Should FCA Reconsider Its Approach To Whistleblowers?

November 26, 2021
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Nobody doubts the usefulness of tipsters in the fight against financial crime, but the UK's Financial Conduct Authority (FCA) has long eschewed the idea of rewarding them for their information, no matter how crucial. In view of the success of the US' Dodd-Frank regime, it might profit by reviewing this long-established policy.

Nobody doubts the usefulness of tipsters in the fight against financial crime, but the UK's Financial Conduct Authority (FCA) has long eschewed the idea of rewarding them for their information, no matter how crucial. In view of the success of the US' Dodd-Frank regime, it might profit by reviewing this long-established policy.

The FCA has acknowledged that informants or "whistleblowers" provide it with vital information. Its most recent annual report says that it has received reports from more than 1,000 of them, containing 2,754 separate allegations. It took action in 150 cases and made constructive use of the information in another 145. It refers to the most frequently reported "allegation themes" as compliance, fitness and propriety, treating customers fairly, culture of organisations, consumer detriment, unauthorised business, data security, mis-selling, pressure selling and fraud. These subjects are all high on the FCA's agenda.

In April 2019, the regulator published a summary of the way it enforced its rules, noting that improvements in its detection of misconduct increased public confidence in financial services. It said that it valued information from whistleblowers, "who may give us the earliest indications of wrong-doing".

Over the past two years, the FCA has more than doubled the number of people on its whistle-blowing team, with the aim of improving the process for anybody with information to share with it. In March of this year, it embarked on a publicity campaign entitled “In confidence, with confidence” which exhorted people in finance to tell it about wrongdoing, anonymously if needs be.

We know that whistleblowers can be incredibly helpful sometimes, but do we have a whistleblowing system that works? Some have criticised the FCA for dealing with reports too slowly. At the year ending March 31, 2021, nearly two-thirds of reports were still under investigation. The regulator denies that this constitutes a backlog, stating in a note to whistleblowers that “assessing and acting on whistleblowing can take time”. This is bound to be true even in a system that works perfectly, but delays in the FCA's investigation and enforcement processes are problematic as well.

The next question is whether the FCA could or should do anything to improve the quality of the information that it receives. In 2014, the FCA and its sister-regulator, the Prudential Regulation Authority, considered offering financial incentives to whistleblowers and reported their conclusions to the Treasury Select committee. They decided that this was not appropriate.

Examining the experience of the United States, the trailblazer for rewarding whistleblowers, the report said that:

  • Financial incentives benefited only a small number of people whose information led directly to successful enforcement action and fines.
  • There was no empirical evidence that incentives increased the number or quality of disclosures.
  • The practice called for a complex and costly structure of governance.
  • Legal fees for both whistleblowers and firms were significant.
  • A system of rewards might undermine effective internal whistleblowing mechanisms.

It also raised concerns about entrapment, conflicts of interest in court, the malicious reporting of speculative rumours and the way in which the public might perceive such a practice.

Perhaps it is time to revisit those findings, particularly as it is always difficult for someone to decide to tell the authorities about their colleagues' misconduct. Invariably, there are serious ramifications for their career and earnings, as well as the time and emotional wear and tear that come with "blowing the whistle".

Employment law offers an informant some protection from bad treatment or unfair dismissal, but only 12 percent of people who claim "whistleblowing protection" before the Employment Tribunal are successful. This figure does not include people who settle their cases without commencing proceedings. The possibility of a successful claim against an employer at some point in future may not be enough to convince someone to risk their livelihood and prospects.

Would a system that resembles the one set up by the Dodd-Frank Act 2010 encourage people to tell the FCA about serious misconduct? Section 922 of that act awards whistleblowers between 10 percent and 30 percent of any monetary recovery of more than $1m that the Securities and Exchange Commission obtains from an offending party through successful enforcement action. Given the scale of the usual penalties, such rewards can be very substantial indeed.

There have been several academic studies which suggest that the central arguments against so-called bounty regimes are ill-founded. They point to evidence that such regimes increase the quality and quantity of disclosures and deter misconduct. They also conclude that the risk of entrapment and fraudulent claims is overblown, particularly in countries with sophisticated and reliable regulatory and judicial systems. The US experience is a good one, according to the country's regulators and prosecutors.

Many would-be whistleblowers are worried that regulators might scrutinise their own behaviour once they have exposed the misconduct of others. The US' success might, therefore, rest partly on the willingness of the authorities to do deals with people on the margins of misconduct.

The FCA would do well to re-consider its decision not to incentivise whistleblowers. A system of rewards could well improve the volume and quality of intelligence that it receives. This would help it bolster the integrity of the UK's financial services and markets.

Neil Swift is a partner at Peters & Peters in London and can be reached at nswift@petersandpeters.com.

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