Is it time for the world to adopt a US-style payment system? (Part 2)

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 2)

Some benefits are available to those who blow the whistle on corporate misconduct in the UK, but they are of limited application, and are unlikely to incentivise individuals to report significant wrongdoing in, for example, UK financial services firms.  The question is whether some kind of UK Dodd-Frank provisions would assist? The UK’s financial services regulators think not.

A 2014 report from the FCA and PRA argued against the introduction of financial incentives for whistleblowers. The report suggested that there was no empirical evidence of incentives leading to an increase in the number or quality of disclosures received by the SEC.

In addition, it highlighted a number of “moral hazards” presented by financial incentives: malicious reports might be encouraged, conflicts of interest would arise that could be exploited in court by the subjects of any enforcement action, and internal compliance programmes would be undermined, as would the duty of approved persons to be open with their regulator.

Most tellingly, the report argued that Dodd-Frank style multi-million pound awards would offend public opinion: it was against “UK norms” to reward well-paid individuals for complying with a public (and, in some cases, regulatory) duty.

Time for a rethink?

Suggesting that those in the US are not aware of the potential moral hazard in incentivising whistleblowing is somewhat unfair; in 2016, a former Deutsche Bank employee turned down his share of an $8m award on the basis that the penalty from which it derived had been paid by the bank’s shareholders, with no action taken against the firm’s senior management charged with oversight of the bank’s conduct.

More importantly, the FCA/PRA report’s contention that both the number and quality of tips did not improve following the implementation of financial incentives conflicts directly with the stated experience of SEC enforcement, or recent statistics.  Earlier this year the Financial Times published data showing that between 2016-2017 disclosure of wrongdoing to the SEC increased by 16 percent, whereas tips to the FCA fell by a third.

UK authorities appear to consider that the risk of societal distaste for rewarding individuals within the financial services industry outweighs the potential benefits of encouraging those individuals to report the same kinds of wrongdoing that have tarnished the reputation of banking in the public eye. Perhaps this should be revisited, particularly in relation to cases where the conduct has been sufficiently egregious in nature to warrant the imposition of fines in excess of $1m.

The FCA and PRA’s approach ignores the fact that many whistleblowers in financial services will be putting their career at risk, and therefore their lifelong earning potential. It also fails to recognise the very real prospect that whistleblowers dedicate substantial amounts of time to providing information, assistance and witness testimony, often to multiple law enforcement agencies, not just in the UK, but also overseas.  It also fails to address what appears to be a correlation between access to rewards for whistleblowers, and the numbers of tips received. 

As regulators and policymakers reflect on our response to the global financial crisis, the question must be what works, as opposed to what accords with a societal distaste for rewarding already wealthy individuals for complying with an ostensibly moral duty.  In an environment where regulators and investigative agencies have limited budgets, there are strong arguments for the pursuit of evidence-led policy responses that encourage whistleblowers to bring serious wrongdoing to light, as well as protecting them when they do so.