Last week the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) introduced new rules on whistleblowing that will apply to banks and insurers. The new rules apply to UK deposit-takers with assets of £250m or greater (including banks, building societies and credit unions), PRA-designated investment firms, and insurance and reinsurance firms within the scope of Solvency II, the Society of Lloyd’s and managing agents.
The new rules on whistleblowing will require these firms to:
- appoint a Senior Manager as their whistleblowers’ champion (the champion should be a non-executive director, although if a firm’s governance structure does not include such a position, there is no requirement to create such a post. The champion must be subject to the Senior Managers Regime or the Senior Insurance Managers Regime);
- implement internal whistleblowing arrangements to manage all types of disclosure from all types of people;
- include text in settlement agreements explaining that workers have a legal right to blow the whistle;
- inform UK-based employees about the FCA and PRA whistleblowing services;
- present a report on whistleblowing to the firm’s board at least annually;
- inform the FCA if it loses an employment tribunal proceeding with a whistleblower; and
- require its appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service.
Firms have until 7 September 2016 to comply with the new rules, and the requirement to assign responsibilities to a whistleblowers’ champion will take effect on 7 March 2016.
The strengthening of internal whistleblowing policies and arrangements, together with increased senior managerial and board responsibility, demonstrate that the FCA considers more work is required in this area. In order to mitigate the risk of regulatory action, firms will need to ensure that they allocate sufficient resources and take particular care in responding to and recording their management of reports from whistleblowers.
The FCA will consult on applying the rules to the UK branches of overseas banks. Once the new rules are in effect, the FCA will also consider whether similar rules should apply to other firms regulated by the FCA (such as stockbrokers, mortgage brokers, insurance brokers, investment firms and consumer credit firms).
The new rules are the latest in a series of steps taken by the FCA in recent years to encourage disclosure by whistleblowers. To date, however, the FCA has not taken any steps towards introducing financial incentives for whistleblowing. The proponents of financial incentives (which are a feature of certain US whistleblowing regimes) contend that financial incentives actively encourage people to blow the whistle and compensate them for the trauma that is inevitably associated with doing so.
In the US, the Securities and Exchange Commission (SEC) is authorised to provide monetary awards to whistleblowers who produce “high-quality original information” that leads to enforcement action in which over USD1 million in sanctions is ordered. Whistleblowers can be eligible to receive awards ranging between 10 and 30% of the money collected. The SEC has paid over USD50 million to 18 whistleblowers since 2011: thus, while the financial incentives can be significant, only a small proportion of US whistleblowers have actually received payment:
The small proportion of whistleblowers who have benefitted from financial incentives in the US reflects the complexities inherent in offering such payments. In addition, there is concern that financial incentives may discourage potential whistleblowers from reporting issues at an earlier stage where damage could be mitigated or even prevented if they are motivated instead to amass more evidence to support their claims. The complex governance system and significant legal fees involved in implementing a financial incentive programme may also weigh against introducing incentives in the UK, particularly when the FCA has reported a 28% increase in whistleblowing disclosures for the 2014/2015 financial year as against the prior financial year. The jury is out on whether financial incentives would increase the number or improve the quality of disclosures, but at this stage the FCA has not indicated it intends to introduce such a system.