PRA Letter Reinforces Need for Compliance with Rule on Board Diversity
PRA published a letter reinforcing the importance of Board diversity for improving decision-making and reminding firms to comply with the PRA rules in this area. The letter, which is written by the PRA Executive Directors for international bank, deposit-taker, and insurance supervision, is addressed to the Chairs of Solvency II insurers, large non-directive firms, and Capital Requirement Regulation (CRR) firms, is a reminder of the requirement to comply with PRA rules in this area. The letter states that diverse boards, made up of members with different skills, knowledge, experience, and values will support different perspectives being brought to discussion on business operations and risk strategy.
As noted in Supervisory Statement SS5/16, titled "Corporate governance: Board responsibilities," PRA expects boards to have the diversity of experience and capacity to provide effective challenge across the full range of the business. The letter highlights that the publication of EBA report on the benchmarking of diversity practices in February 2020 showed that 70% of the sampled UK credit institutions and investment firms have a policy in place for promoting diversity on the management body. While this showed is a substantial progress since 2015, when only 15% of the sampled UK credit institutions and investment firms reported having such a policy, compliance is still not universal. Following the initial EBA benchmarking report, PRA extended these requirements to insurers in April 2018 and now all Capital Requirement Regulation (CRR) firms, Solvency II firms, and large non-Directive firms are required to engage a "broad set of qualities and competencies when recruiting to the management/governing body." Significant credit institutions and investment firms, which are required to have a nominations committee, must also set a target for the under-represented gender in the management body. Firms must also explain on their website how they comply with the respective requirements.
According to the letter, Chairs of these firms should see that their firm is meeting the PRA requirements and take remedial action where required. In doing so, Chairs (and, where appropriate, Chairs of the Nomination Committee) should consider the extent to which the diversity policy is embedded in recruitment and succession planning for the board, to support constructive debate and challenge on the range of issues facing the firm. Chairs should expect to discuss this with their supervisors through the course of normal supervisory dialog.
Related Link: Letter
Keywords: Europe, UK, Banking, Insurance, Solvency II, CRR, ESG, Governance, Board Diversity, PRA, BoE
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Insurance product strategist; insurance domain expert; extensive experience developing risk assessment frameworks for insurers
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
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