FCA Issues Reminder on Board and Executive Management D&I Disclosure Obligations

The UK Financial Conduct Authority (“FCA”) has provided a reminder to primary market participants in its Primary Market Bulletin 44 of the need to make diversity and inclusion-related (“D&I”) disclosures in their annual reports. The obligations were introduced last year through amendments to the Listing Rules  and the Disclosure Guidance and Transparency Rules (“DTRs”), as set out in the FCA’s Policy Statement PS 22/3 (and covered in our previous blog post here).

At a glance, the amendments to the Listing Rules oblige in-scope companies to disclose annually on a “comply or explain” basis whether they meet specific board diversity targets, and to publish standardised data on the composition of their board and senior management, in each case in relation to sex or gender and ethnic background.

Changes to the corporate governance rules were introduced (through the amendments to the DTRs) to encourage a broader consideration of diversity at a board level, including with respect to a wider pool of diversity characteristics, spanning ethnicity, sexual orientation, disability, and socio-economic background

The rules are intended to increase transparency with better, more comparable information on the diversity of companies’ boards and executive management. The FCA believes that greater transparency will provide improved data for companies and investors to assess progress in this area, and inform shareholder engagement and investment decisions, thereby enhancing market integrity and promoting greater D&I.

Which companies are required to comply with the new D&I disclosure obligations and when?

Applicable to UK and overseas issuers with a premium or standard listing, the amended Listing Rules and DTRs came into force for accounting periods beginning on or after 1 April 2022. This means that the first set of annual reports including the new D&I disclosures will be published from April 2023 onwards on a “comply or explain” basis.

What are in-scope companies required to disclose?

In-scope companies must include a statement in their annual reports setting out whether they have met specific board diversity targets (see our previous blog post on this here). The disclosures must be made by reference to a specific reference date selected by the company during the relevant accounting period.

What are the implications of making inaccurate D&I disclosures?

The FCA uses Primary Market Bulletin 44 to set out some steps and guidance to ready in-scope companies for making the relevant disclosures, as well as outlining its supervisory strategy for monitoring and enforcing compliance with the new disclosure obligations.  In particular, the FCA confirms that it will conduct periodic reviews of annual reports to identify both areas of concern and best practices.

If in-scope companies are not meeting their D&I disclosure obligations, or fail to provide a clear explanation in their annual reports under the “comply or explain” basis, the FCA may ask them to take corrective action, including by requiring companies to publish such information via an RIS as soon as possible and/or requiring enhanced disclosures in subsequent annual reports.

The FCA has committed to deploying its full suite of powers and sanctions, where appropriate, and will consider where disclosures are potentially false, misleading or omit material facts, likely to cause investor harm, or which may breach other relevant FCA ESG-orientated rules.

It is therefore important for in-scope companies to make accurate D&I disclosures; where data is difficult to collate or insufficient for full and accurate disclosures, a company should make this clear within its annual report and explain the extent to which it is unable to make the relevant disclosures. Companies should also identify any legal restrictions which may prevent the collection or publication of the requisite D&I data.

Practical Steps

The FCA makes use of the bulletin to remind in-scope companies of Listing Principle 1, highlighting that this also extends to establishing and embedding D&I reporting procedures, systems and controls to meet disclosure obligations, including under the new rules.  

In preparation for making the relevant D&I disclosures, the FCA encourages in-scope companies to review their governance arrangements for oversight of D&I targets, to be aware of the relevant compliance framework, assess existing public narrative reporting on D&I, and to establish or enhance procedures, systems and controls over data collection and reporting. If it appears that targets may not be met, companies should ensure they can provide clear and meaningful explanations and may wish to review the effectiveness of board succession plans.

Photo of Summreen Mahween Summreen Mahween

Having trained at the firm’s London office, Summreen Mahween is an associate in the Corporate Practice Group.

She works on a range of transactional and commercial matters, predominantly advising public and private companies on mergers and acquisitions, corporate restructurings, commercial advisory work, and…

Having trained at the firm’s London office, Summreen Mahween is an associate in the Corporate Practice Group.

She works on a range of transactional and commercial matters, predominantly advising public and private companies on mergers and acquisitions, corporate restructurings, commercial advisory work, and general corporate governance. Whilst her clients are wide-ranging, Summreen has a particular focus on the life sciences and technology industries.

Summreen also has significant experience in financial services and regularly writes about, and advises on, ESG-related developments in the banking sector. Her pro bono work principally consists of advising non-profit organisations on various Business and Human Rights matters.

Photo of Allan Topol Allan Topol

Allan Topol is a resident in the firm’s Washington office.  While practicing law with Covington, he has written ten novels of international intrigue and numerous articles dealing with foreign policy issues in The Huffington Post, The New York Times, The Washington

Allan Topol is a resident in the firm’s Washington office.  While practicing law with Covington, he has written ten novels of international intrigue and numerous articles dealing with foreign policy issues in The Huffington Post, The New York Times, The Washington Post, and Military.com.

Mr. Topol’s law practice has involved extensive civil and criminal litigation, with an emphasis on water, air and major hazardous waste enforcement cases, as well as international environmental law and toxic torts.  He has also advised clients on many of these environmental issues assisting them in dealing with immediate problems as well as developing long term strategies.