review work. Over time, we will also assess how far our regulatory intervention has resulted in a material improvement in both the completeness of diversity-related reporting and whether the targets have been met or exceeded.

If a listed company fails to disclose diversity-related information or fails to provide a clear explanation in their annual financial report as required under LR 9.8.6 R (9), LR 9.8.6 R (10), LR 9.8.6 R (11), LR 14.3.33 R (1), and DTR 7.2.8A R, then we will request that the company publishes this information via a Regulatory Information Service (RIS) in line with the rules, as soon as possible after discovery.

Any non-compliance will be viewed seriously and will lead to action using the full suite of powers, as well as sanctions, where appropriate.

In addition to considering any non-compliance with the relevant Listing Rules and DTRs, we will consider disclosures identified as containing potentially false or misleading information, including the omission of material facts, likely to cause investor harm or which may breach other relevant FCA rules for environmental, social and governance (ESG) matters (see Technical Note TN 801.2).

We would like to remind premium and standard listed companies in scope of the Listing Rules: 

• That Listing Principle 1 (which requires a listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable them to comply with their obligations (LR 7.2.1 R)) extends to establishing and embedding D&I reporting procedures, systems and controls in order to meet your obligations under the Listing Rules and DTRs. 
• There is an expectation that listed companies retain records to support both the statement and numerical data disclosed in their annual financial reports. 

We set out below the steps we would expect listed companies to have considered in preparation for making the relevant D&I disclosures on a comply or explain basis: 

1. Review your governance arrangements for oversight of diversity and inclusion targets and reporting, including the roles of the board, sub-committees, and senior management. 

2. Know your compliance framework including both new and existing rules and regulations. 

3. Assess your existing public narrative reporting of diversity and inclusion. 

4. Establish or enhance your procedures, systems and controls over data collection and reporting, including for choosing an appropriate reference date for data collected. 

5. Where it appears you may not meet the targets or have the relevant data: 

a. Ensure you can provide clear and meaningful explanations (which could include possible action plans) as to why you have not met the targets or do not have the relevant data.

b. You may wish to review the effectiveness of your existing board succession and recruitment plans.

6. Identify any legal restrictions which may prevent collection or publication of the required data.

We aim to have a data-driven and outcomes-based approach towards both monitoring compliance and policy evaluation. Periodic reviews and stakeholder engagement will be key to assessing the ongoing effectiveness of this policy intervention.

In line with this, we intend to review this policy in 3 years to assess the impact of our rules on promoting transparency on key diversity metrics and supporting market integrity. We will review the data to see if there is evidence to support enhancing our rules.