EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING FCA AND PRA PUBLISH NEW WHISTLEBLOWING RULES As part of its series of policy changes focused on strengthening individual accountability within the banking and insurance sectors, the FCA and PRA have published new whistleblowing rules. Acting FCA Chief Executive, Tracey McDermott, has said that the new rules "are designed to build on and formalise examples of good practice already found in parts of the financial services industry and aim to encourage a culture in which individuals working in the industry feel comfortable raising concerns and challenge poor practice and behaviour". These rules supplement the statutory protections all employees and workers have pursuant to the Public Interest Disclosure Act 1998 (the PIDA). The bulk of the rules apply from 7 September 2016. However, the requirement for relevant firms to appoint a "whistleblowers' champion" applies from 7 March 2016, coinciding with the implementation of the Senior Managers Regime (SMR), Certification Regime and Senior Insurance Managers Regime (SIMR). The whistleblowers' champion will then become responsible for overseeing implementation of the new rules. 1. At a glance The new key rules on whistleblowing require relevant firms to: • appoint a senior manager under the SMR or SIMR (generally a non-executive director) as whistleblowers’ champion; • put in place internal whistleblowing arrangements able to handle all types of disclosure from all types of person; • include text in settlement agreements explaining that workers have a legal right to blow the whistle; • tell all UK-based employees about the FCA and PRA whistleblowing services; • present a report on whistleblowing to the board at least annually; • inform the FCA if it loses an employment tribunal case with a whistleblower; and • ensure appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service. OCTOBER 2015 London Table of Contents 1. At a glance 1 2. Application 2 3. Key features of the rules 2 4. Consequences of non-compliance 5 5. MiFID II whistleblowing requirements 5 6. Timing 6 7. Action points 6 8. Contacts 7 RELATED LINKS > Herbert Smith Freehills > Employment homepage > Employment Notes blog > Employment, pensions and incentives insights > Financial Services Regulatory homepage > FSR and Corporate Crime Notes blog > Financial Services Regulatory insights > Herbert Smith Freehills insights EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING HERBERTSMITHFREEHILLS 2 2. Application The new whistleblowing rules apply to: • UK deposit-takers with assets of £250m or more (ie, banks, building societies and credit unions); • PRA-designated investment firms; and • Insurance and reinsurance firms subject to Solvency II, and the Society of Lloyd's and managing agents. Mindful of potential implementation issues – including possible conflicts with home country laws and board oversight issues – the FCA plans to consult on the extent to which the regime should apply to UK branches of overseas banks. In due course the regime may be extended further, including to FCA regulated stockbrokers, mortgage brokers, insurance brokers, investment firms and consumer credit firms. Until then, firms not caught directly should treat the rules as non-binding guidance. 3. Key features of the rules Whistleblowers' champion By no later than 7 March 2016, relevant firms must appoint a non-executive director subject to the SMR or SIMR to act as "whistleblowers' champion". The champion must be allocated the "prescribed responsibility" under the SMR or SIMR for overseeing the integrity, independence and effectiveness of the firm’s policies and procedures on whistleblowing. They must have adequate resources (including access to independent legal advice) and specialist training in order to discharge their responsibilities. Provided it does not prevent them from discharging their duties effectively, the champion can be based overseas. Following consultation, the FCA has removed draft guidance that suggested that the champion would have to be open to direct approaches from whistleblowers. Reflecting the expectation that the role will be fulfilled by a nonexecutive director, the FCA and PRA have clarified that the whistleblowers' champion will not have day-to-day operational responsibility in handling disclosures. Firms that do not currently have any non-executive directors should appoint an appropriate senior manager. Internal whistleblowing arrangements The rules require the implementation of internal whistleblowing arrangements able to handle "all types of disclosure from all types of person". "All types of disclosure" Firms' procedures should be able to handle disclosures of a "reportable concern", which go beyond "protected disclosures" under the PIDA (see box below). A "reportable concern" under the FCA/PRA rules is: • anything that would be the subject-matter of a protected disclosure, including breaches of rules; • a breach of the firm’s policies and procedures; and • behaviour that harms or is likely to harm the reputation or financial well-being of the firm. Under the PIDA, a "protected disclosure" must be a disclosure of information which, in the reasonable belief of the worker making it, tends to show that one or more of the six specified types of wrongdoing has taken place, is taking place or is likely to take place: • criminal offences; • breach of any legal obligation; • miscarriages of justice; • danger to the health and safety of any individual; • damage to the environment; or • the deliberate concealing of information about any of the above. EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING HERBERTSMITHFREEHILLS 3 In contrast to the test for a "protected disclosure", there is no requirement for a "reportable concern" to be in the public interest, or for the whistleblower to have a reasonable belief in its accuracy. Instead, firms will be left to assess each "reportable concern" and respond appropriately. The FCA and PRA provide that the whistleblowing arrangements should not be used where the nature of the issues properly fall within the scope of grievance processes or other procedures. The PRA notes that firms can filter out genuine whistleblowing reports and redirect reports that would be better dealt with by other areas of the organisation. The result for firms and individuals is a regime with differing levels of risk attaching to different disclosures depending on whether the concern raised is a protected disclosure (and therefore both the PIDA and the rules apply) or a reportable concern that is not also a protected disclosure (in which case only the rules will be relevant). "All types of person" Further, the rules make clear that the arrangements should be accessible by anyone, not just employees or others currently protected under the PIDA. While the FCA accepts that not every disclosure will result in an investigation, it expects "due consideration" to be given to investigating each concern raised, with the decision and consideration recorded. Nature of arrangements Through their arrangements, firms must: • give whistleblowers access to different methods of communication (eg, email and phone); • be able to deal with concerns confidentially and (when requested) maintain the anonymity of the whistleblower (unfortunately, no guidance is given on how firms should deal with scenarios where it may be impossible to properly investigate a complaint without jeopardising the confidentiality of the whistleblower); • assess and, where appropriate, escalate to the regulators or law enforcement agencies matters raised internally; • maintain appropriate records, including tracking outcomes; • prepare up-to-date written procedures that are readily available to employees outlining the firm’s processes for complying with the whistleblowing rules; • provide feedback to whistleblowers when appropriate; and • take reasonable measures to ensure that no person under the control of the firm engages in victimisation of the whistleblower. With respect to external whistleblowers, a key aspect to this will likely be protecting their confidentiality, a measure which the FCA and PRA note may help protect external whistleblowers from victimisation by people outside of the firm's control. While the FCA declined to issue guidance regarding where whistleblowing teams should sit within relevant firms, the PRA noted that larger firms may wish to create an internal specialist unit or outsource certain aspects (subject to careful monitoring). New requirements for agreements with workers The FCA rules require that, where firms enter into settlement agreements with departing workers, the agreement must contain text explaining that it does not prevent the making of protected disclosures. The FCA has provided sample text in guidance. The PRA rules do not require express wording in settlement agreements, but rather prohibit firms from drafting settlement agreements, employment contracts and ancillary documents in a manner which prevents or discourages workers from making protected disclosures. Similarly, the FCA rules state that firms must not use measures intended to prevent protected disclosures, and specifically must not request that workers enter into warranties that they have not made a protected disclosure, or that the worker knows of no information which could form the basis of a protected disclosure. EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING HERBERTSMITHFREEHILLS 4 Publicity All UK-based workers must be informed about FCA and PRA's whistleblowing services. Firms will need to implement steps to ensure this is done, for example, during induction processes or via employment contracts or polices. Further, firms must make staff aware that they are entitled to approach the regulators at any stage, whether or not they have raised the concern internally. Firms must also ensure that their appointed representatives and tied agents tell their UK-based workers about the FCA's whistleblowing service. Reporting At least once a year the firm's board of directors must receive a report on the effectiveness of the firm's whistleblowing systems and controls, produced with oversight by the firm's whistleblowers' champion. Save for including details of any tribunal cases involving whistleblowing that the firm lost (as explained below), firms will have discretion to determine the content of the report; however, confidentiality of individual whistleblowers must be maintained. While reports not need be made publicly available, the FCA and PRA will be able request copies. Further, both sets of rules also provide for reporting of employment tribunal claims. The FCA rules state that firms must inform the FCA if they lose any employment tribunal claim in which the claimant successfully claimed to have suffered detriment or been dismissed as a result of making a protected disclosure. While the PRA has not introduced a parallel reporting obligation, it expects the whistleblowers' champion's annual report to the board to include "details of any employment tribunals involving whistleblowers which the firm has lost" (ie, wider than those where there is a finding of detriment/dismissal for whistleblowing, for example a dismissal could be found to be procedurally unfair even though there is a fair reason for dismissal which is not the protected disclosure), which is to be made available to the PRA on request. No regulatory duty to blow the whistle Out of concern for whistleblowers who may fear reprisals, the FCA declined to introduce a regulatory duty on staff to "blow the whistle". Training The FCA and PRA expect firms to consider whether training is appropriate for staff, managers and the whistleblowing team. The rules include some suggested topics: FCA TRAINING TOPIC PRA TRAINING TOPIC ALL STAFF • A statement that the firm takes the making of reportable concerns seriously. • A reference to the ability to report reportable concerns to the firm and the methods for doing so. • Examples of events that might prompt the making of a reportable concern. • Examples of action that might be taken by the firm after receiving a reportable concern, including measures to protect the whistleblower’s confidentiality. • Information about sources of external support. • When and how to report instances of wrongdoing, plus examples of events that might prompt a report and action that might be taken (including to protect confidentiality). • What would constitute a PIDA protected disclosure and how to report a protected disclosure to the FCA and PRA. EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING HERBERTSMITHFREEHILLS 5 MANAGERS • Recognising, protecting and providing feedback to whistleblowers. • Ensuring fair treatment of those accused of wrongdoing. • Accessing sources of internal and external advice and support. • Recognising, protecting and providing feedback to whistleblowers. WHISTLEBLOWING TEAM • Assessing and grading the significance of reports. • Protecting confidentiality. • How to assist the whistleblowers' champion when asked. • Assessing and grading the significance of reports. • Protecting confidentiality. • How to spot trends. • Specialised training for the whistleblowers' champion to assist them in the performance of their role, if appropriate. Other matters The FCA and PRA opted not to require firms to "monitor" whistleblowers in order to guard against mistreatment. 4. Consequences of non-compliance Firms failing to comply with the new requirements set out by the FCA and PRA may find themselves not only in breach of the new rules, but also of Principle 2 (due skill, care and diligence) and Principle 3 (management and control) of the Principles for Businesses. The FCA notes that it would regard as a serious matter any evidence that a firm had acted to the detriment of a whistleblower, and that such evidence would be relevant to an assessment of the fitness and propriety of a firm and its staff, potentially affecting the firm’s continuing satisfaction of Threshold Condition 5 (Suitability) or an approved person's or certification employee's status as such. On an individual level, whistleblowers' champions would be exposed to potential financial penalties for breaching the SMR or SIMR conduct rules, and for being knowingly concerned in a firm’s breach of a regulatory requirement. More significantly, under the SMR, where a firm contravenes a requirement in relation to the whistleblowing rules, the whistleblowers' champion could be presumed guilty of misconduct, unless they were able to demonstrate that they had taken such steps as a person in their position could reasonably be expected to take to avoid the contravention occurring (or continuing). The FCA is expected to issue final guidance on the presumption of responsibility and guidance in relation to other enforcement matters in Autumn 2015. 5. MiFID II whistleblowing requirements Firms preparing for implementation of the recast Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), applicable from 3 January 2017, will no doubt be aware of new whistleblowing requirements imposed on firms within scope of the rules. The MiFID II whistleblowing rules require investment firms, market operators, data reporting services providers, credit institutions in relation to investment services or activities and ancillary services, and branches of third-country firms to have appropriate procedures for their employees to report potential or actual infringements of MiFID II and MiFIR internally through a specific, independent and autonomous channel. Additionally, MiFID II requires national regulators to establish effective mechanisms to enable reporting of potential or actual infringements of MiFID II and MiFIR, including: • specific procedures for the receipt of reports and their follow-up; • the establishment of secure communication channels for the receipt of reports; EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING HERBERTSMITHFREEHILLS 6 • appropriate protection for whistleblowing employees of financial institutions against retaliation, discrimination or other types of unfair treatment; and • protection of the identity of both the whistleblower and the individual who is allegedly responsible for the infringement, at all stages of the procedures (unless disclosure is required by national law in the context of further investigation or subsequent administrative or judicial proceedings). The new FCA and PRA rules are largely in line with these MiFID II requirements, which are very high level in nature. 6. Timing Whistleblowers' champions must be appointed by 7 March 2016. Firms must implement the remainder of the new whistleblowing rules by 7 September 2016. 7. Action points While many firms are likely to already have whistleblowing procedures in place, as part of their preparations for the SMR and SIMR, firms should: • identify and appoint an appropriate non-executive director willing to act as whistleblowers' champion and make arrangements to ensure they have appropriate resources; • make arrangements for the production of the whistleblowers' annual report; • refresh relevant policies, procedures, systems and controls to ensure compliance with the rules, including with respect to record keeping, reporting on tribunal outcomes and notifying staff of the FCA and PRA's whistleblowing services; • inform appointed representatives and tied agents of their responsibilities; • review template documents (including employment contracts and settlement agreements) to ensure they comply with the new requirements; and • arrange appropriate training sessions, including for managers, the whistleblowers' champion and their team and HR/legal. EMPLOYMENT AND FINANCIAL SERVICES REGULATION BRIEFING HERBERTSMITHFREEHILLS 7 8. Contacts Andrew Procter, partner Financial services regulatory T +44 20 7466 7560 M +44 7809 200645 email@example.com Andrew Taggart, partner Employment T +44 20 7466 2434 M +44 7917 461269 firstname.lastname@example.org Karen Anderson, partner Financial services regulatory T +44 20 7466 2404 M +44 7809 200009 email@example.com Peter Frost, partner Employment T +44 20 7466 2325 M +44 7919 327049 firstname.lastname@example.org Jenny Stainsby, partner Financial services regulatory T +44 20 7466 2995 M +44 7766 775129 email@example.com Tim Leaver, partner Employment T +44 20 7466 2305 M +44 7809 200370 firstname.lastname@example.org Hywel Jenkins, partner Financial services regulatory T +44 20 7466 2510 M +44 7809 200327 email@example.com Christine Young, partner Employment T +44 20 7466 2845 M +44 7809 200725 firstname.lastname@example.org Rod Fletcher, partner Corporate crime and investigations T +44 20 7466 2411 M +44 7802 216842 email@example.com Nick Wright, associate Employment T +44 20 7466 7524 M +44 7809 200529 firstname.lastname@example.org Susannah Cogman, partner Corporate crime and investigations T +44 20 7466 2580 M +44 7809 200135 email@example.com Anna Henderson, professional support consultant Employment T +44 20 7466 2819 M +44 7515 783785 firstname.lastname@example.org Daniel Hudson, partner Corporate crime and investigations T +44 20 7466 2470 M +44 7809 200312 email@example.com Kimberly Everitt, professional support lawyer Financial services regulatory T +44 20 7466 7493 M +44 7738 737141 firstname.lastname@example.org If you would like to receive more copies of this briefing, or would like to receive Herbert Smith Freehills briefings from other practice areas, or would like to be taken off the distribution lists for such briefings, please email. © Herbert Smith Freehills LLP 2015 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein. 8
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FCA and PRA publish new whistleblowing rules
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