knowledge 20 November 2024 |

DE&I in Financial Services Regulation: Key Developments for 2024

Regulator Focus on DE&I

In the context of financial services regulation, DE&I continues to be a key focus for policymakers.  The Central Bank of Ireland (the “CBI”) continually emphasises that diversity and inclusion, in all their forms, are “important components of well-managed, financially resilient, strategically-minded firms, and therefore pertinent to [its] mandate”.¹  According to the CBI, DE&I needs to be considered holistically throughout organisations, including by boards and decision makers, as well as by policymakers and regulators.  Significantly, the CBI considers a lack of diversity and inclusion in senior management and at board level to be a leading indicator of elevated behaviour and culture risks.²

In the CBI’s view, diversity and inclusion can be understood as umbrella concepts which encompass principles such as equality, equity, and belonging in the workplace.³

• Diversity describes the existence and acceptance of differences between people, in whatever form those differences take.  These include differences on the basis of grounds protected under the Employment Equality Acts 1998 to 2021 (i.e. gender, civil status, family status, age, disability, sexual orientation, race, religion, and membership of the Traveller community).  Diversity can also relate to differences in socio-economic background, education, experience, and thinking styles, among other things.
  
  As part of its supervisory mandate, the CBI has highlighted⁴ the importance of promoting diversity of thought, or “cognitive diversity”, and discouraging groupthink.   According to the CBI, a lack of diversity of thought reduces firms’ capacity to identify and anticipate negative outcomes.  The European Banking Authority (the “EBA”) has undertaken an analysis of the correlation between the profitability of credit institutions and the composition of the executive directors within their management body.  The EBA’s report⁵ observed that, of the institutions sampled, credit institutions with executive directors of more than one gender appeared to have a higher probability of a return on equity, as compared to credit institutions with executive directors of only one gender.⁶

• Equity recognises that not everybody has the same starting point in life.  Accordingly, equity considers individuals’ capacity to avail of opportunities, and seeks to remove barriers that may limit opportunities, in order to deliver fair and equitable societal outcomes for all.

• Inclusion seeks to guarantee a workplace culture that “facilitates and supports individuals to contribute, irrespective of their differences, so that diverse views are shared”.  According to the CBI:
  
  “An inclusive environment may help promote internal challenge and create a safe environment for people to speak up, encouraging critical challenge at all levels of the organisation and an openness to change where there is a ‘no blame’ culture. This in turn may drive more effective decision-making and improve governance and risk management within the firm.”⁷

The regulator focus on DE&I reflects a wider emphasis in the market: namely, an increased demand at all levels of society for corporate entities to be proactive in relation to ESG considerations.  Increasingly, regulated entities understand that strong ESG-related performance is not only an ethical priority; it is essential to ensuring continued market success and relevance.

Below, we set out a non-exhaustive list of developments, at both the domestic and European levels, highlighting the continued regulator and market focus on DE&I.

Domestic Initiatives

Central Bank Demographics Analysis

Each year, as part of its commitment to monitoring and reporting on the level of diversity in the financial services sector, the CBI issues a report on the demographics of candidates put forward by regulated firms for pre-approval controlled function (“PCF”) roles.  The number of female applicants for PCF roles has continued to increase across the financial services sector (from a low base of 16% in 2012).  In 2023, 32% of PCF applications related to female candidates.⁸  Over the coming years, the CBI hopes to see further increases, as firms strive to achieve parity of representation.⁹

Women in Finance Charter

The Women in Finance Charter, launched in 2022, is an industry initiative supported by the Irish Government, pursuant to the “Ireland for Finance” strategy.  It underpins the ambition of the Irish financial services industry to see increased participation by women at all levels of the workforce, particularly in leadership, management, and at board level.

As at July 2024, 91 financial services firms operating in Ireland have signed the Charter.  Signatories to the Charter commit their organisations to improving the number of women in management and board-level positions by setting positive targets, to be publicly disclosed and reported on, with progress independently monitored by the Economic and Social Research Institute (the “ESRI”).  The ESRI’s 2024 report on the Charter (here) highlighted that signatory firms have, over the past two years, made significant progress in relation to meeting their targets and improving female participation across their businesses.

McCann FitzGerald LLP is proud to support the Women in Finance Charter, as part of the firm’s wider commitment to progressing gender equality, diversity, and inclusion.

Balance for Better Business

Balance for Better Business is an independent, business-led review group established by the Irish Government in 2018.  It strives to promote gender balance at the board and executive leadership levels of Irish businesses, and sets progressive targets for the achievement of its aims.

The group’s most recent report, published in December 2023 (here), highlighted significant industry change and progress over the last number of years.  The report reflected that, as at the end of last year, the proportion of women on the boards of ISEQ 20 companies is 39%, exceeding the original target for 2023 of 33%.  Across other listed companies, the percentage of women on boards is 28%.  The figure for private companies with Irish ownership has remained at 22% since 2021.

In May 2024, Balance for Better Business launched its renewed strategy for 2024-2028, setting a new target for organisations to exceed 40% female representation on boards and leadership teams in 2024.

Euronext Dublin Irish Corporate Governance Code

In September 2024, Euronext Dublin published an Irish Corporate Governance Code (here), addressed to companies with a primary equity listing on Euronext.  Significantly, the Irish Code mandates the maintenance of a diversity and inclusion policy (with regard to gender and other aspects of diversity of relevance to the company such as, age, disabilities and educational and professional background), which should include measurable objectives for implementing such a policy.

For more information on the Code, see our briefing here.

Statutory Framework

Domestically, the Gender Pay Gap Information Act 2021 has been introduced, requiring certain employers to publish information relating to the remuneration of employees by reference to gender.  The reporting requirements under the Act have similarities to the reporting requirements that will be introduced by the EU Pay Transparency Directive¹⁰ (required to be transposed into national law by 7 June 2026).  The EU Directive (see our detailed briefing here) contains additional requirements such pre-employment pay transparency obligations and extensive employee information rights to pay data, as well as a ban on pay secrecy clauses.

Large undertakings employing 250 or more people and engaged in a wide range of prescribed economic activities have been periodically required to provide information to the Central Statistics Office (the “CSO”) on gender representation in senior executive teams and boards of directors.  That information informs the CSO’s Gender Balance in Business Survey.  According to the most recent survey¹¹, in 2023, 30% of all senior executives in Ireland were female, as well as 19% of CEOs, and 25% of members of boards of directors.

Pursuant to the Companies (Corporate Governance, Enforcement and Regulatory Provisions) Act 2024, which is awaiting commencement, a company may provide information on the gender composition of its board on a voluntary basis.  The information requested will be prescribed by the Minister in the company’s B1 Form annual return and is for statistical purposes only (including to feed into global assessments for the purposes of the gender balance on boards legislation).

With regard to gender balance on boards, the Irish Corporate Governance (Gender Balance) Bill 2021, a Private Members’ Bill, proposed to introduce a legislative requirement for certain companies to have 33% of each gender on their board within a year of commencing the legislation, and 40% within three years.  The Minister for Children, Equality, Disability, Integration and Youth Roderic O’Gorman recently gave an update¹² on the status of the Bill; the Minister noted that the Bill broadly aligned with the aims of the EU Directive on improving the gender balance among directors of listed companies.¹³  The EU Directive has a deadline for transposition of 28 December 2024.  As part of the transposition of that Directive, the Department of Children, Equality, Disability, Integration and Youth will consider the totality of existing national legislation; thus, it might be expected that general policy aims of the Irish Corporate Governance (Gender Balance) Bill 2021 will be achieved, in the first instance, as part of the transposition process.

European Developments

Gender Balance on Boards Directive

As noted above, the Directive on improving the gender balance among directors of listed companies has a transposition deadline of 28 December 2024.  The Directive aims to increase the representation of women among directors of listed companies and improve gender balance in company decision-making processes.  The Directive applies to any company with a registered office in the EU and the shares of which are admitted to trading on an EU-regulated market; the Directive does not apply to small and medium-sized enterprises (“SMEs”).

EU Member States must subject listed companies to the objective of having boards on which members of the “underrepresented sex” hold (i) at least 40% of non-executive director positions; or (ii) at least 33% of all director positions (including both executive and non-executive), by 30 June 2026.  Listed companies that do not achieve these objectives will have to adjust their selection process for appointment or election to director positions.  Clear, neutrally-formulated, and unambiguous criteria will have to be applied in a non-discriminatory manner throughout the entire selection process.  There will be an element of positive discrimination; when choosing between candidates that are equally qualified in terms of suitability, competence and professional performance, priority will have to be given to the candidate of the underrepresented sex, unless there are reasons of greater legal weight, such as the pursuit of other diversity policies.

Pursuant to the Directive, upon the request of a candidate during selection for appointment as a director, listed companies will have to inform the candidate of the qualification criteria that are being applied, the objective comparative assessment of the candidates and, where relevant, specific considerations that tip the balance in favour of a candidate that is not of the underrepresented sex.

Diversity Benchmarking

The Capital Requirements Directive¹⁴ (“CRD IV”) and the Investment Firms Directive¹⁵ (the “IFD”) contain requirements for in-scope institutions to take into account the diversity of the management body when recruiting new members, to implement a diversity policy, and to implement measures to improve the representation of the underrepresented gender in the management body.  CRD IV and the IFD also require remuneration policies of credit institutions and investment firms to be gender neutral and to respect the principle of equal pay for male and female workers for equal work or work of equal value.¹⁶

In December 2023, the EBA introduced Guidelines (here) to ensure harmonised benchmarking of diversity practices, which will enable competent authorities to monitor diversity trends over time.  The benchmarking of diversity practices is to be based on a representative sample of credit institutions and investment firms.  The EBA will collect information on diversity policies, and on the composition of management bodies in terms of the gender, age, educational and professional background, as well as the geographical provenance of their members.  The first data collection exercise will be conducted in 2025, with a reference date of 31 December 2024.

The Proposed Social Taxonomy

Regulated firms will be aware that ESG reporting is a key focus of EU policy, underscored by the development of the EU sustainable finance framework¹⁷.  To date, the legislative focus has primarily been on environmental disclosures.  In 2022, however, the Platform on Sustainable Finance outlined a proposal¹⁸ for the development of a social taxonomy, which would focus on achieving social objectives, including decent work, adequate living standards and wellbeing, and inclusive and sustainable communities.  Since the report was issued, that has been little sign of progress in the development of a social taxonomy, though social objectives continue to be advanced at an EU level and domestically through general policy initiatives.

Comment

DE&I will continue to be a key focus for Irish and European policymakers.  Ensuring compliance in the context of the breadth of legislation in this area is a key challenge for regulated firms, particularly as they seek to implement effective and proportionate policies that reflect the wide spectrum of DE&I considerations.

If you have any questions about any of the developments mentioned in this briefing, please get in touch with one of the below key contacts, or your usual contact at the firm.

Also contributed to by David O’Keeffe Ioiart