Out-Law News | 04 Aug 2014 | 4:34 pm | 3 min. read
The FCA and Prudential Regulation Authority (PRA) had been asked to conduct further research into the impact of the practice in the United States of paying whistleblowers whose information leads to enforcement. Presenting the outcome of that research to the Treasury Select Committee, the regulators said that "no more than a handful" of whistleblowers had been paid since the US regime came into force in 2010.
"Both regulators agree that strong measures are needed to encourage and protect whistleblowers, who can play an important role in helping to protect the safety and soundness of firms and to prevent and detect wrongdoing," the regulators said in their note. "We agree with the PCBS [Parliamentary Commission on Banking Standards] about the need for a better culture in financial services firms to help improve behaviour, and value the opportunity to improve senior management accountability for whistleblowing."
"There is no empirical evidence to suggest that the US system raises either the number or the quality of whistleblowing disclosures within financial services. Nor do the incentives in the US model appear to improve the protection available to whistleblowers. What whistleblowers tell us they would like is better protection for all whistleblowers rather than large payments to a tiny minority ... We therefore propose not to introduce financial incentives, but to press ahead with the regulatory changes necessary to require firms to have effective whistleblowing procedures, and to make senior management accountable for delivering these," they said.
The FCA will publish further proposals on whistleblowing later in the year, it said.
The term 'whistleblowing' refers to an employee telling a prescribed person or a person in authority at their employer about alleged dishonest or illegal activities occurring within an organisation or company. Whistleblowers may make their allegations to other parties within the company, known as 'internal' whistleblowing. They may also make their allegations to external regulators, law enforcement or the media, the last of these in more limited circumstances.
Legal protection for whistleblowers was introduced in the UK in 1999 under the Public Interest Disclosure Act. The rules protect employees who make disclosures of certain types of information, including evidence of illegal activity or damage to the environment, from retribution by their employers such as dismissal or being passed over for promotion. In addition, where an employee is dismissed for making a 'protected' disclosure, this dismissal is automatically unfair.
In its July 2013 report on banking culture, the Parliamentary Commission on Banking Standards (PCBS) made a number of recommendations to improve senior management accountability for whistleblowing in financial firms. These recommendations, which have been accepted by the regulators in full, included requiring firms to have effective mechanisms in place through which employees can raise concerns and accountability for those mechanisms. Firms will also be required to ensure safeguards for individual employees, resting with the member of senior management responsible for the firm's whistleblowing regime.
"At a time when we are seeking to improve firms' internal whistleblowing processes, introducing significant financial incentives for whistleblowers to come to the regulator rather than raise their concerns within the firm risks undermining our supervisory approach as well as the improvements in culture we want to encourage," the regulators said.
They also said that financial incentives could lead to malicious reporting by "opportunists" whistleblowing on speculative rumours, and to the risk of entrapment or conflicts of interest in court.
However, financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the FCA's conclusion that offering financial incentives to whistleblowers would not increase the number of reports made, particularly in serious cases, was "extremely surprising".
"It is clear from the FCA and PRA's recent messaging on the senior persons regime that they are seeking to improve the culture within all firms; in particular, by placing responsibility for regulatory compliance firmly on the shoulders of senior management," he said. "This includes making senior management directly responsible for ensuring the whistleblowing procedures within their firms are clear, well publicised and effectively conducted."
"Only time will tell if the FCA's approach on whistleblowing is successful in achieving what must be its objective to increase the number of significant whistleblowing reports it receives, whilst ensuring adequate protections are in place for those who blow the whistle," he said.