The United Kingdom’s Prudential Regulation Authority and Financial Conduct Authority this week recommended that Parliament not create a financial reward program for whistleblowers, similar to one administered by the U.S. Securities and Exchange Commission.
In early July, a government response issued by the Department for Business Innovation and Skills made the same recommendation. “The government does not believe financial incentives should be introduced as an integral part of the whistleblowing framework,” it wrote. Concerns included: unintended consequences, such as an increase in the number of disclosures made for personal gain; making people far more suspicious of whistleblowers; the potential for issues to remain unreported for longer; and that some employees might be more interested in policing their employer rather than working for them.
The FCA and PRA considered this recommendation when making their own decision not to create awards programs of their own. Those regulators also met with U.S. officials as part of the review. In the U.S., Congress provided financial regulators, in particular the Securities and Exchange Commission, with new tools to encourage whistleblowers to come forward. The SEC, for example, can pay whistleblowers 10 to 30 percent of settlements in excess of $1 million. The rewards are drawn from an Investor Protection Fund, established by Congress, which has a current balance of more than $450 million.
Reasons cited for the decision:
Incentives in the U.S. benefit only the small number whose information leads directly to successful enforcement action resulting in the imposition of fines (from which the incentives are paid). They provide nothing for the vast majority of whistleblowers;
There is as yet no empirical evidence of incentives leading to an increase in the number or quality of disclosures received by the regulators;
Introducing incentives has been accompanied by a complex, and therefore costly, governance structure;
The incentives system has also generated significant legal fees for both whistleblowers and firms, although many whistleblowers are represented on a contingency basis (no award, no fee);
And, incentives offered by regulators could undermine the introduction and maintenance by firms of effective internal whistleblowing mechanisms, which the regulators want to see.
Bill Shepherd, a partner at the law firm Holland & Knight, who hosted one of the informational meetings for U.K. regulators at his firm's office in Washington, D.C., calls the decision "a big win" for U.S. companies that do business in the U.K. because they could have been subject to a new front on whistleblower cases. The U.K. approach is much more based on "ethics and improvement from within" instead of creating a whistleblower industry the way the U.S. has. The decision “may now give U.S. lawmakers and enforcement authorities reason to review their own practices,” he adds.
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