October 27, 2021
Diversity and inclusion (“D&I”) in the workplace including at leadership levels of organisations is an ever prominent issue brought into sharp focus during the pandemic, intensified in the wake of the recent racially motivated crimes in the US and elsewhere, which had brought this critical issue on the agenda of many regulators, globally including the UK’s financial services regulators, the Financial Conduct Authority (“FCA”) and the Prudential Regulatory Authority (“PRA”)
Earlier this year, in July, the UK’s financial services regulators published a discussion paper and a consultation paper setting out proposals to enhance diversity and inclusion in the financial services and the UK listed company sectors respectively. The feedback period on both papers recently came to an end. This alert looks at some of the detail behind the proposals and considers whether in some aspects the FCA has missed an opportunity to push forward the broader D&I agenda and whether in other ways it has gone too far with certain proposals which may have a real and direct impact on the privacy of individuals and the qualitative impact of the proposals.
INTRODUCTION & OVERVIEW OF THE PROPOSALS
Joint Discussion Paper Impacting the UK Financial Services Sector
What?: On 7 July, the FCA, the PRA and the Bank of England (together, the “Regulators”) issued a joint discussion paper – “Diversity and inclusion in the financial sector – working together to drive change” (“DP 21/2“) expounding how meaningful change in respect of diversity and inclusion in the financial services sector can be accelerated and the paper should be viewed as the starting point for the implementation and formalisation of the related requirements. The Regulators’ make it clear that their primary focus is enhancing “diversity of thought” or “cognitive diversity” whilst recognising that diversity of thought can be influenced by many factors including demographic characteristics which are visible and measurable (e.g. gender, age, ethnicity) and invisible (e.g. disability, sexual orientation and education).
Which firms does it impact?: DP 21/2 affects the whole UK financial services sector including firms authorised and regulated jointly by the FCA and PRA (e.g. banks, building societies, designated investment firms, credit unions and insurance firms) or solely by the FCA. Payment services and e-money firms, credit rating agencies and recognised investment exchanges regulated by the FCA and FMIs regulated by the Bank of England fall within the broad reach of the paper.
Next steps: The proposals are only at a “discussion paper” stage but will be the foundations upon which further steps towards change in this area are built upon. Whilst the official deadline for feedback on the discussion paper passed on 30 September, the regulators propose to continue to engage with firms and other regulators on the topics presented in the paper and intend to gather further data to support their analysis and eventual recommendations with a view to issuing a formal consultation paper in Q1 2022 followed by a Policy Statement in Q3 2022.
Consultation Paper Impacting Listed Companies in the UK
What?: On 28 July 2021, the FCA has published a consultation paper – “Diversity and inclusion on company boards and executive committees” (CP 21/24) which sets a number of proposals to enhance diversity-related reporting by certain listed companies in relation to gender and ethnic diversity at both board and executive management level.
Which types of companies does it impact?: The companies in the scope of the breath of the proposals are both UK and overseas issuers with equity shares, or certificates representing equity shares, admitted to either the premium or standard section of the FCA’s Official List (“In-scope Companies”). In addition, the corporate governance related proposals will also capture UK issuers admitted to UK regulated markets and certain overseas listed companies (subject to exemptions for small and medium companies). The FCA is proposing to exclude open-ended investment companies and shell companies. The FCA is also proposing at this stage, to exclude issuers of debt securities, securities derivatives or miscellaneous securities. The FCA estimates that there are about 1,106 issuers who would be In-scope Companies (766 large issuers and 340 small and medium-sized issuers).
Next steps: The consultation closed on 20 October 2021 and, subject to consultation feedback and approval by the FCA Board, the FCA aims to publish a policy statement along with the new Listing Rules and the Disclosure and Transparency Rules (“DTR”) before the end of 2021. This would mean that any new rules would apply to accounting periods beginning on or after 1 January 2022.
A MORE DETAILED LOOK AT THE PROPOSALS
Policy Options Under Consideration for the Financial Services Sector – DP 21/2
Which firms should be in scope? – The Regulators are seeking views on which of the entities identified as falling in the UK financial services sector above should be in scope and the extent that different categories of firms should fall in scope. For example, it is expected that firms which currently fall within the Senior Managers and Certification Regime (“SMCR”) should fall in scope but potentially to different degrees depending on their classification for SMCR purposes (i.e. whether and ‘enhanced’, ‘core’ or ‘limited scope’ firm). The Regulators are keen also to include FMIs (even though they are not caught by the SMCR in the same way as other firms) given the important albeit unseen role they place in society and the UK financial markets. An alternative to utilising the SMCR regime as a foundation to introducing potentially new D&I rules would be to utilise existing size classifications under the UK Companies Act 2006 regime for accounting and reporting purposes (i.e. micro-entity, small, medium sized and large). The Regulators are also keen to gather views on the extent to which overseas firms operating in the UK (including through branches) should be caught – we consider that to the extent that these firms are providing financial services and products into the UK market, it would be appropriate that they fall in scope, albeit this should be in a proportionate manner.
Data Collection: One of the trickiest elements for the Regulators to navigate in putting together their proposals is in relation to data collation. The Regulators rightly see data collation (and related setting of targets or metrics) as key to driving impact and change D&I however recognise first that many firms are already collecting some data (albeit not in a consistent manner) and that collection of meaningful D&I data (particularly in smaller firms) can run directly counter to data privacy rules and these will vary across different jurisdictions. In addition, the effectiveness of D&I data collation including data which requires individuals to self-identify for certain categories of diversity, is likely to be impacted by the culture of the individual firms and indeed the culture (and potentially laws and regulations e.g. rules which may prohibit certain sexual or romantic orientation) across different jurisdictions. Further, on the key diversity element of ethnicity, the appropriate ethnic categories for a firm may well be impacted by the jurisdictions in which those firms principally operate (albeit with UK operations or nexus), where they are incorporated or have their headquarters or key leadership teams. How should the regulations be structured to accommodate for this? This is also proving to be a key factor in the specific proposals for listed companies (see below). Finally, on data collation, whilst for purposes of the discussion paper, the Regulators are gathering feedback on collection of data across the nine “protected characteristics” recognised under the UK’s Equality Act 2010 plus socio-economic background, we do not expect this to result in proposals in the first instance which would cover all of these areas.
Key focus areas of the Discussion Paper: The following areas are the focus of the discussion paper and where the Regulators are actively considering developing policy options (including potentially mandatory proposals):
New Specific Proposals for Listed Companies – CP 21/24
Key new annual reporting requirements:
Unlike DP 21/2 which is looking at a broad range of D&I characteristics potentially across the whole population of a firm, the initial focus of the FCA in CP 21/24 is on gender and ethnicity at board and executive management level. Specifically, if the proposals are to be adopted, they will require In-scope Companies to make the following public annual disclosures:
Ethnic categories – The non-White ethnicity categories are to be based on the UK’s Official National Statistics (ONS) categories – which as readers will immediately appreciate would not appropriately reflect ethnic categories which may be more appropriate for companies either incorporated or based in overseas jurisdictions and where board or senior management teams are composed of persons and/or might more fairly reflect the demographics in such jurisdictions.
Where – The annual disclosure must be set out in the annual report and accounts of the issuer.
Failure to meet the targets – Where In-scope Companies have not met all of the targets, they will need to indicate which targets have not been met and explain the reasons for not meeting the targets.
We would recommend that issuers consider taking up the opportunity to provide further disclosure and context (whether or not they have failed to meet targets and/or perceive a risk in so doing) as this additional narrative can also serve to provide a helpful platform for setting out narratives which can support and distinguish an issuer’s efforts to enhance diversity in its board and leadership teams.
Enhancing existing corporate governance disclosure requirements:
In addition to amending the Listing Rules to reflect the above new annual reporting requirements, the FCA is proposing additional specificity and more information to be disclosed by certain issuers who currently are required to publish a corporate governance statement which includes a description of diversity policies which apply to the their administrative, management and supervisory bodies (or, if they do not have one, explain not). The FCA is proposing to expand the disclosure of the diversity policy to cover the following elements:
POINTS OF NOTE ON THE PROPOSALS & SOME PRACTICAL CONSIDERATIONS FOR ORGANISATIONS
MIS-STEPS? – WHAT DO WE THINK ABOUT THE PROPOSALS?
We note that DP 21/2 is broad and sweeping in nature and makes reference to all protected characteristics under the Equality Act as an attempt to consider diversity & inclusion as a whole rather than focusing on any specific area of underrepresentation. Whilst the ambition is noteworthy, If the intention is to address a broad range of D&I, some market participants would be in favour of a qualitative, in-depth approach over a more modest range of criteria, mindful of overlaps and multiple data requests that firms are facing.
Conversely, CP 21/24, whilst making positive steps in its focus on gender and ethnicity does not cover all aspects of diversity & inclusion including some other key areas including disability and socio-economic background which some market participants view as a missed opportunity. A more ambitious set of proposals giving companies a longer lead time to start to consider, embed and eventually report on a slightly broader data set merited consideration by the FCA.
Finally, we note that neither of the papers have tackled the question of intersectionality nor how the Proposals or development of new rules pursuant to the discussion paper would adequately address this. For example, the new and/or enhanced corporate governance disclosures could have specifically required companies to include disclosures on the extent to which they have identified and are addressing issues of intersectionality.
A QUICK LOOK ACROSS THE SEAS – GLOBAL COMPARISONS
The publication of papers with a focus on D&I is not unique to the UK or the UK Regulators, this is a current hot topic with regulators around the globe keen to ensure representation across companies to reflect all elements of diversity & inclusion. For example:
Whilst no formal changes have yet to be put into effect in the UK, it is clear to see through the publication of both CP 21/24 and DP 21/2, that the Regulators and the FCA are determined to follow and, potentially in a number of respects, lead the global momentum to drive enhancement of diversity & inclusion in business and this is welcome. As the detailed proposals are crystallised and finalised, we will continue to review whether some of the possible unintended consequences (particularly around possible compromises on data privacy) are identified and addressed and if a proportionate set of measures are rolled out across the financial services and listed company sectors.
 The FCA regulates part of the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers. The FCA the conduct regulator for around 51,000 financial services firms and financial markets and the prudential supervisor for 49,000 firms, setting specific regulatory standards for around 18,000 firms.
 DP 21/2
 CP 21/24
 A new set of compliance regulations introduced in the UK to reduce harm to consumers and strengthen financial market integrity by making firms and individuals at those firms more accountable for their conduct and competence. The rules were rolled out across different parts of the UK financial services sector from 2016 and apply to a range of firms in a proportionate manner depending on size and business type, including banks, insurers, FCA-solo regulated firms, PRA-designated investment firms and deposit takers.
 Research quoted DP 21/2 notes that gender is the most commonly collected data with some firms now also collecting and mapping data across the lifecycle of employees. More sophisticated firms are also now starting to collect data on ethnicity.
 The Listing Rules would be amended to include a new definition of executive management – “executive committee or most senior executive or managerial body below the board (or where there is no such formal committee or body, the most senior level of managers reporting to the chief executive) including the company secretary but excluding administrative and support staff”. We note that whilst there is merit in including the company secretary, this role would not normally carry executive responsibilities, hence different terminology e.g. “management” may be a more accurate and representative definition.
 This obligation is set out in the Disclosure and Transparency Rules (DTR) of the FCA’s Handbook and the relevant DTR applies to certain UK and overseas issuers admitted to UK regulated markets but exempts small and medium issuers.
 The concept of intersectionalism is credited to Kimberlé Crenshaw, a legal scholar at Columbia University. The term is used today more broadly to refer to any individuals with multiple self-identities. Specifically, intersectionalism in the workplace does not refer only to the factors of a person’s identity. It is a concept that recognizes the multiple identity factors and how they influence privilege and marginalization, power and influence, emotional impact, and individual and intersecting behaviour (Source: DiversityCan).
This alert has been prepared by Selina Sagayam and Shannon Pepper.
Ms. Sagayam, a corporate partner in the London office of Gibson Dunn, co-chairs Gibson Dunn’s global ESG Practice, is a member of its Global Diversity Committee and chairs its London Diversity Talent & Inclusion Committee.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Environmental, Social and Governance (ESG) practice, or the following in London:
Selina S. Sagayam – International Corporate Group (+44 (0) 20 7071 4263, [email protected])
James A. Cox – Labour & Employment Group (+44 (0) 20 7071 4250, [email protected])
Michelle M. Kirschner – Global Financial Regulatory Group (+44 (0) 20 7071 4212, [email protected])
Please also feel free to contact the following practice leaders:
Environmental, Social and Governance (ESG) Practice:
Susy Bullock – London (+44 (0) 20 7071 4283, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
Perlette M. Jura – Los Angeles (+1 213-229-7121, [email protected])
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Michael K. Murphy – Washington, D.C. (+1 202-955-8238, [email protected])
Selina S. Sagayam – London (+44 (0) 20 7071 4263, [email protected])
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