Whistleblowing: New requirements to strengthen protections in regulated firms

On 6 October 2015, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) published new rules relating to whistleblowing in certain regulated firms which will take effect next year and will require the relevant firms to publicise reporting channels to staff, ensure their procedures for dealing with reports are adequate, appoint a senior whistleblowing “champion” who must produce (or oversee the production of) an annual report to be available to the regulator, and to restrict certain types of provisions in settlement agreements.

The rules will affect UK deposit-takers (with assets of £250m or greater, including banks, building societies and credit unions), all PRA-designated investment firms and insurance and reinsurance firms within the scope of Solvency II and the Society of Lloyd’s and managing agents (together ‘relevant firms’). For all other firms regulated by the FCA, the rules are non-binding guidance (although the FCA has said it will consider extending the scope to UK branches of overseas banks and other entities subject to its regulation in due course).

According to Tracey McDermott, acting FCA chief executive: “These rules are designed to build on and formalise examples of good practice already found in parts of the financial services industry and aim to encourage a culture in which individuals working in the industry feel comfortable raising concerns and challenge poor practice and behaviour.”

The key provisions are:

• Publicise FCA/PRA reporting channels. To inform all UK-based employees about the FCA and PRA whistleblowing services, to ensure they are aware of whistleblowing channels beyond their internal reporting channels. Principal firms must also require their appointed representatives and tied agents to inform their staff about the FCA whistleblowing service.
• Whistleblowing capabilities. To have whistleblowing arrangements that:
  • are able to deal with all types of whistleblowing disclosures, not just those related to regulatory concerns and/or protected disclosures under the Public Interest Disclosure Act;
  • ensure the “effective assessment and escalation” of concerns, although not all disclosures may result in investigations; and
  • are available to any person who wishes to make a disclosure (although there is no requirement to promote the arrangement to those outside the firm).
• Whistleblowers’ champion. To appoint a whistleblowers’ champion who:
  • must be a senior manager subject to the Senior Managers Regime or the Senior Insurance Managers regime;
  • must be a non-executive director;
  • may be based overseas if they can perform the role effectively;
  • need not have a day-to-day role in handling disclosures; and
  • will oversee the preparation of an annual report for the board on whistleblowing (which is available to the FCA/PRA on request, but is not a public document).
• Settlement agreements. When negotiating settlement agreements with employees, firms must include text explaining that nothing in the agreement prevents the worker from making a protected disclosure. Relevant firms may not require the signatory to confirm that they know of no information that could form the basis of a protected disclosure or state whether they have made a protected disclosure. The same requirement applies to employment contracts.
• Report findings of victimisation. To inform the FCA of cases where an employment tribunal finds in favour of a whistleblower in claims that the whistleblower was victimised. The whistleblower champion should have oversight of this as part of their role.

Relevant firms have until 7 September 2016 to comply with the new requirements, although the requirement to assign responsibilities to a whistleblowers’ champion will take effect on 7 March 2016.

Comment

While the new rules do go some way to encourage and protect whistleblowers, one might ask whether they go far enough. In particular, the exact role of the whistleblowers’ champion remains undefined and there appears little more by way of incentive for whistleblowers to come forward than there was prior to the rules being published.

While the FCA notes that levels of reporting have increased ten-fold since 2007/2008 they remain significantly below the levels of reporting in the US where three times as many reports were made to the SEC in 2013. Some believe this disparity is a result of the US’ approach towards incentivizing whistleblowers, with the SEC paying out awards reaching more than $30m in some cases (although the levels of fines handed down to firms following whistleblower reports dwarf these incentive payments).

In July 2014, the FCA and PRA reported on their research into the impact of financial incentives for whistleblowers, concluding that “introducing financial incentives for whistleblowers would be unlikely to increase the number or quality of the disclosures we receive from them…or significantly increase integrity and transparency in financial markets.” In its consultation on these new whistleblower rules, the FCA noted that: “the issue of whether regulators should pay rewards to whistleblowers was raised”. However, no further explanation or comment was provided in response, suggesting that at least for the time being, there remains no appetite to incentivise whistleblowing through financial rewards.

The FCA’s Policy Statement and Rules are available here and the PRA's Policy Statement is available here.