Should Regulators Pay Whistleblowers? The FCA Thinks Differently

Conflicting views in either side of the Atlantic have opened-up debate on the benefits of running an incentivized whistleblower program,

News coming out of the US and UK on the remuneration of whistleblowers from the financial regulatory authorities of both countries have been signalling differing views. The UK’s main financial watchdog, the Financial Conduct Authority (FCA), believes payments have no value in increasing quality disclosures. On the contrary, US securities regulator, the Securities Exchange Commission (SEC) hands out a substantial sum to an unidentified whistleblower.

The UK’s FCA issued a report on the sensitive whistleblower incentives programme. Its findings state that payments or incentives to encourage the practice, have no real value or benefit. A claim members of the UK’s FX industry agree with, the regulator’s report states: “The research showed that introducing financial incentives for whistleblowers would be unlikely to increase the number or quality of the disclosures we receive from them.”

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“In a self regulated environment people who want to whistleblower will, payments are the motivator it’s doing the right thing,” explained one London-based compliance official who remains anonymous.

A UK regulated CFD broker added to Forex Magnates: “We haven’t come across any instances where whistleblowing is prevalent in our immediate sector.”

The report states that since the introduction of the US led rulings on payments for whistleblowing, only a small number of cases have to come light, with the possibility of false and malicious claims taking presidence.

The increasing role of whistleblowers comes to light on the back of major scandals that impacted the international financial markets. Banks and brokers have been paying the price of manipulation in the settling of Libor and currency rates.

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In 2013, a UK governing body, the Parliamentary Commission on Banking Standards (PCBS),  issued a paper which encouraged firms to improve their governance on the matter.

The FCA report comes during a period where the SEC, the US’s main securities regulator, issued a substantial reward to an individual for their role in a case. In the details issued by the SEC, a statement read that the whistleblower provided the agency with “specific, timely and credible” information that assisted the authorities in their investigation, the whistleblower is believed to have provided critical information that lead to the disciplinary action against the firm.

The concept of whistleblowing has two main purposes, on the one hand it acts as a safety net for regulated firms that are breaching guidelines and staff can raise their concerns. In addition, it acts as a substitute for firms which have inadequate measures to deal with procedural discrepancies. In the recent SEC case, the regulator emphasised the fact that the whisteblower had reported issues to the firm’s management, however they failed to act.

“The whistleblower did everything feasible to correct the issue internally. When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed,” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower, in a statement.

The SEC implemented new payment incentives for whistleblowers in 2011 under the doctrine of the Dodd-Frank Act. The whistleblower program rewards whistleblowers who share high-quality original information that results in an SEC enforcement action with sanctions exceeding $1 million. 

The SEC reported in October 2013, that it paid one unidentified whistleblower $14million, the highest single payment to any tipster.

The FCA favours against the implementation of incentives for whistleblowers, on the other hand, the watchdog will be addressing the matter by strengthening the regulatory framework, it concludes: “(The FCA will go ahead) with the regulatory changes necessary to require firms to have effective whistleblowing procedures, and to make senior management accountable for delivering these.”

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