Regulatory-political activism: the Financial Conduct Authority goes woke (2024)

In 2021, the Financial Conduct Authority (FCA) published proposals to add to the Listing Rules targets for women and ethnic minorities on boards, and additional reporting requirements on diversity in senior leadership positions. The proposals show the FCA engaging in highly contestable political activism that will impose costs on companies. They also demonstrate the limitations of technocratic approaches like cost-benefit-analysis to achieving “better regulation”.

The FCA proposed that with effect from early 2023, for listed companies:

• At least 40% of the board should be women (including those self-identifying as women)


• At least one of the senior board positions (Chair, Chief Executive Officer, Senior Independent Director or Chief Financial Officer) should be a woman (including those self-identifying as a woman)


• At least one member of the board should be from a non-white ethnic minority background (as categorised by the Office for National Statistics)

Companies that do not achieve these targets would be required to explain the reasons why.

Already you may be wondering: why is this a matter for the FCA at all? Its objectives are protecting and enhancing the integrity of the UK financial system, consumer protection, and the promotion of competition. The fundamental principles of Listing Rules concern “maintaining market confidence and ensuring fair and orderly markets.”

Well, according to the FCA, its proposals are

“intended to increase transparency by establishing better, comparable information on the diversity of companies’ boards and executive management [to] provide improved data for companies and investors to assess progress in these areas and […] inform shareholder engagement and investment decisions, enhancing market integrity.”

Over time, it expects that

“enhanced transparency may strengthen incentives for in-scope companies towards greater diversity on their boards. This may have further benefits of improving the quality of corporate governance and company performance in due course.”

The FCA wants “better data” under the new rules to allow it to “assess whether and how best to take further steps to promote greater diversity of company boards, for example, in relation to sexual orientation, lower socio-economic background and people with disabilities.”

Existing ‘gender pay’ reporting is of limited use even if one accepts its premise. So adding another layer of bureaucracy for large companies, and a distraction from the real challenges of economic recovery seems undesirable, and unlikely to contribute to financial stability, growth or competition.

The FCA itself admits the evidence base for its proposals is “inconclusive”, and that it cannot show a “causal link” between its policy proposal and “any desired outcomes deriving from greater diversity.” It says the benefits from increased transparency will outweigh the costs of this measure, but transparency is not a standalone benefit, especially concerning private businesses. It should not be mandated unless it delivers market and consumer welfare benefits, which is exactly what the FCA has admitted it cannot show. It can only plead a hope that the greater availability of published data might eventually show some benefits. The cost-benefit-analysis attached to the proposals does not include, for example, costs of excluding otherwise preferred candidates in effort to meet the diversity targets, The benefits include speculative benefits to investors and consumers that “may” arise, even though the examination of the evidence base set out elsewhere in the proposal found no persuasive evidence of such effects. The impact on women of accepting self-identified women towards the targets is not addressed at all.

The Compatibility Statement in the proposal asserts with a breezy confidence that the proposal is fully compatible with the FCA’s objectives of market integrity and consumer protection. This suggests limitations in the use of overriding statutory objectives for regulators to encourage them in the direction of preferred policies, such as competition and innovation. Here the FCA simply states that the proposals support its objectives, and government economic policy (which it is obliged to have regard to), even though it admitted that the evidence base is weak or inconclusive. Arguably the most controversial part of the proposal (the inclusion of self-identified women as women) is not explained at all.

This reveals that this is not just well-meaning but misplaced managerialism from the FCA, rather it is a salvo in the Culture War. Departing from the principles of the Equality Act (including current gender pay reporting regulations which, despite the confusing use of the word ‘gender’ in the title, are based on male and female categories), and the legal definition of sex,[1] the FCA wishes firms to report based on the self-identified gender of directors and includes self-identified women within the targets for women directors. The proposed reporting requirements include the concept of ‘non-binary’, which does not exist in law, and is not even defined by the FCA. The express intention of the proposed rule changes is pursuit of “intersectionality”.

These are contested political positions. The elected government has explicitly decided not to pursue recognition in law of self-identified gender and successfully defended the sex binary in the Supreme Court. Forcing companies and their employees to formally treat male employees as women, simply because they self-identify as such, oversteps the role of the financial regulator. It also undermines the usefulness of the data that the FCA is seeking. As the group Sex Matters points out, there is no reason to believe that the perceived experiences and disadvantages of female workers, which the targets are seeking to address, are shared by males who self-identify as women, and without disaggregated data there will be no way to establish this. The FCA did not explain why it wishes to include self-identifying women within its targets and reporting requirements for women, or publish the Equality Impact Assessment that it says it has carried out, which may leave it open to legal challenge. This indicates that the proposals are part of an activist agenda by the FCA, loosely cloaked in weak academic evidence purporting that greater diversity supports financial stability.

In consulting on these proposals, in clear opposition to government policy, the FCA is pushing a political agenda under cover of self-confessedly tenuous links to financial performance, transparency and consumer protection. This is typical of gender identity activist manoeuvres in influencing policy by having their preferred positions adopted in discrete fields, to build a perception of inexorable progress, or a fait accompli that simply needs to be formally reflected in law. It is notable that the chair of activist charity Stonewall sits on the FCA’s executive committee, and the FCA is a member of Stonewall’s controversial Diversity Champions scheme, which the BBC recently withdrew from, as it was considered to compromise its impartiality.

After another year of reports of high profile failures and the resignation of its chairman, instead of front running Parliament in trying to redefine legal concepts of sex and gender in the broad pursuit of diversity and inclusion, perhaps the FCA should focus on its core objectives in the much more prosaic way that most investors and consumers would understand them, and no doubt as Parliament intended them.

In the coming year, the FCA’s moves on this front should be of interest to all MPs and in particular the Treasury Committee and the Women and Equalities Committee as they will affect over a thousand of the UK’s most successful companies, tens of thousands of their employees and all of us as investors and consumers. More generally, the ability of a regulator to freelance on highly political issues while box-ticking away its statutory purposes should be a key concern of the government as it pursues it regulatory reform agenda.

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[1] Recently upheld by the Supreme Court which found in favour of the government in the case of Elan Cane, where an applicant who considered themselves to be non-binary failed in a judicial review challenge to the policy that passports can only be issued as either male or female.