Diversity and Inclusion on Regulated Boards: What the FCA Actually Expects

The FCA and PRA’s interest in board diversity isn’t a corporate social responsibility add-on sitting alongside the core SMCR framework — it’s grounded directly in the regulators’ view that homogenous boards are more prone to groupthink, and that groupthink is a genuine safety and soundness risk in a regulated firm’s governance. This guide sets out what the regulatory expectations actually require, and what it means in practice for SMF9 and SMF14 searches specifically.

The Regulatory Rationale, Not Just the Policy

The core argument the FCA and PRA make is straightforward: a board where every director shares a similar professional background, similar assumptions, and a similar instinct about what counts as a reasonable risk is less likely to catch a blind spot than a board with genuine variation in perspective and experience. This isn’t framed as a fairness argument alone — it’s framed as a governance effectiveness argument, directly connected to the same concerns about genuine challenge and behavioural independence that run through the SMF9 chair’s core accountability.

What Listed and Large Firms Are Actually Required to Report

Listed companies, including many regulated firms, report against specific board composition targets covering gender representation and ethnic minority representation at board level, disclosed on a “comply or explain” basis in annual reporting. Large regulated firms more broadly face increasing supervisory interest in board diversity data even where formal listing-rule targets don’t directly apply, as part of the wider culture and governance assessment supervisors conduct.

Beyond Demographic Diversity: Cognitive and Experiential Diversity

The regulatory conversation has increasingly broadened beyond demographic characteristics alone to what’s often described as cognitive or experiential diversity — genuine variation in professional background, industry experience, and ways of approaching a problem. A board that meets demographic diversity targets while every director has spent their career in the same narrow segment of financial services may still lack the range of perspective the underlying governance rationale is actually trying to achieve. Supervisors increasingly probe for this directly, asking boards to articulate not just their demographic composition but the actual range of experience and perspective their non-executive directors bring to genuine challenge.

What This Means for SMF9 and SMF14 Searches

Diversity as a genuine search criterion, not a late-stage check

Boards that treat diversity as a criterion applied late in the process — reviewing a shortlist that was built without it in mind and asking whether it happens to be diverse — consistently produce weaker outcomes than boards that build diversity into the search brief from the outset, alongside the technical and regulatory fit criteria we cover throughout our designation guides. A genuinely well-run search widens the candidate sourcing approach specifically to bring in strong candidates from backgrounds and networks the firm’s existing board composition doesn’t already reflect, rather than treating the existing network as the natural starting point and diversity as an overlay.

Succession planning is where this matters most

Given the realistic six-to-nine month timeline that any SMF9 or SMF14 appointment carries, boards planning succession well in advance — rather than reacting to an unplanned departure — have considerably more room to run a genuinely broad search than boards scrambling to fill an urgent vacancy from whatever pool is immediately available. This is one of several reasons proactive succession planning consistently produces better board composition outcomes than reactive recruitment.

Chemistry assessment and diversity aren’t in tension

A board sometimes worries, understandably, that prioritising diversity might come at the expense of the chair-CEO chemistry and cultural fit considerations we discuss elsewhere on this site. In practice these aren’t in tension — a genuinely broad search simply widens the pool of candidates assessed for chemistry and fit, rather than lowering the bar on either. The mistake is assuming chemistry can only be found within a narrow, familiar candidate pool; a properly run search tests it across a genuinely diverse slate.

Where Firms Get This Wrong

The most common failure is treating a single diverse appointment as having “solved” board diversity, rather than continuing to apply the same discipline to every subsequent search. A board that makes one visibly diverse appointment and then reverts to its previous sourcing pattern for the next three vacancies hasn’t changed its underlying approach — it’s made a single exception to it. Genuine, sustained change requires the sourcing discipline to be a standing part of every search brief, not a one-off correction.