First published on Thomson Reuters Accelus on 10 September 2015
I understand that, from early next year, the regulatory framework in relation to employees of regulated firms is set to change significantly, and that these changes include new whistleblowing rules. I have a number of questions about these regulatory changes and what impact they will have.
Because there is already protection in place for whistleblowers, why are the financial regulators getting involved now?
With the regular uncovering of serious wrongdoing by banks following the financial crisis, the Parliamentary Commission on Banking Standards wants to see an enhanced whistleblowing framework enforced by the FCA and PRA to raise standards of conduct. It will require certain regulated firms to formalise whistleblowing procedures and encourage the disclosure of suspected misconduct so that those blowing the whistle can do so confident that their concerns will be considered and that there will be no personal repercussions backed up by potential regulatory sanctions.
Who will it apply to and when will it come into force?
The proposals will apply to insurers (including Lloyd's managing agents and third country branches) and PRA designated investment firms – typically UK banks, building societies and credit unions. The implementation date is still to be confirmed but it is planned to come into effect from January 2016.
How does its scope differ from the current whistleblowing rules?
The existing framework providing legal protection to whistleblowers is already wide, both in terms of who and what it covers. However the FCA and PRA propose that firms' whistleblowing procedures should apply on an even more expansive basis. This will include the self-employed, agents, employees of subsidiaries, appointed representatives, customers and competitors and should extend to any allegation of wrongdoing, not just those already covered under the existing framework. In order to provide an enhanced level of protection, the consultation proposes that retaliatory treatment by regulated firms could be a matter for regulatory enforcement.
The draft amendments to the FCA handbook extend matters subject to whistleblowing disclosure to a breach of any regulatory rule, failure to comply with a firm's policies or procedures and the almost limitless concept of any behaviour that "has or is likely to have an adverse effect on the firm's reputation or financial wellbeing".
While the extension to customers and competitors is no doubt well intentioned, it does run the real risk of disgruntled customers and competitors using this improperly and for personal advantage.
In future will employees be under a duty to disclose wrongdoing?
Possibly. Although the Parliamentary Commission on Banking Standards recommended this should be the case, the view of the FCA and PRA in their consultation papers was that this would be undesirable, but the point has been left open and the views of the industry sought in the consultation response. Of course it would be open to individual employers to require this as part of employees' contracts if they wished to do so and for senior employees it is already not uncommon to have a requirement that they should disclosure their own or other's wrongdoing. This already applies automatically to those who have fiduciary duties, such as directors, and can also apply to other senior managers.
So what are the specific proposals which firms will need to implement?
- Inform their UK-based employees that they can blow the whistle to the FCA or the PRA and provide details on how to do so
- Put internal whistleblowing arrangements in place (if they are not already), and inform their UK-based employees about these arrangements
- Offer protections to all whistleblowers, whatever their relationship with the firm, and the subject of their disclosure
- Include a passage in new employment contracts and settlement agreements clarifying that nothing in the agreement prevents an employee, or ex-employee, from making a protected disclosure
- Appoint a "Whistleblowers’ Champion"
- Respect the confidentiality of people who raise concerns
- Be able to deal with disclosures from people who have not revealed their identity
- Assess and escalate concerns raised by whistleblowers within the firm as appropriate, and, where this is justified, to the FCA, the PRA or an appropriate law enforcement agency
- Track the outcome of whistleblowing reports;
- Track what happens to an internal whistleblower to determine whether they are subsequently disadvantaged as a consequence of speaking out;
- Provide feedback to whistleblowers, where appropriate;
- Prepare written procedures (e.g. staff handbooks, etc.); and
- Take all reasonable steps to ensure that no person under the firm’s control engages in victimising whistleblowers, and take appropriate measures against those responsible for such victimisation.
What is the Whistleblowers' Champion's role?
This is a new concept altogether and requires the appointment of a suitably senior and independent person (being a non-executive director or the Chairman) who is personally accountable under the Senior Managers Regime/Senior Insurance Managers Regime to have overall responsibility for overseeing the effectiveness of whistleblowing arrangements. Their duties will include ensuring there are arrangements for protecting whistleblowers against detrimental treatment, preparing an annual report to the board about their operation and reporting to the FCA where, in a case before an employment tribunal contested by the firm, the tribunal finds in favour of a whistleblower. The Whistleblowers' Champion is required to undertake specific training and, crucially, they must have access to legal advice independent of the firm.
Given the Champion will have individual accountability to the regulators, it is probable that we will see whistleblowing issues now being dealt with much more seriously at board level.
How much will it cost and what about the internal resources to deal with it?
The cost benefit analysis forming part of the consultation paper disclosed additional compliance costs of £280,000 per year for the largest firms and is indicative that firms will be expected to do more than pay lip service to this.
Interestingly, the consultation seeks to break a common link that raising issues of wrongdoing is to be automatically equated with an employee raising a grievance, and in order to dispel this it is suggested that internal operational responsibility for whistleblowing is moved from HR to internal audit, compliance or a third party.