Since the global financial crisis struck and the public spotlight has been turned on financial sector malfeasance, there have been increasing calls for better protection and incentivisation for whistleblowers.
In 2012, Public Concern at Work published a report based on whistleblowers in the UK financial services sector. The report highlighted the particular concerns within the sector, and specifically referred to the lack of trust in internal systems and cultural problems which saw whistleblowers victimised or discriminated against.
In recent years there have been a number of legislative attempts to improve the situation. Key measures include a new public interest test for qualifying disclosures, the removal of good faith from the definition of a protected disclosure, and the introduction of vicarious liability for employers in situations when detriment is caused to a whistleblower by another worker.
Accordingly, as of July 2013, for a worker to make a protected disclosure, it must be made with a reasonable belief that it is in the ‘public interest’. The 2013 case of Chestertons v Nurmohamed set the hurdle relatively low for this particular test when the Employment Appeal Tribunal found that a disclosure made with the reasonable belief that it would benefit both the whistleblower and some 100 other managers at the company could be considered in the public interest.
The US approach
It has been suggested that the UK might benefit from assimilating aspects of the US system. Financial reform legislation introduced in 2010, gave the US Securities and Exchange Commission (SEC) more powers to incentivise insiders to come forward if they have information about wrongdoing. The laws provide whistleblowers with financial rewards if the information they provide leads to enforcement action with sanctions that are above $1 million. The SEC can award anywhere between 10% and 30% of the total award. The largest ever whistleblowing payout was $30 million in September 2014.
In July 2013, the UK Government launched a call for evidence on the effectiveness of whistleblowing legislation. The response was issued in June 2014 and whilst there were no proposals to implement radical reforms to whistleblowing legislation there was an acknowledgement of the need for cultural change. However, the Government was against the idea of financial incentivisation for whistleblowers from the outset, citing lack of evidence of its effectiveness, alongside the fact that the majority of respondents to the call had agreed that it was not appropriate for the UK framework.
This rejection was affirmed by the Financial Conduct Authority (FCA) and the Bank of England’s Prudential Regulation Authority (PRA) in July 2014. The FCA and PRA undertook research in collaboration with SEC, the Commodities Futures Trading Commission (CFTC) and various other organisations that dealt with, represented, or were affected by, whistleblowers. They concluded that there was no empirical evidence to suggest that financial incentives lead to an increase in the number or quality of disclosures received by the regulators.
The UK approach
At present, the UK attitude remains that the promotion of cultural changes and improved support networks for whistleblowers is a more effective approach than the introduction of financial incentives, which would only be applicable in a very small number of cases. The Government wants the process to remain a principled one where public interest, rather than financial gain, is the foremost motivation. While the door to incentives has been left open for specific cases, such as those dealt with under the Governments Serious and Organised Crime Strategy, the overall view is that incentives proportionate to fines could cause further issues as it may encourage potential whistleblowers to delay disclosure as a problem grows in the hopes of securing a larger eventual fine.
Is the Government’s strategy working?
The FCA took over as the UK financial services regulator on 1 April 2013 and since then, the number of whistleblowing disclosures has increased significantly. FCA data shows an increase over the 2012 figure of 68% and 144% in 2013 and 2014 respectively.
Looking forwards, we can expect more measures protecting whistleblowers and encouraging companies to work with regulators to increase transparency and uncover harmful practices. In February 2015, the FCA and PRA published a consultation paper which focused on the strengthening of firm’s internal structures and aimed to encourage employees to raise concerns and protect whistleblowers from victimisation. One of the most noteworthy proposals is to introduce whistleblowers’ champions, a senior manager who would be responsible for overseeing the effectiveness of internal whistleblowing arrangements and ensuring that appropriate protections are in place to prevent whistleblower retaliation. The individual would be responsible for preparing an annual report to the board which could also be reviewed by the FCA or PRA. The FCA have made it clear that anti-retaliation is a responsibility of the board, which means that if the whistleblower is dealt with unfairly both the company and the senior manager could face regulatory scrutiny. The overall intention is that this will help to catch misconduct at an earlier stage and therefore manage risks more efficiently from the outset.
The framework will apply to UK banks, building societies and credit unions with assets greater than £25m and PRA designated investment firms and insurers. With requirements to provide independent controls assurance and track what happens to whistleblowers the responsibilities in relation to whistleblower protection will be placed solely on the company. The proposals show another step towards strengthening company culture by ensuring avenues for reporting issues are open and well protected.
The consultation period closed on 22 May 2015 and while no date has been provided for final rules or their implementation companies should now begin to consider the challenges the reforms will bring. Companies will have to think about the scale and extent of their whistleblowing procedures which will inevitably require significant investment in time and resources.