Corporate Law Update

• The FCA implements new requirements for listed companies to report on diversity within their boards and executive management
• The FRC consults on taking back responsibility for approving auditors of public interest entities

FCA implements new requirements for board and executive diversity reporting

The Financial Conduct Authority (FCA) has published a policy statement on diversity and inclusion on company boards and in executive management.

The new requirements apply to both UK and overseas issuers with a premium or standard listing of equity shares (or certificates representing equity shares). They do not apply to AIM companies.

What did the FCA previously propose?

The statement follows the FCA’s consultation in August 2021 on mandatory diversity reporting by listed companies. For more information on that consultation, see our previous Corporate Law Update.

In brief, the FCA proposed the following:

• Specific board targets. An issuer would need to meet specified diversity targets or explain why it has not done so. The targets are:
  • At least 40% of the board to be women (including persons self-identifying as women).
  • At least one of the senior board positions (chair, CEO, SID and CFO) to be a woman (including a person who self-identifies as a woman).
  • At least one board member to be from a non-white ethnic minority background.
• Management composition. An issuer would need to provide a breakdown of its board and the most senior level of its executive management by gender and ethnicity using prescribed tables and classification schemes.
• Diversity policy. Existing requirements (in DTR 7.2.8AR) for large companies admitted to a UK regulated market to explain their board diversity policy would be extended to audit, remuneration and nomination committees, as well as to other aspects of diversity.

What has the FCA decided?

Following positive feedback, the FCA has proceeded with its proposals. However, it has made certain changes to the proposals to reflect feedback surrounding privacy concerns, data protection issues, and the intersection of the proposals with existing reporting requirements, and sensitivity around evolving public policy and wider social debate.

The key changes are as follows:

• Issuers may report against targets for female representation based either on sex or on gender identity.
• Issuers must report numerical breakdowns using standardised tables provided by the FCA. However, they may do so based either on sex or on gender identity and can adapt the format of the tables to reflect their choice.
• Issuers must explain their approach to collecting data (for example, by relying on existing data collection or using dedicated questionnaires). This new requirement is designed to complement the flexibility the FCA has introduced and allow investors to draw a reasoned conclusion from the data.
• Where an issuer has board members or executive managers overseas and local law prevents collecting or publishing data, it may instead explain the extent to which it cannot make numerical disclosures and complete the tables.
• Closed-ended investment funds and sovereign-controlled companies may adjust their disclosures on senior board positions and numerical data if they are inapplicable to the fund, so long as they provide an explanation.

The FCA has decided not to extend reporting to other categories, such as sexual orientation, disability or socio-economic background at this time.

What happens next?

The FCA has published the instrument implementing the changes.

The new reporting requirements will apply to financial years starting on or after 1 April 2022. This means we should start seeing the first disclosures towards the end of Q2 or beginning of Q3 2023.

The new requirements cover both UK and overseas issuers with a premium or standard listing of equity shares (or certificates representing equity shares). This includes closed-ended investment funds and sovereign-controlled companies, but not open-ended investment companies or “shell companies”.

The new requirements do not apply to issuers which have only debt securities listed.

The expanded scope of DTR 7.2.8AR continues to apply only to UK issuers with securities admitted to a UK regulated market and (through the Listing Rules) to certain overseas listed companies.

The FCA will review the new requirements in three years’ time to assess whether the nature and level of targets remain appropriate and sufficiently ambitious.

FRC consults on taking back oversight of major company audits

The Financial Reporting Council (FRC) is consulting on taking back responsibility for approving and registering firms that conduct audits of public interest entities (PIEs).

At the moment, the FRC is the authority responsible for overseeing firms that conduct statutory audits of companies under UK accounting legislation. In this role, the FRC decides the criteria for qualifying as a statutory auditor and keeps a publicly available register of statutory auditors.

In practice, the FRC delegates day-to-day responsibility for approving statutory auditors to “recognised supervisory bodies” (RSBs). The four RSBs are the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW), the Institute of Chartered Accountants of Scotland (ICAS) and Chartered Accountants Ireland (CAI).

The FRC is now proposing to take back responsibility for approving firms and individuals who undertake, or expect to undertake, statutory audits of PIEs.

PIEs include entities with transferable securities admitted to a UK regulated market (such as the London Stock Exchange Main Market), as well as certain credit institutions and insurance undertakings.

The consultation paper notes that taking back responsibility for approving auditors of PIEs from the RSBs would augment the FRC’s supervisory toolkit and allow it to be increasingly assertive in holding auditors to account.

The FRC would implement the changes through new regulations, a draft of which the FRC has published alongside the consultation.

Under the proposed regulations, a firm that intends to undertake an audit of a PIE will need to register specifically as such with the FRC and satisfy certain conditions. These include that the audit firm has in place adequate procedures to carry out PIE audit work and to meet the legislative requirements and standards applicable to PIE audit work.

The consultation paper contains a list of audit firms the FRC expects to be impacted by the proposals.

The FRC has asked for responses by 26 May 2022.