Financial whistleblowers gained widespread attention last month when a former Deutsche Bank employee was awarded $200m (£146m) by a US regulator after raising concerns about Libor manipulation. The award was the largest ever made under the US whistleblower programme.
In the UK, the Financial Conduct Authority has also been busy.
In its Annual Report and Accounts for the year ending March 31 2021, the UK regulator said it had received 1,046 reports from whistleblowers, containing 2,754 separate allegations.
Of those reports, the FCA took action to mitigate harm in 150 cases, and used the intelligence received to inform its work in 145 cases. Only 97 reports were not considered relevant to the prevention of harm and 654 cases were still being assessed at year end.
The most frequently reported themes included compliance, fitness and propriety, treating customers fairly, data security, mis-selling and fraud – all clearly high on the agenda of a regulator whose aim is to improve the way the financial system works and how authorised companies conduct their business.
When whistleblowing works well it helps consumers, markets and firms and keeps everyone safe and that is our aim Mark Steward, FCAThe FCA acknowledges that whistleblowers are a vital source of information and says that it wants to improve the process for those who contact the FCA. Indeed, in March of this year it launched its first external communications campaign 'In confidence, with confidence'.
At the time, the FCA’s director of enforcement, Mark Steward, said: “When whistleblowing works well it helps consumers, markets and firms and keeps everyone safe and that is our aim.”
In April 2019, it also published a high-level mission statement on its approach to enforcement.
Perhaps self-evidently, the FCA said that improved detection of misconduct increased public confidence and sends the message that misconduct will be uncovered and dealt with.
It noted that “we must increase the likelihood of detection in tandem with efficient investigations”. Citing the sources of intelligence and data relied upon, including market data and information from firms, consumers and public databases, information from whistleblowers was singled out as it “may give us the earliest indications of wrongdoing”.
FCA slow to respond
Clearly, whistleblowers are a valuable source of real-time intelligence on misconduct in financial services. Of the reports made to the FCA, only a small number (less than 10 per cent) were irrelevant.
However, almost two-thirds of the reports made that year were still being assessed at year end. This is a similar proportion to the previous year.
In fact, there is no published data on the outcomes of those whistleblower reports that did not produce a measurable outcome in the financial year they were made.
So, a key question arises: if whistleblower reports have the potential to be so helpful, should anything be done to increase the speed at which they are dealt with?
Interestingly, the FCA maintains that the number of pending reports does not constitute a backlog. In its guidance to whistleblowers, it states: “Assessing and acting on whistleblowing information can take time – it may also become part of our ongoing supervisory work with a specific firm.”
On the resourcing front, over the past two years the FCA has more than doubled the staff in its whistleblowing team, although they pass reports received onto other teams within the regulator to investigate.
In addition, one could ask whether the FCA could, and should, improve the quality of information it receives. Back in 2014, the FCA and Prudential Regulation Authority considered offering financial incentives for whistleblowers and reported its findings to the Treasury Committee.
They concluded that it was not appropriate. Examining the experience of the US, the trailblazer for rewarding whistleblowers, the key findings included:
- Financial incentives benefit only a small number whose information leads directly to successful enforcement action and fines.
- An absence of empirical evidence that it increased the number or quality of disclosures.
- The requirement for a complex and costly governance structure.
- The significant legal fees for both whistleblowers and businesses.
- The potential to undermine effective internal whistleblowing mechanisms.
Concerns were also raised about malicious reporting of speculative rumours, entrapment, conflict of interest in court, and public perception.
But now perhaps it is time to revisit those findings.
Risks of whistleblowing
Particularly in financial services, the decision to blow the whistle on the misconduct of one’s colleagues is a very difficult one.
There are potentially very serious ramifications for an individual’s current and future career prospects and potential earnings, as well as the time and emotional demands that come with being a whistleblower.
Employment law does offer protection from negative treatment or unfair dismissal, but it is noteworthy that only 12 per cent of those who claim whistleblower protection in the Employment Tribunal are successful (although that does not include those who settle without commencing proceedings).
The possibility of a successful claim against their employer some way down the line may not be sufficient incentive for a would-be whistleblower to put their livelihood on the line.
But might a system more like that under the Dodd–Frank Wall Street Reform and Consumer Protection Act in the US encourage whistleblowing on serious misconduct? Rewards can be up to 30 per cent of the penalty imposed after successful enforcement action, which, given the scale of penalties, can be very substantial indeed.
Indeed, the US Commodity Futures Trading Commission, which recently announced the record reward of $200m for a whistleblower whose information was key to the investigation into global benchmark manipulation, resulted in Deutsche Bank alone paying fines of $2.5bn.
There have been several academic studies that suggest the central arguments against so-called bounty regimes are incorrect. There is evidence that such regimes increase the quality and quantity of disclosures, as well as providing a positive deterrent effect against misconduct.
They also conclude that the risk of entrapment and fraudulent claims is overblown, particularly in those countries with sophisticated and reliable regulatory and judicial systems. The US experience is positive, with reward programmes being widely praised by regulators and prosecutors alike.
Interestingly, the chairman of the US Securities and Exchange Commission told the House of Representatives that their whistleblower programme “has resulted in the investigative staff receiving a substantial volume of high-quality information”.
Finally, another matter likely to be of concern to whistleblowers will be the risk of being drawn into an investigation of whether they were involved or implicated in wrongdoing.
Shining a light on your own potential misconduct while blowing the whistle on that of others puts an individual very much at the mercy of the regulator. Perhaps an important feature of the US success in this area comes from its preparedness to do deals with lesser participants in misconduct.
Ultimately, while not all tools used by the US are successfully imported into the UK, this new remote-working world gives the FCA an opportunity to reconsider how best to incentivise whistleblowers to improve the volume and quality of intelligence it receives, provided of course that sufficient resources are devoted to the speedy investigation of concerns.
Neil Swift is a partner at Peters & Peters
