Daniel Barton 10 Apr 2018 05:45pm

Are whistleblower reward programmes really a good idea?

Daniel Barton considers how a reward programme for whistelblowers could change attitudes in the UK financial services sector and avert the risks of serious misconduct in the sector

It is widely known that the finance industry is no stranger to whistleblowing. Last year, for example we heard about the Financial Conduct Authority’s (FCA) investigation into a global bank’s treatment of a whistleblower. You could argue this highlights some attitudes to whistleblowers – find out who they are and make the matter go away.

Perhaps unsurprisingly, and in light of examples such as this, whistleblowing tip-offs concerning fraud, bribery and corruption made to the UK’s Serious Fraud Office (SFO) are continuing to fall. Official FCA statistics show that the number of whistleblowing cases opened have decreased by over 40% from 2014 through September 2017. It is imperative that action is taken to change this.

The rewarding of whistleblowers is an extremely divisive topic between investigators of fraud and corruption. Many in the financial sector agree that employees should speak up about potential wrong-doing, simply because it is the ethically sound thing to do. In other cases, however, some believe that a financial reward, as is currently offered in the US under the Dodd-Frank Act, is necessary to provide employees with a level of security.

In March, the Securities and Exchange Commission (SEC) awarded its latest whistleblower $33m (£23.m), as part of a $83 million package between three individuals. The reward, issued by the US financial regulator brings the total number of whistleblowers awarded up to 53 and the total paid to $262m since the programme started in 2012.

These payouts will be welcomed by many in the US. However, it will undoubtedly add fuel to the fire of the debate in the UK over the potential introduction of whistleblower bounties, especially in the face of the FCA ruling out any such initiative, stating that it is unlikely to increase the number of quality disclosures.

Whatever the right or wrong answer, something needs to change. Both employees and senior management must speak up about potential wrongdoing, and should be protected for doing so, and companies should ensure that they have and properly implement the necessary procedures that creates such an environment.

An annual review from The Banking Standards Board – an independent body set up by banks to improve standards across the industry – found that in a survey of approximately 28,000 financial services executives, two-thirds would be worried about negative consequences if they raised concerns within their bank. This attitude must change, otherwise we run the risk of seeing more high profile cases of misconduct in the sector.

In 2016, the FCA expanded what it expects banks and insurers to provide for whistleblowers to help alleviate the problem. These recommendations includes a senior executive whistleblowing champion to ensure the policies are in place, and that they are being properly implemented; to present a report on whistleblowing to the board at least once per annum; and establish internal arrangements to handle all type of whistleblowing disclosures.

While it is true that the rules currently only apply to a relatively small number of companies in the UK, the FCA has announced that it intends to roll out the regime to the entire financial services industry by 2018, which could include extending the application of the rules to overseas banks and other regulated firms such as mortgage brokers, insurance brokers, consumer credit brokers and investment managers.

The good news is, as more firms come within the scope of the FCA’s new regime, and as safeguards for whistleblowers become more established and well understood, it would be judicious to expect numbers to rise again.

Currently the UK does not have a mechanism in place for rewarding whistleblowers. Therefore, as a country, it is in a prime position to forge its own structure and formalise how we approach this key action and protect those who are simply trying to turn a bad situation into a better one.

Daniel Barton is a managing director at Alvarez & Marshal