The Financial Conduct Authority was found in favour by an employment tribunal on two out of three claims made against it by a whistleblower who alleged the regulator ignored his warnings over high street banks’ ‘undercapitalisation’ around the time of the financial crisis.
At a hearing in East London which lasted 19 days, Judge Massarella dismissed whistleblower Walker Sigismund’s claims of detriment and automatic unfair dismissal on the grounds that he made public interest disclosures.
“In making these disclosures, the claimant contrived to position himself as a whistleblower in the belief that this would protect him from redundancy,” the tribunal heard.
His third claim of ordinary unfair dismissal - which is when an employer breaches a worker’s contract rather than their statutory employment rights - did succeed. This was because the tribunal found the FCA to have “acted unreasonably” by deciding “not to engage” with Sigismund’s ground of appeal - that he was dismissed for being a whistleblower.
"The claimant was ‘denied the opportunity of showing that the real reason for dismissal was not sufficient'," the tribunal said. "It may well have made no difference to the outcome; but the authorities are clear that that is a matter of remedy."
The reserved judgement, published on October 6, said Sigismund was entitled to compensation. If he and the FCA do not agree on a compensation amount, there will be a further remedy hearing to calculate it.
At the hearing, 15,710 pages of agreed documents were presented alongside what the tribunal called “an unagreed supplementary bundle” of 12,777 pages.
The tribunal said the bundles were so big that the FCA had to provide laptops for the lay members and the witness table, with the bundles preloaded onto them.
“A single hard copy stretched from one side of the tribunal room to the other…It is unclear how such a manifestly disproportionate bundle came to be created,” the tribunal noted.
Sigismund was employed by the FCA for 18 years, from October 2006 to October 2018. He started off as a manager within the risk department.
Before joining the FCA, which was then known as the Financial Services Authority, Sigismund had worked at various banks, including HSBC and Natwest. He claimed to have “tr[ied] to correct malpractice” at these employers, that he “blew the whistle on hidden losses” and “trained risk managers to do the same”.
At the FCA, Sigismund created what he later coined the ‘Harm Metric’. Designed to be a metric of consumer harm posed by financial institutions, it switched the focus from a firm’s default point to their distress point, focusing on the losses which occurred before default. His idea was to create “an early warning system”.
Initially, Sigismund garnered some support for his ‘new’ method. His boss until 2013, Lyndon Nelson, said in an email sent back in November 2007 that Sigismund’s ‘Harm Metric’ data “would tend to show that Northern Rock was in breach, or likely breach, of minimum capital requirements in December 2006”.
Julian Adams, who used to head up wholesale insurance at the regulator, agreed. He said: “The analysis is quite compelling and would have put Northern Rock as our highest risk firm in December 2006.”
Northern Rock failed between August and September 2007. Sigismund’s ‘Harm Metric’ did not go online until August 2007. He argued, however, that had it gone live earlier, he could have predicted the financial crash.
In an ‘Executive Harm Update’ sent at the end of May 2008, Sigismund wrote that Royal Bank of Scotland was at the ‘Top of the Harm list’.
“The update also contained a chart which indicated that the magnitude of RBS’s undercapitalisation was £28.8bn,” the tribunal heard.
While the watchdog knew RBS needed additional capital, having raised £12bn via a record rights issue a month earlier, Sigismund’s data suggested £12bn would not be enough. RBS failed in October 2008.
Sigismund also warned of the undercapitalisation of around 150 regulated firms in December 2007. “We note at this point that other firms, which the claimant identified as at imminent risk of failure, did not,” the tribunal said.
Around the time of the financial crash, banks were required to hold capital at least equivalent to 8 per cent of their risk weighted assets.
Sigismund had argued that the regulator should also use his metric, which judged capitalisation based on either market, credit, operational or liquidity risk.
But not everyone felt this method worked in practice. As the tribunal observed, there was “considerable disagreement” among supervisors as to the suitability of using his ‘Harm Metric’.
The regulator’s former chief economist, Peter Andrews, said banks were undercapitalised “for a long time” and that there was "no other alternative".
“If the FSA were to declare, as the claimant has suggested, that the majority of banks were undercapitalised, this would have destroyed market confidence and led to the huge economic costs of bank runs,” he said.
The tribunal did, however, say this illustrates how one statutory objective of the FSA/FCA “might be in conflict” with another.
Former chair of the FCA, Charles Randell, went as far as to suggest there was nothing “genuinely new” or particularly useful for the FCA in the ‘Harm Metric’.
Sigismund has since argued the “underuse” of his metric was down to a “lack of sufficient confidence and understanding of such sophisticated mathematical techniques”.
From May 2007, the regulator began paying for the data which underpinned the ‘Harm Metric'. By 2009, the risk department was spending around $100,000 (£90,575) per annum on data, and by 2013 this cost had doubled to $200,000 (£180,633).
During this time, Sigismund sent out daily and monthly internal newsletters to FCA employees on his findings. By 2014, the tribunal said he was in daily, personal email communication with the FCA's chief executive at the time, Martin Wheatley.
At the end of 2013, Sigismund was seconded to the chief economist’s department but still produced work on the 'Harm Metric'. In March 2015, he was instructed to stop work on it entirely - though this decision was never recorded in writing.
An internal audit had found Sigismund’s metric “lacked proper explanations”, that he “ignored legal realities and misunderstood aspects of regulation”. It also suggested the FCA should have a review process in place to validate models “as early as possible” so as not to spend time and resources on models which are not going to be used in the long run.
Two academics also reviewed it, both agreeing it was nowhere near being fully formulated for regulatory use.
Sigismund was then moved from the chief economist’s department to work on peer-to-peer lending.
In its analysis of how Sigismund communicated his 'Harm Metric', the tribunal found he both "lack[ed] perspective" and that his relationship with one manager "was not an easy one".
In an email sent in November 2010, Sigismund had likened himself to Moses and “Galileo trying to explain that actually the earth goes around the sun” when describing how he felt trying to communicate his data with FCA supervisors.
He added in a later witness statement that Galileo "was tried by the inquisition, found ‘vehemently suspect of heresy’ and forced to recant" before spending the rest of his life under house arrest.
“At the FSA and FCA, I often thought of them and my isolation and similar house arrest and treatment," he said.
The tribunal said comparisons of his own treatment with that of Galileo, and the reference to being subjected to house arrest, appeared to disclose “a concerning lack of perspective”.
Sigismund also wrote to former Bank of England governor Mark Carney, as well as former chancellor Philip Hammond, in January 2019 saying “I arguably deserve a Nobel prize" in reference to his metric which he had, by then, been claiming had long been ignored by his peers at the FCA.
Four years prior to this, upon Wheatley’s departure from the FCA in 2015, Sigismund applied for the top role at the regulator. He had also applied to become the next governor of the Bank of England in September 2012, a role for which he was not interviewed.
His line manager at the FCA in 2013, Gavin Stewart, said he had found it hard to properly appraise Sigismund’s performance due to the fact the two were “unable to fully agree” on his objectives. The tribunal said, upon hearing various findings, that it was not surprised by this.
It said: "Given the exceptionally high opinion the claimant had of his own work – we note the, seemingly unironic, references to Moses and Galileo – we find it unsurprising that there was no meeting of minds."
Speaking on the judgement, an FCA spokesperson said: “We are sorry that this ever came before Tribunal, but pleased that it found overwhelmingly in our favour.”
ruby.hinchliffe@ft.com