FCA consultation on new Diversity and Inclusion Listing Rules

United Kingdom

Over the summer, the FCA announced a consultation on its proposal to introduce a new continuing obligation in the Listing Rules that would require UK and overseas companies with a UK premium or standard listing (subject to certain exemptions) 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 (DTRs) to indicate that existing reporting requirements on board diversity policies should apply to the remuneration, audit and nominations committees and is seeking views on whether this should consider wider diversity characteristics such as sexual orientation, disability and socio-economic backgrounds. 

The purpose of the changes is to enhance market integrity by encouraging increased transparency and providing better data for companies and investors to assess companies’ progress in obtaining a diverse board.

The consultation on the proposal will close on 20 October 2021, and subject to consultation feedback and FCA board approval, the FCA would seek to make the relevant rules by late 2021 for reporting periods beginning on or after 1 January 2022. If the proposals go ahead companies would be encouraged to consider making disclosures on a voluntary basis in annual financial reports published before the requirements would take effect.

The FCA is continuing to focus on improving board diversity for the UK’s largest companies. Although the results of the latest survey from the Parker Review indicated that there has been some improvement in representation of ethnic minorities on the UK’s top boards, there is still some way to go in order to achieve the “one by 2021” target. Following on from the FCA’s recent joint Discussion Paper with the PRA: “Diversity and inclusion in the financial sector – working together to drive change the FCA has now announced a number of proposals to boost board diversity.  

On 28 July 2021, the FCA announced a new consultation on its proposal to introduce a continuing obligation in the Listing Rules requiring in scope UK and overseas companies to make annual disclosures as to whether they meet specific board and executive management gender and ethnicity targets set by the FCA. This will be on a “comply or explain” basis. This consultation, therefore, builds on existing initiatives to improve board diversity for the largest UK companies instigated as a result of the Hampton Alexander Review and the Parker Review.

In addition, the FCA also announced that it is proposing to amend the corporate governance rules within the FCA’s Disclosure Guidance and Transparency Rules (DTRs) to indicate that existing reporting requirements on board diversity policies should apply to the remuneration, audit and nominations committees and is seeking views on whether this should consider wider diversity characteristics such as sexual orientation, disability and socio-economic backgrounds. This is in order to enhance market integrity, by encouraging increased transparency, but also to provide better data for companies and investors to assess their progress in D&I initiatives.

In this Law-Now we set out a practical view of the likely impact of these proposals on in-scope companies and relevant stakeholders.

What are the proposed new requirements?

New Listing Rule

The new proposed 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 1 January 2022 setting 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% of the board are women (including individuals self-identifying as women);
    • at least one of the senior board positions (Chair, CEO, SID or CFO) is held by a woman (including individuals self-identifying as a woman); and
    • at least one member of the board is from a non-White ethnic minority background (as categorised by the Office of National Statistics); and
  • a  numerical disclosure on the gender and ethnic diversity of their board, senior board positions (Chair, CEO, SID and CFO) and executive management team in a standardised table format as set out in Annex 2 to the consultation report.

Greater transparency

The FCA also suggests that in-scope companies may also include for context:

  • a summary of any key policies, procedures and processes, and any wider context, that it considers contributes to improving the diversity of its board and executive management;
  • any mitigating factors or circumstances which make achieving diversity on its board more challenging; and
  • any risks it foresees in being able to meet or continue to meet board diversity targets in the next accounting period or any plans to improve the diversity of its board.

It is expected that the first financial reports to include the required statement would be published in spring 2023.

Enhanced disclosure requirements

In addition to the new Listing Rule, the FCA is proposing to amend DTR 7.2.8AR which requires certain companies’ corporate governance statements to contain a description of any diversity policy applied to its administrative, management and supervisory bodies in respect of certain aspects such as age, gender or educational and professional backgrounds. To the extent an issuer does not apply a diversity policy they are required to explain why in the corporate governance statement.

The proposed amendment to the DTR provides that an issuer’s disclosure should also include the diversity policy applied to its remuneration, audit and nominations board committees, and reporting in respect of additional diversity aspects such as ethnicity, sexual orientation, disability and socio-economic background. The amendment to the DTR is not proposed to change the scope of the rule, such that issuers that qualify as small or medium companies under the DTRs would continue to be exempt from any reporting requirement.

Who will be “in-scope” for the new Listing Rule?

The new Listing Rule is proposed to be applicable to premium and standard listed companies with UK-listed equity shares[1]. This includes all FTSE 350 companies and the FCA estimates 1,106 companies in total will be in scope.

The new Listing Rule is expected to apply equally to in-scope UK and overseas issuers to ensure a level regulatory playing field for issuers listed on the UK regulated markets and to enable investors to access the information they may require in order to make their investment decisions in line with the increasing popularity of environmental, social and corporate governance (ESG) investment mandates. The Listing Rule may need to be applied more flexibly to overseas issuers who may be in differing stages of progress in respect of D&I targets or who may be located in countries where ethnic minorities may form a smaller part of the composition of the overall population generally. As the targets are set on a ‘comply or explain’ basis, the proposals indicate that such issuers may just need to disclose and explain the relevant country specific context in which such targets may or may not have been met. 

Smaller companies would also be in-scope for the new Listing Rule. While reaching board diversity targets may be more challenging for companies that may have fewer directors on their boards, such companies have been kept in-scope as the FCA believes the cost of the additional annual ‘comply or explain’ disclosure are unlikely to be high and such companies may just need to explain that they require additional time to recruit a more diverse board (see further below under ‘Costs’).

How will “comply or explain” drive change in listed companies?

The FCA considers that ‘comply or explain’ targets and data disclosure will prompt issuers to consider, and investors to scrutinise, more closely and therefore hold to account companies on how they encourage more diversity of gender and ethnicity on their boards and senior management committees, thereby improving opportunities for these groups. The ability to ‘explain’ why targets have not been met provides flexibility if, for example, smaller boards need more time to recruit or if there has been an unexplained departure affecting compliance with the target. In previous guidance, the Financial Reporting Committee has indicated that giving full, clear and meaningful explanations (including, for example, details of any relevant actions taken by the company, and any mitigating factors preventing compliance with the rules) is best practice when ‘explaining’ non-compliance[2].

Explaining non-compliance will promote debate and transparency and puts a marker in the sand allowing investors to monitor progress and hold issuers to account. It is also hoped that the potential reputational impact of explaining rather than complying will be such that it will incentivise organisations to comply in the medium to longer term.

What impact might these proposals have on the wider corporate world?

The FCA’s proposals will not be applicable to private companies, FCA regulated investment or other financial services firms[3] or AIM listed companies, as AIM is not a regulated market for the purpose of the Listing Rules. The number of main market listed companies roughly comprises approximately 0.07% of the total number of VAT and/or PAYE businesses currently operating in the UK. Therefore, unless a private company is contemplating a main market listing in the future, it is questionable as to how much impact these proposals will have on making meaningful change to the UK business landscape[4]

That said, AIM companies are typically encouraged to consider adopting main market requirements to the extent possible as corporate governance best practice. It is also possible that professional services firms or other suppliers of in-scope issuers (e.g. law firms, auditors or sponsors) may also be indirectly impacted by the new Listing Rule to the extent issuers’ express their diversity policy to extend to their advisors or other entities with which they have regular dealings. Also, purely from an internal organisational perspective, where an issuer will have one diversity policy to be implemented at group level, it is likely that any private subsidiaries of the listed company could also eventually benefit from the changes to be implemented at the top-co level for the issuer to attain the relevant diversity targets. 

How does this fit in with the wider push towards ESG investing?

The proposals are aimed at enhancing market integrity to support transparent price formation by providing shareholders and investors with readily available key information that could inform valuations of issuers’ securities and other investment decisions which are increasingly focused on ESG factors. These new proposals follow on from the FCA’s implementation of a new climate change disclosure rule for premium listed companies (see our previous Law-Now here). The consultation is already seeking views on whether in the future the FCA should consider an expansion to the existing proposals by requiring data on representation by sexual orientation at senior levels or extending reporting to capture a further level below executive-level management.

ESG is a wide umbrella and therefore it is likely that other similar initiatives that fall within ESG factors will also align with the FCA’s operational objectives of protecting and enhancing the integrity of the UK financial system and the consumer protection objective and will therefore continue to be proposed and/or enhanced in the future.

Will requiring reporting on just the categories of gender and ethnicity be enough to affect change?

As indicated above, the FCA recognises that focusing on women (and those self-identifying as women) and ethnicity may lead to concerns that other important minority groups with protected characteristics under the Equality Act 2010 (such as age, disability and sexual orientation) as well as other characteristics such as socio-economic background are being overlooked. However, it 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. The FCA nevertheless encourages companies within their internal polices and recruitment processes and in their external corporate reporting to focus on a wider diversity agenda and to consider how to promote representation across all minority and groups with protected characteristics. This is reflected in the changes to the DTR.

What are the practical issues that remain to be considered as part of the consultation?

Data gathering, Data Protection and employment issues

One of the first practical steps will be for issuers to gather data on gender and ethnicity. Most organisations only require provision of this data on a voluntary basis and for some organisations there is low take up. Whilst obtaining data on gender is simpler, experience has shown this is not necessarily the case for ethnicity data. However, given these proposals only affect board and the most senior level of executive management, data capture for this group should be much more achievable.

In terms of processing the data, the collection and processing of personal data in respect of race, ethnicity or sexual orientation, is classified as “special category data” under the UK GDPR and whilst not forbidden, companies would need to determine that they have a lawful basis under which to collect and process such information if they are to comply with the new proposed rules within the framework of their obligations under UK data protection legislation. Any final iteration of the proposed Listing Rule and amendment to the DTRs would be subject to consultation with the Information Commissioner’s Office (ICO) in respect of any data protection issues or concerns raised by stakeholders during the consultation.  


The FCA considers the new reporting requirements to be proportionate and any associated costs as likely to be modest since the ability to “explain” provides flexibility to boards and disclosure of detailed numerical data will not be required. Any associated costs (such as recruiting new board members) are considered to be more likely to be internal “one off” costs. As meeting the requirements may be challenging for some companies, such as those with smaller boards, the consultation seeks views on any potential cost implications.

A standardised approach is expected to minimise costs for issuers who already voluntarily provide this data, reduce costs (including familiarisation and legal review costs) for investors when considering whether the relevant issuers’ securities fall within their investment mandates, and ultimately lead to improved pricing and more informed investment decisions.

What should we expect to happen as a result of these proposals?

The key outcome sought is to increase and improve D&I, as well as market integrity, for the benefit of issuers, investors and wider consumers. The FCA also expects the measures, in time, to strengthen incentives for companies to work towards attaining and sustaining greater D&I across their organisations to enable better representation of stakeholder interests, contributing to healthier corporate cultures which should result in better quality corporate governance and long-term performance of issuers. The FCA also expect the data produced by these initiatives to feed into policy analysis and research and to help drive future related policy proposals.

All of these outcomes seem laudable. Critics will no doubt cite that this initiative undermines a company’s ability to recruit the ‘best’ candidate for its board and will lead to the increase in the size of boards and tokenism. However, given the regime allows for non-compliance where there is a dearth of suitably qualified candidates, this perceived downside is ultimately within the control of the corporates, as are the steps they take to improve the diversity of suitably qualified candidates.


The introduction of targets is a material change and most companies (other than parts of the FTSE100) will find it difficult to meet them, especially in the first few years.  So at the outset non-compliance seems inevitable. According to latest published  figures the percentage of women on boards in FTSE 350 companies sits at 34.3%.  The ability to increase gender representation in the short term will also depend on when appointment terms come to an end and board vacancies become available. It took 5 years for the percentage of women on boards to move by 12.4%. Nobody is expecting change to happen overnight. Most companies will be willing to include a narrative to explain why the target was not met and their plans to get closer to the targets with realistic timescales (which is what happened when board diversity was first tabled a few years ago). Over time compliance will become more common. The key outcomes identified by the FCA should flow from this compliance.

The consultation will close on 20 October 2021, and subject to consultation feedback and FCA board approval, the FCA would seek to make the relevant rules by late 2021 for reporting periods beginning on or after 1 January 2022. Companies would be encouraged to consider making disclosures on a voluntary basis in annual financial reports published before the requirements would take effect and should certainly be planning now their strategy to meet the targets and their explanation of why they have been unable to do so. 

If you would like to discuss any of the above, please contact Catherine Taylor, Kristy Duane, Katy Nagy de Nagybaczon or your regular CMS contact.

 [1] This includes closed-ended investment funds, sovereign-controlled companies and companies with UK-listed global depositary receipts that represent equity shares, but excludes open-ended investment companies, shell companies (such as SPACs) and issuers of standard listed debt and debt-like securities and other non-equity securities. Closed-ended investment funds would be permitted to adjust their disclosures on senior board positions and numerical data disclosures where these are not applicable as long as they set out the reasons why such disclosures are not applicable to them.

[2] See, for example, FRC guidance from February 2021 Improving-the-Quality-of-Comply-or-Explain-Reporting.pdf (frc.org.uk)

[3] Save for those that have shares admitted to the FCA’s Official List

[4] ONS statistics as at March 2020 indicate the number of businesses operating in the UK which operate VAT and/or PAYE was 2.75 million (UK business; activity, size and location - Office for National Statistics (ons.gov.uk)). Statista indicates as of July 2021, there were 2010 companies trading on the London Stock Exchange (• Number of companies on London Stock Exchange 2021 | Statista).