In what may be seen as a game of two halves, the increase in whistleblowing reports to the FCA seen in 2013 and 2014 (948 and 1,367 reports respectively) has been followed by a decline in 2015 and 2016 (1,104 and 866 reports respectively).
This decline is despite the introduction by the FCA and PRA of the senior managers regime (SMR) and rules on whistleblowing in 2016. These new rules followed criticism in 2013 from the parliamentary commission on banking standards (PCBS) regarding the FCA's handling of whistleblowing. The commission reported evidence from whistleblowers that "demonstrated a lack of confidence in the regulator's willingness and ability to support them and to act upon their concerns".
The new rules required firms with more than £250m in assets, designated investment firms and those within Solvency II to appoint a senior manager as their whistleblowers’ champion. These rules also required such firms to put in place internal whistleblowing arrangements able to handle all types of disclosures from any person and to include in settlement agreements that workers have a legal right to blow the whistle.
The same rules required firms to tell 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 they lose an employment tribunal with a whistleblower and require their appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service.
The SMR, which came into force in March 2016 and forms part of the government's programme of banking reform following the financial crisis of 2008, was designed to make it easier for the regulators to hold senior individuals within banks and other designated financial institutions personally accountable for failings on their watch. It required firms to assign responsibility for certain areas of the business to named senior individuals.
The SMR forms part of the UK government's programme of banking reform following the financial crisis of 2008 and was developed following the recommendations of the independent PCBS in July 2013. The "senior managers" part of the new regime gives named senior individuals within firms the responsibility for certain areas of the business, while the "certification regime" requires firms to assess the fitness and propriety of staff in certain roles.
Both the UK's financial regulators, the PRA and the FCA, announced that they will apply relevant aspects of the SMR to their own senior members of staff, including the requirement to allocate core responsibilities to designated senior managers.
The question of whether these regulatory changes have resulted in a shift in the culture of such firms regarding whistleblowing remains to be answered. Some financial institutions experienced an increased interest from employees about their responsibilities and ownership, with concerns escalated internally on a defensive basis. This reflected the impact of the SMR resulting in senior managers' decisions becoming in danger of being based on personal interest and liability, rather than applying a risk-based approach.
It is unlikely that the whistleblowing figures for the past two years reflect a reduction in misconduct, as tip-offs received by regulators in other markets increased during the same period. For example, the number of whistleblowing cases raised by the securities and exchange commission (SEC) in the US, where whistleblowers receive financial incentives for reporting dishonest or illegal activities, has increased by 40 per cent since 2012 with a year-on-year increase every year.
The SEC has now awarded approximately $153m (£119m) to 43 whistleblowers with the biggest award being more than $30m in 2014 and two awards each in excess of $20m in 2016. The SEC awards can range from 10 to 30 per cent of the money collected when the penalties are more than $1m.
The SEC received more than 4,000 whistleblowing reports in FY 2016 and has received more than 14,000 such reports since the award programme began. The SEC has received whistleblowing reports from all 50 states and 103 foreign countries, with the UK leading the way for such reports.
In 2016 the SEC also brought its first stand-alone enforcement action against a company for whistleblower retaliation.
The result of this was a half-million dollar penalty for terminating the employment of an employee who had several years of positive performance reviews, because the employee reported to senior management and the SEC that the company's financial statements might be distorted. This strong enforcement of anti-retaliation protections is a critical component of any whistleblower programme and is something the FCA will need to move towards to ensure its programme is successful.
In June 2016 Merrill Lynch, in connection with its settlement to pay $415m to the SEC for violations of the customer protection rule, also settled charges that it violated US rules by using language in severance agreements that operated to impede employers from voluntarily providing information to the SEC. This is again something the FCA must take note of if its programme is to achieve its objectives.
The disappointing decline in the number of whistleblowing reports may reignite and give renewed impetus to the debate about the possible introduction of financial incentives for UK whistleblowers. Should the FCA or others consider implementing financial incentives for whistleblowing in the UK, similar to the regime in the US, this could result in an increase both in the number of reports and the likelihood of senior individuals blowing the whistle on significant misconduct. Whistleblowing for many still results in the loss of their job, an almost inevitable failure to find alternative employment in the financial services industry and, in some cases, the threat or impact of physical violence.
It is disappointing in the sense that while the FCA has worked hard to review and improve its whistleblowing procedures and increase the resources dedicated to the area, it has not resulted in an increase in the number or quality of reports enabling the FCA to take action.
Irrespective of whether the decline in whistleblowing reports to the FCA might indicate that the FCA’s work to date in this area is effective or not, it is relevant to all financial services firms that the FCA continues to use whistleblowing reports as the basis for many interventions and investigations. While the extent to which whistleblowing results in an enforcement action and subsequent sanction remains opaque, it is transparent that whistleblowing reports have both initiated and supported some of the FCA's interventions in financial services firms and the financial markets.
Extra time is being played with the result still in the balance regarding the success of the FCA's whistleblowing regime.
Michael Ruck is a senior associate of Pinsent Masons LLP
Key points
There has been a decline in FCA whistleblowing reports during 2015 and 2016.
The senior managers regime was designed to make it easier for the regulators to hold senior individuals personally accountable.
It is unlikely that the whistleblowing figures for the past two years reflect a reduction in misconduct.
