Is it time for the world to adopt a US-style payment system? (Part 1)

A good opportunity to reflect on the regulatory responses to the crisis and the extent to which they are working.

Is it time for the world to adopt a US-style payment system? (Part 1)

One important response has been an increased focus on how to encourage whistleblowers – and particularly those in large, systemically important financial institutions – to report evidence of wrongdoing to Boards, or, in some instances, to regulators and law enforcement agencies. 

In the UK, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have instituted demanding protections for whistleblowers as part of the new Senior Managers Regime, to which all major UK banks and insurers are currently subject (with the FCA looking to extend the SMR to all financial services firms over the coming years).  Whilst these rules look likely to be vigorously enforced – the Chief Executive of Barclays plc, Jes Staley is currently the subject of parallel FCA and PRA investigations into allegations he attempted to unmask a whistleblower – are they enough to incentivise individuals to risk it all by coming forward to blow the whistle?

The 2010 US Dodd-Frank Act – the principal American legislative response to the global financial crisis – established comparable protections for whistleblowers against retaliatory acts by their employers.  But it went further, establishing an Office of the Whistleblower whose primary function is to make cash awards to individuals who come forward with information leading to successful civil or criminal enforcement.  As we reflect on lessons learned, it is time to consider the success of this scheme, and whether the UK should adopt the US approach and pay financial rewards to whistleblowers.

Reform in the US

The Dodd-Frank Act provides that individuals bringing suspected breaches of securities laws to the attention of the Securities and Exchange Commission (SEC) are entitled to a percentage of any financial penalty levied against the wrongdoer (typically the whistleblower’s employer), so long as the eventual penalty is greater than $1m.

The rewards on offer can be staggering. The largest award made under the programme, in 2014, is understood to have been circa $35m, and was awarded to a tipster living outside the US.  The SEC is set to announce its largest SEC whistleblower award to date – more than $61 million to two JP Morgan whistleblowers whose information led to a $300million settlement with the SEC confirmed in December 2015. During the 2016 financial year, the SEC received more than 4200 whistleblowing tips, awarding more than $57m to 13 claimants.

In the view of Andrew Ceresney, until December 2016 the SEC’s director of enforcement, the programme has been “transformative” to the commission’s work, “both in terms of the detection of illegal conduct and in moving our investigations forward quicker and through the use of fewer resources”. The SEC has argued that, without the prospect of these awards, firms responsible for misleading the market, bribing foreign public officials, Ponzi schemes and other investment frauds would all have escaped justice.