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FCA and PRA publish joint consultation paper on how firms should handle whistleblowing

Submitted By Firm: Addleshaw Goddard

Contact(s): Michael Leftley, Sarah Harrop

Author(s):

Amanda Steadman

Date Published: 6/18/2015

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The FCA and PRA have published a joint consultation on how certain organisations within the financial services sector should manage internal whistleblowing disclosures. The consultation paper sets out wide-ranging proposals aimed at ensuring a consistent approach across the sector. The proposals include instituting rigorous internal whistleblowing arrangements, offering protection to all whistleblowers, including those who fall outside the scope of the UK legislation, and the appointment of a non-executive director to act as a "whistleblowing champion" to oversee the operation of the internal arrangements. The consultation closes on 22 May 2015.

Background

In June 2013 the Parliamentary Commission on Banking Standards (PCBS) published its report, Changing Banking for Good, setting out proposals for reform of the banking sector. This included a number of recommendations aimed at ensuring that: (i) banks have effective whistleblowing arrangements in place; and (ii) whistleblowers are protected from victimisation.

In response, the FCA and the PRA have proposed a package of measures aimed at formalising the whistleblowing procedures within:

  • UK banks
  • Building societies
  • Credit unions (which have in excess of £25 million in assets)
  • PRA-designated investment firms
  • Insurers

(together Relevant Firms).

The consultation paper notes that, at present, Relevant Firms are under no UK legal or regulatory duty to have whistleblowing arrangements in place, although many do so to comply with the requirements of the Capital Requirements Directive and/or to comply with the guidance in the FCA and PRA Handbooks and the voluntary recommendations of the FRC's current Corporate Governance Code. In addition, Relevant Firms with a US listing will have whistleblowing arrangements in place in order to comply with the Sarbanes Oxley legislation.

The intention is that the new proposals will allow a more consistent approach across Relevant Firms and ensure that employees have the confidence to blow the whistle where they suspect misconduct. The FCA estimates that implementing the proposals will cost larger firms (10,000+ staff) approximately £280,000 per year, together with a one-off set up cost of £70,000 (with the costs significantly lower for small and medium sized firms).

Proposals

We report on the key consultation proposals below:

Internal whistleblowing arrangements

The consultation recommends that Relevant Firms institute whistleblowing arrangements and inform their UK-based employees about them. It is proposed that Relevant Firms should:

  • Respect the confidentiality of whistleblowers and also permit anonymous disclosures.
  • Permit the assessment and escalation of concerns within the Relevant Firm and to the FCA, PRA or appropriate law enforcement agency.
  • Track the outcome of the whistleblowing disclosure and what happens to the whistleblower (to monitor for victimisation).
  • Provide appropriate feedback to whistleblowers.
  • Create written whistleblowing procedures.
  • Take all reasonable steps to prevent the victimisation of whistleblowers and to take appropriate action against perpetrators of detrimental treatment.
  • Ensure that such arrangements are overseen by the audit and compliance function and are supported by appropriate record-keeping and secure IT.
  • Consider which part of the business should have ownership of the whistleblowing arrangements. The consultation suggests that HR departments are unlikely to be appropriate and that the internal audit function would be more suitable.
  • Where third parties provide whistleblowing-related services (e.g. whistleblower hotlines), consideration should be given to the quality of the service and how it can be monitored.

Inform UK-based employees that they can blow the whistle to the FCA or PRA

The consultation proposes that all UK-based employees of Relevant Firms are informed about the dedicated whistleblowing services provided by the PRA and the FCA, including: how to contact them, the protections they offer, and the kinds of disclosures it would be appropriate to make to each of the services. It is recommended that employees be provided with this information regardless of whether they have made an internal report.

Offer protection to all whistleblowers

The consultation proposes that the whistleblowing arrangements should be extended to all whistleblowers, even if they would not qualify for protection under the whistleblowing legislation (although it is recognised that reports from customers might be better dealt with by a different part of the business e.g. the customer complaints department).

It is also proposed that the arrangements and protections should apply to those blowing the whistle about any type of concern, including those that do not relate to breaches of the FCA or PRA rules and those which do not qualify as protected disclosures under the whistleblowing legislation.

Training

The consultation proposes that Relevant Firms consider what training is required to embed the whistleblowing arrangements within the business. This would include training to all employees on how to make a disclosure and to all managers on how to recognise whistleblowing and how to protect the whistleblower.

New employment contracts and settlement agreements to confirm that nothing prevents the making of a whistleblowing disclosure

The consultation proposes that Relevant Firms include express clauses in employment contracts and settlement agreements to clarify that nothing in the agreement prevents the employee from making a whistleblowing disclosure, including to the FCA or PRA. The consultation sets out a suggested form of wording to include in such agreements.

Appointment of a "whistleblowing champion"

The consultation recommends that Relevant Firms allocate responsibility for whistleblowing under the Senior Managers Regime (SMR) and the Senior Insurance Managers Regime (SIMR) to an individual, dubbed the "whistleblowing champion". Under the SMR, the whistleblowing champion should be a non-executive director who is a senior manager under the SMR. Under the SIMR, the whistleblowing champion should be one or more non-executive directors. In either case, the person appointed must have a level of authority and independence sufficient to enable them to perform the role. The whistleblowing champion must also have sufficient resources to enable them to carry out their role. This means having access to independent legal advice and specialist training.

The whistleblowing champion would have responsibility for:

  • Overseeing the integrity, independence and effectiveness of internal whistleblowing arrangements, including the protection of whistleblowers from victimisation.
  • Preparing an annual report to the board about the operation of the arrangements. The firm would have discretion as to the content of the report and there would be no obligation to make that report public (although it must be made available to the regulator on request).
  • Reporting to the FCA promptly where the Relevant Firm loses a whistleblowing claim before an Employment Tribunal (even where an appeal is intended). It is believed that this information will be a new source of intelligence that could inform supervisory work. It would also ensure the whistleblowing champion is involved in such cases, ensuring that appropriate lessons are learned.

The consultation does not prescribe how the role should be performed and recognises that it will vary between Relevant Firms: in smaller firms it might be a "hands-on" role, whilst in larger firms it might be an oversight role with day-to-day operations delegated to a dedicated whistleblowing function. However, even in larger firms it is expected that the whistleblowing champion will be open to direct approaches by whistleblowers.

No regulatory requirement to blow the whistle

The PCBS report proposed that employment contracts, codes of conduct and staff handbooks include clear references to the "duty" on staff to blow the whistle internally. However, the FCA and PRA have declined to introduce such a duty on the basis that it could place individuals in a position where they feel they face being penalised whatever course of action they take. It could also lead to defensive reports being made which could overwhelm the firm. Instead, the decision to blow the whistle should remain a matter for individual. This approach echoes that taken in the independent Whistleblowing Commission report published by the whistleblowing charity, Public Concern at Work in November 2013.

Comment

At the same time as publishing the consultation paper, the FCA published a note on how the FCA handles whistleblowing disclosures. This reveals some interesting trends in the whistleblowing disclosures made to the FCA last year. In 2014, the number of disclosures rose by over 45% on the previous year (948 in 2013 rising to 1376 in 2014). Approximately 17% of the 1,376 reports made in 2014 concerned the culture of the organisation. This helps explain the proposals for opening up whistleblowing protection to all whistleblowers regardless of who they are and regardless of the nature of the report. It also helps explain the emphasis placed upon having an independent and authoritative person at the helm of the whistleblowing arrangements.

One relatively positive trend is that the reports reveal relatively few whistleblowers allege to have suffered a detriment as a result of blowing the whistle - less than 6% of the 1,376 reports in 2014 involved complaints of victimisation.

Whilst the proposals in this consultation affect only Relevant Firms, the FCA intends to launch a further consultation on whether the same or similar rules should be extended to: (i) UK branches of overseas banks; and (ii) a wider range of firms regulated by the FCA.

The consultation closes on 22 May 2015, after which the FCA and PRA will consider the responses and publish policy statements containing their final rules.

Consultation Paper: Whistleblowing in deposit-takers, PRA-designated investment firms and insurers

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