The Financial Conduct Authority (FCA) and the Bank of England Prudential Regulation Authority (PRA) published a report on 30 July 2014 that recommends that no financial incentives are given to whistleblowers. This differs from the position in the US where the SEC is authorised to give whistleblowers financial awards of between 10% - 30% of settlements that exceed US$1 million.
The Parliamentary Committee on Banking Standards (PCBS) was appointed to conduct an enquiry into professional standards and the culture in the banking sector. The PCBS published a report in June 2013 which expressed shock at the fact that many people turned a blind eye to misconduct and failed to report it. The PCBS called on the FCA to undertake research into the impact of financial incentives in the US.
In October 2013, the FCA accepted the PCBS recommendations that senior management should be responsible for ensuring that their firms have effective mechanisms in place for employees who raise concerns and should ensure that there are safeguards for whistleblowers.
The July 2014 report
In their July report, the FCA and the PRA agree with the PCBS that strong measures are needed to encourage and protect whistleblowers, that there should be a better culture in financial services firms to improve behaviour and that senior management accountability for whistleblowing should be improved.
However, the report recommends that no financial incentives are given to whistleblowers as:
- Incentives in the US only benefit a small number of people who provide information which leads to successful enforcement action resulting in monetary sanctions.
- There is no empirical evidence that incentives lead to an increase in the number or quality of the disclosures received.
- Introducing incentives has led to a complex and therefore costly governance structure.
- The incentives system in the US has generated significant legal fees for both whistleblowers and firms.
- Incentives could undermine the establishment and maintenance of effective whistleblowing mechanisms.
The FCA and PRA are also concerned that providing financial incentives could create a number of moral or other hazards. Amongst others, these include (i) malicious reporting by opportunists and uninformed parties which pass on rumours or public information; (ii) the potential entrapment of market participants; (iii) the fact that a court may call into question the reliability of a whistleblower’s evidence; (iv) the fact that large monetary payouts are contrary to policy norms in the UK; and (v) paying significant awards to well paid individuals to fulfil a public duty could reinforce perceptions that the financial sector is at odds with the rest of society.
In June 2014, the UK Government stated its intention to change cultural attitudes to whistleblowing. It also indicated that it will create a model whistleblowing policy which can be adopted by businesses by the end of 2014.
The FCA and PRA have said that they will publish (i) annual reports about whistleblowing disclosures received and any action taken; and (ii) proposals on how to improve whistleblowing regimes within firms.
Regardless of how the landscape develops, businesses should ensure that they have effective mechanisms in place for whistleblowers and protect whistleblowers who raise concerns.
It is also important for businesses to deal with any whistleblower reports appropriately and the following will need to be considered:
- The investigation into allegations made by the whistleblower should be carried out promptly.
- Businesses will need to consider how to scope the investigation.
- The investigation should be kept confidential and as few people as possible should be involved.
- Businesses will need to consider whether it is appropriate for the investigation to be carried out internally or whether it should be outsourced to external lawyers.
- It will be necessary to assess whether there should be a review of electronic data (emails, documents etc.) and if so, businesses need to ensure compliance with local data protection laws.
Businesses should also be aware that there are many other avenues for regulators and prosecutors to obtain information of suspected wrongdoing even if no whistleblowers come forward.