As International Women’s Day (8 March) approaches, the UK Prudential Regulation Authority (PRA) has published a letter addressed to Chairs of regulated firms about the importance of diversity. It reinforces the importance the PRA places on diversity for improving decision-making and providing effective challenge, and reminds regulated firms of the PRA’s rules in this area.
The PRA already expects boards to have diversity of experience and capacity to provide effective challenge across the full range of the firm’s business, and already requires firms to have a board diversity policy in place, set a target for the under-represented gender where the firm is required to have a nominations committee, and explain on their website how they comply with the respective requirements.
The PRA asks Chairs to satisfy themselves that their firm meets the PRA’s requirements and to take remedial action where they do not, noting that the recent European Banking Authority report on the benchmarking of 2018 diversity practices (as reported here) showed that 30% of sampled UK firms still did not have a diversity policy in place, despite requirements to do so. The PRA notes that Chairs should expect to discuss the extent to which the diversity policy is embedded in recruitment and succession planning for the board with their supervisors through normal regulatory dialogue.
This letter is a clear reminder of the importance the PRA places on diversity, particularly at board level, and reflects a wider focus on diversity from investors (as reported here) and from society generally. The PRA is particularly concerned that some firms do not appear to comply with long-standing requirements, noting that, although there has been progress since the previous benchmarking report for 2015, 30% of UK firms sampled in 2018 continue to not comply with the requirements to have a board diversity policy.
The PRA’s diversity requirements, including the requirement to have a board diversity policy, seek to ensure boards have sufficient diversity, made up of members with different skills, knowledge, experience and values, to reduce the risk of groupthink which they note can adversely affect the safety and soundness of PRA-regulated firms. The PRA’s focus is therefore on ensuring the board reflects a broad set of qualities and competencies and, on this basis, we expect to see the PRA actively challenging firms that do not satisfy the requirements.
We reviewed the Remuneration Reports of the FTSE 100 for 2019 and it showed that all the main banks and insurance companies in the FTSE 100 do have diversity policies in place and some link their annual or long-term incentives to diversity targets. Some are gender specific, while some are wider diversity considerations. If you would like to see our FTSE 100 diversity review, please let us know.
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