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FCA diversity and inclusion targets to impact on D&O insurance

The UK Financial Conduct Authority (“FCA”) has published its final policy on disclosure of diversity and inclusion targets which has significant implications for directors and officers (D&O) insurance and the need to ensure there is adequate protection in place.

The FCA’s targets focus on speeding up the pace of change around diversity and inclusion in financial services at a time when company boards face increased scrutiny from the public, regulators, legislators and shareholders.

Companies will be required to make the new disclosures in their annual reports for financial years starting on or after April 1, 2022.

The new rules will require issuers, as an ongoing listing obligation, to include a statement in their annual financial report setting out whether they have met specific board diversity targets, including:

  • At least 40% of the board are women.
  • At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)) is a woman.
  • At least one member of the board is from a minority ethnic background (which is defined by reference to categories recommended by the Office for National Statistics (ONS)) excluding those listed, by the ONS, as coming from a White ethnic background).

The FCA states in the document published on April 20: “These measures will improve transparency on the diversity of company boards and their executive management for investors and other market participants, increasing engagement on this area and informing investment decisions. We hope, in turn through investor pressure, issuers are encouraged towards greater diversity in practice, which may have further benefits for corporate governance and decision-making.”

The new disclosure is to be provided on a “comply or explain” basis and those issuers that have not met the targets will have to explain why. The FCA will review the rules in three years’ time to ensure they are working and to check if the diversity targets are still appropriate.

The FCA is also expanding the Disclosure and Transparency Rules to require companies with a diversity policy to describe their diversity policy for remuneration, audit and nominations committee and to include in their diversity policy-reporting wider diversity characteristics, including ethnicity, sexual orientation, disability and socio-economic background.

Sarah Pritchard, Executive Director of Markets at the FCA said: “As investors pay increasing attention to diversity at the top of the companies they invest in, enhancing transparency at Board and executive management level will help hold companies to account and drive further progress.' 

The scope of the Listing Rule proposals includes UK and overseas companies with equity shares, or equity shares represented by certificates (including global depositary receipts), admitted to either the premium or standard listing segments of the FCA’s Official List in the UK or considering admission to such listings.  

 

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