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Regulators Oppose Financial Incentives for Whistle-Blowers

By Principal Lawyer, Business Crime & Regulation

The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), part of the Bank of England’s regulatory and supervisory arm, have produced a joint note on financial incentives for whistleblowing.

The note is a second stage response to the final report published by the Parliamentary Commission on Banking Standards (PCBS) in June 2013 titled ‘Changing Banking for Good’. The report criticised the FCA’s management of whistleblowing and stated that currently whistle-blowers are not confident in the regulators’ ability to support them.

In their initial response to the PCBS report the FCA and PRA agreed to conduct research into financial rewards for whistle-blowers. The research undertaken primarily examined whistleblowing in the U.S. where regulators can use financial incentives to encourage employees to provide information.

The conclusions of the regulators’ research raised a number of concerns over the introduction of financial rewards for whistle-blowers. They concluded that financial incentives, which are paid from the financial penalty that a company may face as a result of successful enforcement action, would not assist the vast majority of whistle-blowers nor would it increase the number or substance of disclosures. Furthermore the FCA and PRA believe that any introduction of financial incentives could lead to a significant increase in legal fees for all parties and undermine the effectiveness of a company’s established whistleblowing policies and procedures. Additionally the regulators believe that the introduction of financial incentives could lead to malicious reporting as well as potential conflicts of interest when a company is prosecuted.

Having undertaken research into the U.S. regulatory system the FCA has stated that: ‘There is no empirical evidence to suggest that the U.S. system raises either the number or the quality of whistleblowing disclosures within financial services. Nor do the incentives in the U.S. model appear to improve the protection available to whistle-blowers. What whistle-blowers tell us they would like is better protection for all whistle-blowers rather than large payments to a tiny minority’.

In light of these conclusions the FCA and PRA have so far decided not to introduce financial incentives but rather focus on implementing regulatory changes to improve whistleblowing procedures within companies.

This includes acting on recommendations made in the PCBS report to make individuals in senior management positions accountable for ensuring that the company’s whistleblowing procedures are in place and remain effective. The FCA argue that making such changes will encourage and develop a business culture where reporting concerns becomes regular practice.

The FCA state in their conclusions that: ‘Providing financial incentives to whistle-blowers will not encourage whistleblowing or significantly increase integrity and transparency in financial markets and therefore propose not to introduce financial incentives, but to press ahead with the regulatory changes necessary to require firms to have effective whistleblowing procedures, and to make senior management accountable for delivering these’.

From late 2014 following the expansion of its whistleblowing division, the FCA will begin to publish annual reports on the disclosures they receive and outline any subsequent action taken. Information gathered by the FCA will be used to identify gaps in the current system and consequently greater attention can be given to sectors from which they receive fewer disclosures than expected. The regulator also plans to increase awareness among potential whistle-blowers including building on the new tracking mechanism and the existing forums for meeting and communication, as well as extending the support systems available to them.

It appears likely that the authorities will take steps to encourage more whistle-blowers to come forward and this in turn will lead to more investigations and/or prosecutions.

The FCA will publish further proposals on whistleblowing later this year.

Shula de Jersey is a Business Crime & Regulation Solicitor at Slater and Gordon Lawyers.

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