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PRA letter on board diversity

  • United Kingdom
  • Employment law
  • Financial services

16-03-2020

David Bailey, Director of International Banks Supervision, and others at the Prudential Regulation Authority (PRA) have written to Solvency II insurers, large non-Directive firms (NDFs) and Capital Requirement Regulation (CRR) firms to remind them about their responsibilities with regard to ensuring board diversity.

The letter draws the recipients’ attention to Supervisory Statement SS5/16 on corporate governance.

In particular the letter notes that the PRA expects to see evidence of effective challenge; to this end, it is necessary to ensure diversity of experience and the PRA expects firms to have an effective board diversity policy in place.

The PRA reminds firms that under the General Organisational Requirements section in the PRA Rulebook all CRR firms, Solvency II firms and large NDFs are required to engage a ‘broad set of qualities and competencies when recruiting to the management/governing body’ and for this purpose put in place a policy to promote diversity of the management body. Significant credit institutions and investment firms that are required to have a nominations committee must additionally set a target for the under-represented gender in the management body.

The PRA letter refers to the European Banking Authority’s benchmarking report published in February 2020. The Benchmarking report is based on data as at September 2018, and evidences that:

  • many institutions across member states had not adopted a diversity policy;
  • the representation of women in management bodies was still relatively low; and
  • many institutions did not have a gender diverse board.

In the UK, 70% of the sampled credit institutions and investment firms had a policy in place for promoting diversity on the management body which means that compliance is still not universal.

The EBA report makes clear that diversity is not limited to gender. It also includes, for example, the age, educational and professional background and geographical provenance (the latter is most relevant to internationally active firms) of the members of the management body.

Diversity reduces groupthink and herd behaviour and can help members of the management body to act more efficiently, achieve a business and risk strategy that is in the best interests of the institution and ensure sound management of the institution and its staff, including ensuring that the institution’s policies are gender neutral and ensuring equal opportunities for all genders.

The PRA letter urges Chairs to satisfy themselves that the requirements are being met and where they are not, to take remedial action.

The letter is the latest in a series of letters from the Financial Conduct Authority (FCA) and the PRA this year addressing the issue of culture and diversity.

Both regulators have emphasised that their focus for the coming year will be on conduct and culture, from the top down. In January, Jonathan Davidson, Executive Director of Supervision at the FCA, wrote to CEOs of insurers reminding them of the importance placed by both regulators on conduct and culture. See our briefing here.

The FCA maintains a set of briefings on culture and governance. These materials include a discussion paper on transforming culture and transforming culture conference summary, which highlight the importance of diversity and inclusion as a means of bringing in fresh ideas to challenge normalising and conformity.

We are the authors of Eversheds Sutherland: the Employment Practitioners’ Guide to Financial Institutions.