Whistleblowers’ hotline to the FCA

Deciding to expose serious misconduct within a financial services firm is a tough decision for any individual, as it could impact career prospects and future earnings. Yet regulators see whistleblowing as essential to good governance and culture within the industry.

Reporting wrongdoing has also gained greater prominence during the pandemic, when work from home arrangements have heightened risks around conduct. However, in an isolated working environment, individuals may feel unable to escalate issues through internal channels.

In March the UK’s Financial Conduct Authority (FCA) launched a new campaign, “In confidence, with confidence’’, to encourage those thinking of blowing the whistle on misconduct to take action and report directly to the regulator. The FCA promises protection and anonymity, a dedicated case manager and increased resources and staff devoted to its whistleblowing team. It also expanded the scope of who is considered to be a whistleblower to include not just employees and ex-employees, but also family, neighbours and friends.

While opening up another avenue for individual’s to report wrongdoing is a positive step, the FCA’s new campaign raises several issues that financial institutions need to be aware of, according to experts from UK commercial law firm TLT.

First, loss of control over the investigation. “The FCA requires each firm to have its own whistleblowing policy and designated champion, who would investigate any report internally to see if there is a case to answer. They would make decisions around the scope of the investigation, the extent of any data that’s been considered, who’s being spoken to and all other related matters,” explains James Chadwick, partner at TLT. “The FCA’s campaign would take control away from the firm, with those processes being directed by the regulator and led by people who are disconnected from the firm.”

Loss of control includes losing the potential to assert privilege over investigation material, adds Chantal Peters, legal director at TLT. “For sensitive events, the firm may want the advice and material produced in the associated investigation to be confidential. If the FCA is in charge of the investigation, the financial firm does not have legal privilege over the material that’s produced,” she explains.

Second, an external investigation could take longer. “A firm is probably better placed to take a view early on whether this is just a disgruntled employee, because they have that historic knowledge, understand the culture and business areas, and so on. It may take longer for a third party to understand whether it is a disgruntled employee or something systemic or serious going on within the firm. That disconnect brings with it an element of risk in that it may take the regulator a longer time to get to that point,” Ms Peters says.

In addition, in the case of a whistleblowing event, a financial institution would typically run an investigation, conduct a review and disciplinary process concurrently. “If the FCA is running the investigation, then a firm will likely have to wait until it has finished and released the findings before the firm can consider what action it may need to take from a conduct, disciplinary and employment perspective,” Ms Peters says. “That may mean the process is more drawn out than it would be if those elements were dealt with internally, which can cause disruption to the firm’s business and also the pastoral care for those who are involved in the investigation.”

Third, as mentioned, pastoral care provisions for the whistleblower could be affected. While anonymity is important for the individual, if a firm doesn’t know who they are then it can’t put in place care arrangements. This is important in sexual harassment cases, for example, where the whistleblower may feel that they can’t continue their day job. “If the FCA is involved, there may be a level of support from an external third party, but the firm itself won’t be able to provide support, such as changes in working patterns or job roles,” says Ms Peters.

Mr Chadwick adds that in addition to pastoral care for the whistleblower, it may be appropriate to provide support to those who may be the subject matter or affected by the ongoing investigation. “Interestingly, issues may also arise if a family member or friend raises a whistleblowing event without the employee’s consent, with the employee still needing to complete their day job. This creates a potentially difficult situation for firms,” he says.

While the FCA campaign is not about the regulator replacing the firm’s control function, it could act as a catalyst for firms to improve whistleblowing processes and policies, according to Mr Chadwick. “It could be a stimulus for positive change,” he says. “Firms need to ensure that their policies and processes are set up in a way that encourages a culture where individuals can escalate incidents when they see misconduct, in the knowledge that they’re going to be protected and something is going to be done about it.”

“As a result of the FCA’s campaign, firms should be taking the time now to revisit the whistleblowing conduct, investigation and disciplinary processes to ensure that they are robust and independent, as well as account for this interplay with potential FCA investigations in this space,” says Ms Peters.

Connected to that is the governance arrangements around whistleblowing, ensuring that senior managers who are involved in whistleblowing decisions and reports are discharging their obligations, and that their internal arrangements can stand up to scrutiny, if the regulator comes knocking. “Having an audit trail of evidence is important, as it means that people who do blow the whistle internally will have confidence in that process and be more likely to use the internal process rather than going externally,” she adds.

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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