Avoid ‘light touch’ approach to FCA’s diversity disclosure rules, warns lawyer

The Financial Conduct Authority, the FCA, has published a paper reminding listed companies of their obligation to disclosure data on the gender and ethnic breakdown of their boards and senior management. New targets around diversity and inclusion reporting were introduced last year but some firms will be reporting on this now, given we are already into April of 2023. The FCA warns that those reports must hit D&I targets or contain “clear and meaningful explanation’ of why targets were missed.

A reminder. The rules require that 40% of the board are women, that at least one board member is from a minority ethnic background, and that a woman holds at least one of the firm’s ‘big four’ senior positions: CEO, CFO, Chair and Senior Independent Director. To maximise the new rules’ potential to have a meaningful impact, the FCA has placed emphasis on two key areas - narrative and data collection.

Anne Sammon writes about this for Out-Law. She says: “The FCA will be watching first year reporting to ensure there is more than a tick-box approach to complying with the new disclosure rules. She says: “Light touch compliance to new reporting obligations is a natural trap to fall into … this can mean that opportunities to engage in a reporting process that feeds into real change are missed.” 

The new targets were introduced last year, and Kate Dodd and Tom Proverbs-Garbett covered it for Out-Law in ‘FCA finalises ‘comply or explain’ diversity rules for listed companies. They explain how the FCA wants firms to publish numerical data on the sex or gender identity and ethnic diversity of their board, senior board positions, and executive management in a table. However,  the FCA is allowing firms flexibility in the format of the table to allow companies to reflect their approach to data collection.

On that point, Tom says: ‘… it means that a company is now responsible for deciding the basis on which it compiles and categorises data. Putting the onus on corporates may mean they need to seek advice, especially around equalities legislation and data protection issues, adding to the cost of reporting.’

So, clearly that’s a point that HR should be alive to so let’s get a view on that. Anne Sammon joined me by video-link to discuss it.

Anne Sammon: “I think Tom is absolutely right because we don't have nice, very clear set of rules that says companies must do X, Y and Z, every company is going to have to make their own decisions and that includes decisions around, for example, what you define as a woman, which we all know is in an incredibly complex and difficult area, and because the FCA has left the guidance quite wide, that means that firms are going to have to very carefully consider the way in which they collect data, and even some of those fundamental definitions that they might use to ensure that they're not inadvertently breaching Equality Act legislation.”

Joe Glavina: “In her article Kate talks about data collection across different jurisdictions. She says local laws in relation to data vary considerably from jurisdiction to jurisdiction. There can also be a variation between what is legally allowed and what is culturally acceptable.”

Anne Sammon: “I think this is a really important point that we see quite often overlooked by organisations, when they're doing those data collection exercises, what they'll do is they'll focus on asking the lawyers, you know, are we allowed to ask this question and whilst that is part of the process of finding out what data you should be collecting, it's not the whole process. So, we've seen some jurisdictions where it might be legally permissible to ask a particular question. But culturally, it would cause concern from employees, because for example, if you're asking whether they have caregiving responsibilities, that immediately makes them think that there is some ulterior motive for you asking that question and collecting that data that doesn't fit with their cultural experience of working within the jurisdiction. So I think it's really important that when you're thinking about data collection exercises, you're not just thinking about what does the law say? But also, how does that work from a cultural perspective? And often the way that we see clients go about that is, is to speak to someone local on the ground to run the questions that they're proposing to ask past them and say, from your perspective, would any of these give cause for concern?

Joe Glavina: “Tom says: The guidance makes it clear that companies will be expected to look ahead and address potential hurdles that might hinder D&I progress. Thoughts on that.”

Anne Sammon: “I think this is a really interesting development as a result of the FCA rules. I think firms are going to need to think not just about what they're doing today, but what their plans are for the future in terms of diversity and inclusion and also it gives firms the opportunity to put these things in context. So one of the issues that we quite often see within the FS sector is that certain sub sectors have bigger diversity issues than others. So for example, insurance is one of those areas where, historically, we've seen far fewer women across organisations and what we've started to see is firms look at a far more kind of run typical approach and there have done in the past. So for example, within that sector, I've seen clients who historically have always recruited people on the basis of needing a STEM degree. And that inevitably means that you have less female candidates to start off with, because unfortunately, our school system means that we do seem to have less female STEM graduates. And so they've overhauled that completely and said, well, actually, what is it that a STEM degree might give somebody and have Is there a different way that we can measure that so can we, for example, give them a numeracy test to make sure that they've got that level of numeracy, rather than having a requirement that they've done a particular degree. And it's steps like that, that we've seen have real impact in terms of the numbers of, of women that then come through at the graduate entry level, which then helps with your pipeline of talent for senior levels.”

Anne’s article on this is called ‘UK financial regulator warns firms off D&I vagueness’ and available from the Out-Law website. The earlier article by Kate and Tom is called ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’. We’ve put a link to both of them in the transcript of this programme. 

LINKS
- Link to FCA Primary Market Bulletin 44
- Link to Out-Law article: ‘UK financial regulator warns firms off D&I vagueness’
- Link to Out-Law article: ‘FCA finalises ‘comply or explain’ diversity rules for listed companies’