The debate in the UK as to whether whistleblowers should receive big payouts for exposing employers’ misdeeds is intensifying as authorities consider which approach to adopt.
In the US, those who come forward with incriminating information on their employer are in line for sizeable financial windfalls under two pieces of legislation.
The UK already offers legal protection to whistleblowers through the
Public Interest Disclosure Act, which came into force almost 15 years ago. This was designed to protect employees from reprisals, including unfair dismissal or demotion. In theory, employees should be safe if they make the disclosure to their company, a regulator or a government minister and if their revelations are in the public interest. Yet there is growing recognition among regulators and experts that this law has failed to fully protect whistleblowers.
“The majority of people are motivated by a desire to protect the public or their company"The situation in financial services appears to be slightly worse than in some other industries, according to a
survey by the charity Public Concern at Work (PCAW). Its findings showed that one in five financial employees go directly to regulators with their concerns, without first informing their company bosses. That compares with just 4% in other industries.
While there is widespread agreement that whistleblowers need reasonable assurance that they will not be fired, demoted or bullied as a result of their actions, such protection is still not guaranteed. Leaving aside outright dismissals, 21% of employees in financial services are formally disciplined for reporting misdeeds for the first time and 28% the second time the concern is raised, the PCAW report noted. Within financial services, whistleblowers are almost twice as likely to be fired outright if they make a complaint twice.
Show of support
In the UK, the amount of useful information the FCA received from whistleblowers increased by nearly two-thirds in 2013. As a result, the regulator plans to devote more resources to coping with the influx. It currently advises whistleblowers to raise concerns with their employers. If that route does not seem possible, then the regulator welcomes calls on +44 20 7066 9200 or emails to whistle@fca.org.uk.
In the US, the Securities and Exchange Commission (SEC) set up its own Office of the Whistleblower in 2011. In 2013, it received 3,238 tips and complaints, up from 3,001 in 2012. Under its whistleblower protection programme, whistleblowers are entitled to a payout worth 10–30% of any sanction by the SEC worth at least $1m. To date, it has awarded more than $14m.
Whistleblowers in the States may also receive payout under the False Claims Act, which applies to defrauding US federal agencies. These payouts tend to be considerably higher, as was the case with Keith Edwards, a low-ranking employee at J.P. Morgan, who was awarded $63.9m for his role in uncovering the bank’s misdeeds in mortgage applications.
In February 2014, the European Commission approved a pan-European whistleblowing hotline under the UCITS V rules for fund managers. If an individual has reported an issue to their national regulator and they feel they are being ignored, the hotline offers a route to the European Securities and Markets Authority for further help.
This lack of assurance would seem to strengthen the case of those arguing for financial reward for whistleblowers. But not everyone agrees.
PCAW’s viewMany are sceptical about the American approach of offering large rewards, believing there are more effective strategies for encouraging openness and integrity in the financial services sector.
The PCAW report suggested that big payouts “undermine the moral authority of a genuine whistleblower”, could lead to false reporting and “undermine the credibility of witnesses in future criminal or civil proceedings”.
“The majority of people are motivated by a desire to protect the public or their company,” says Cathy James, Chief Executive of PCAW. “There may be better ways of encouraging this spirit than offering financial rewards.”
CISI’s viewThe CISI believes that other options are available to improve openness. Andrew Hall, the Institute’s Head of Professional Standards and Integrity, says: “A cultural shift within institutions is the first step, to make sure that bosses are receptive to reports of wrongdoing from staff. We are in the process of preparing a presentation to firms that underlines the importance of being receptive to whistleblowers and the downside to sweeping aside their complaints.”
The hope of most whistleblowers, he says, is to know that their reports will be taken seriously – for the sake of the public and the company itself.
In addition, whistleblowers need to feel that regulators will heed their concerns. “There has been a perception that you are casting your concern into the abyss by talking to a watchdog,” says Nigel Sydenham, a former member of the CISI Compliance Forum committee. “But there are signs that this is finally starting to change, with complaints being taken more seriously and more investigations being launched as a result.”
Sydenham points out that bosses today have a greater incentive to pay attention to whistleblowers. For a start, fines for corporate bad behaviour have been getting bigger. At the end of 2013, the EU fined six European and US banks a record $2.3bn, with Deutsche Bank alone hit with a €725.4m penalty. In 2012, Barclays was fined $451m by the British and American authorities for manipulating the interest rate benchmark.
But an even more powerful motivation is increasingly at play, says Sydenham. “Historically, in the event of wrongdoing, it was just the firm that was punished,” he argues. “Recently, there has been a huge push to make individuals personally responsible. It makes a big difference when a top manager knows that they could face heavy fines or a ban from the industry.”
ConclusionThere is growing recognition among watchdogs and professionals of the role that whistleblowers can play in keeping the financial services sector honest and safe. Beefing up the regulators is one way to keep a careful eye on firms. But insiders are much better placed to spot abuses at an early stage – limiting any damage to the public at a far lower cost to the taxpayer than an over-mighty regulator.
Simon Webley, Research Director at the Institute of Business Ethics, believes progress is being made. “A more open culture is starting to emerge,” he says. “Companies know that information can spread very quickly on social media and they want to make sure they know what is going on before reading about it.”
If all goes well, experts hope the world will become a much safer place over the coming years for such public-spirited employees.
The original version of this article, written by Chris Alkan, was published in the June 2014 print edition of the Review.