FCA diversity targets 'meaningless' without proper data capture, law firm warns

FCA diversity targets 'meaningless' without proper data capture, law firm warns

The Financial Conduct Authority's diversity and inclusion listing rules are a step in the right direction, but unless companies implement proper measures for data capture, targets could become 'meaningless', a City law firm has warned.

An update from CMS questioned whether simply reporting on the categories of gender and ethnicity be enough to affect change, given that companies have so far been unable to gather adequate data on gender, ethnicity and other protected characteristics. 

CMS commented: "Most organisations only require provision of this data on a voluntary basis and, for some organisations, there is low take up.

"While obtaining data on gender is simpler, experience has shown this is not necessarily the case for ethnicity data."

However, it warned that an initial focus on gender and ethnicity targets could be meaningless if data capture is not pinned down.

The note said: "The FCA has chosen to initially focus on gender and ethnicity because there are existing data initiatives (such as gender pay gap and voluntary ethnicity pay gap reporting) which allow the FCA to develop its proposals and set meaningful targets.

"The suggestion therefore is that companies are not so developed in their capture of data relating to sexual orientation and disability. Without adequate data capture, setting targets could be meaningless."

That said, CMS believes as these new proposals only affect board and the most senior level of executive management, "data capture for this group should be much more achievable".

In July, the FCA announced a consultation on its proposal to introduce a continuing obligation in its listing rules.

This means UK and overseas companies with a UK premium or standard listing (subject to certain exemptions) will have to make annual disclosures relating to whether they meet specific board and executive management diversity targets relating to gender and ethnicity on a “comply or explain” basis. 

The FCA is also proposing to amend the corporate governance rules within the FCA’s Disclosure Guidance and Transparency Rules to indicate that existing reporting requirements on board diversity policies should apply to the remuneration, audit and nominations committees.

The City watchdog is currently seeking views on whether this should consider wider diversity characteristics such as sexual orientation, disability and socio-economic backgrounds. Its consultation on the proposals closes next month, on October 20. 

The proposals to the listing rule would require in-scope companies with a UK premium or standard listing to make public annual disclosures in their annual finance reports for periods beginning on or after January 1, 2022.

According to the FCA consultation, companies need to set out a “comply or explain” statement on whether they have met proposed targets for gender and ethnic minority representation on their board, as follows:

  • at least 40 per cent of the board are women (including individuals self-identifying as women);
  • at least one of the senior board positions (chairperson, chief executive or chief financial officer, for example), is held by a woman (including individuals self-identifying as a woman);
  • at least one member of the board is from a non-White ethnic minority background (as categorised by the Office of National Statistics); 
  • a numerical disclosure on the gender and ethnic diversity of their board, senior board positions and executive management team in a standardised table format.

The aim is also to improve transparency, requiring firms to be able to show a summary of any key policies, procedures and processes, and any wider context, that they consider contributes to improving the diversity of their boards and executive management.