The subject of rewarding whistleblowers is a thorny one, with diverging regimes in the US and UK continuing to divide opinion. Radar spoke with Covington & Burling financial services partners Charlotte Hill, based in London, a former enforcement lawyer at the UK regulator, and Jerry Hodgkins, based in Washington, DC, a former associate director for the US Securities and Exchange Commission’s Enforcement Division, to discuss the nature of modern whistleblower protections.
In 2015 the UK Financial Conduct Authority introduced new rules forcing firms to put proper whistleblowing procedures in place but continued to deny financial incentives to anyone speaking up. Why is the UK dead set against payouts?
Charlotte Hill (CH): It’s a matter of public policy that the UK does not reward whistleblowers. The FCA believes that there is no evidence for incentives leading to an increase in the number or quality of disclosures made; and that incentives could actually undermine the operation of firms’ own effective internal whistleblowing mechanisms.
The FCA believes that making these disclosures – speaking up when things aren’t quite right – should be a normal part of business practice and the whole idea of the FCA’s rules on whistleblowing is to help to create a culture where speaking up is normal and usual. The FCA and the PRA – as well as the Government – did considerable research on the issue of financial incentives, but the feeling from the regulator and the market generally was “absolutely not”; that this is not something that should carry financial reward.
Jerry Hodgkins (JH): A similar debate took place in the US in public around the time it brought in its rules, and there was definitely that feeling too. Perhaps because there is more history in the US of having bounty programs, it did not have the same amount of resistance as in the UK. As the history and culture are different, it may simply be that it was more palatable in the US.
When the SEC’s whistleblower program was introduced in 2010 as part of the Dodd-Frank Act, did the fact it could offer huge awards lead to an increase in the number of worthless reports?
JH: One of the arguments against the program was that it would consume tremendous amounts of resource, as dealing with the bogus reports would lead to chasing unfounded allegations, taking the focus away from real investigations.
The SEC has a fairly effective system to triage reports. The SEC’s staff reviews all of the tips that come in. Once a whistleblower, whether meritorious or not, files a claim for an award, the SEC’s Office of the Whistleblower prepares a report for the claims awards staff, the committee that determines solely itself whether to make an award. That committee does vote some down, and there is a proposal on the table now to streamline the process.
The CFTC awarded its first overseas award recently, do we think this is the start of a new trend and likely to lead to more cross-border enforcement cases?
JH: When I was part of the SEC claims review staff from 2012 to 2017, I saw some overseas whistleblowers who reported potential violations to the SEC. Although there is extensive confidentiality around the whistleblower, making it hard to discern whether a whistleblower resides outside the United States, it is fair to assume that one or more recipients of SEC whistleblowers awards have and will come from abroad.
The UK’s financial services sector is under more pressure than ever to clean up its act, there is more attention on conduct, and more ways for banks to trip up, so why aren’t more people coming forward?
CH: There may be a number of possible reasons. It’s quite dangerous for an individual to blow the whistle and it will have consequences for the individual making the disclosure. The individual will feel that once they have blown the whistle, they may not receive the firm’s support and they will have to leave their job. Certainly, they are getting the firm into trouble in one way or another. Lack of faith in the treatment they might receive – the protections – may prevent people coming forward.
There is also the element that the individuals themselves may be part of the conduct that might necessitate the disclosure. I think most people would take the attitude that they would just leave their job and let everyone else get on with it, unless it is something that carries worse consequences for not acting, such as market abuse. Even if you do have the protection, it does carry consequences.
The FCA is focussing on this, however, and there is a link between the rules and the new Senior Managers and Certification Regime that is coming in. The SM&CR places more accountability onto senior managers and in doing that, more accountability on a senior person responsible for handling a whistleblowing complaint.
What punishments are there for firms who do not support, or try to fight back against a whistleblower?
CH: In the UK, the FCA and PRA rules require firms to have a proper whistleblowing policy and protections, so there are serious sanctions, fines etc for not complying. It all links in with the FCA’s drive to improve culture in financial services firms – and so to improve behaviour.
JH: In the US, the firm who retaliates against whistleblowers can be punished through a civil action filed by the SEC in court. The whistleblower can also bring a private action against a current or former employer if they are retaliated against for going to management or the SEC with evidence of a potential securities law violation or a belief it has taken place.
Usually, employees with concerns about potential law violations occurring at their employer just want to fix it, even in the US where there is a bounty program, more often than not the employee just wants to make sure something is addressed. They go internally first, the majority don’t go right to the SEC for a payout. The internal procedure is usually followed and then it is either addressed or the employer fights back.
Do individuals ever go straight to the regulator?
JH: There are cases where people have gone straight to the SEC. One way of getting a payout is if a person provides “independent analysis”, not “independent knowledge”, of events.
Cases exist where people are simply outside observers and figure something out, then contact the SEC. Some of those cases have resulted in whistleblower awards. It’s in the minority but it does happen once in a while.
CH: Yes, sometimes they do. However, there is an obligation in the UK to report internally, to follow the firm’s whistleblowing procedures first. However there is also an option and procedure to go straight to the FCA or the PRA and blow the whistle, and the important thing here is to follow this process to the letter.
JH: When the SEC’s whistleblower program was created in 2010 there was a lot of controversy about whether this would impact internal compliance detrimentally, as people would run straight out the door to the SEC, and never allow compliance departments to fix it themselves. People against the bounty made this complaint frequently, so the SEC addressed the concern, and they say there are factors they consider when working out the size of the award, and if the SEC was going to increase the award they would look at the participation by the whistleblower in the internal complaints compliance system. If you went to the company first, the SEC would consider that a good factor when drawing up a reward, and could increase it.
The SEC can give between 10 and 30 percent of the amount of money recovered in an action. In deciding the appropriate percentage, they take into account the culpability of the whistleblower. If the whistleblower has culpability they can still collect, although this reduces the award, as does interference with the internal compliance systems and unnecessary delay. The SEC has a desire to be supportive of internal whistleblowing.
What happens when the whistleblower meets the regulator?
JH: In the US, you have to identify yourself ultimately to collect an award. A whistleblower either has to have their name on it when submitting a tip or they can have a lawyer represent them, so that lawyer can come forward with the tip without identifying the client.
You can get fairly far down the path without telling the SEC who you are, but they would need to know your identity to pay you, ultimately. The more valuable you are, the more likely a case will be brought, and the likelihood you will have a higher percentage of the reward also increases.
“There are tremendous incentives to identify yourself, come forward and talk. If the SEC can look you in the eye and ask questions, follow up and establish rapport, they will view you as much more valuable as frankly, they have a better chance of making a case.”
Whistleblower counsel has generally been good at protecting their clients from negative consequences in those unusual circumstances where a whistleblower has some potential exposure to being sued by the SEC. I personally don’t recall a time when a whistleblower was sued as a direct result of coming forward with a tip.
CH: The FCA’s procedure allows for a whistleblowing disclosure to be made, and the person will meet with the FCA after that. What happens after that will very much depend on the substance of the allegations. If the whistleblower is alleging malpractice by a firm at which they are – or were – employed, the FCA may go to that firm and may investigate those claims. However, there is a danger in doing this, as very often the whistleblower is part of the problem too, so there is a balance to be struck.
JH: The awards have stipulations attached, it has to be a case where there is at least $1m in monetary sanctions, disgorgements etc, and you only recover 10 to 30 percent of what is collected. There are lots of cases where the SEC sues a Ponzi Scheme and they get a judgment of a hundred million, but none of the money is left, where the person getting the award would only have 10 to 30 percent of what has been collected.
The SEC is attempting to change the whistleblower program to make the rewards more meaningful in smaller cases, those less than $2m, so for anything in the $1m-$2m range, they could increase the award. Now the SEC does not have that kind of discretion. Also if the current considerations for determining the size of an award result in such an excessive award that it seems to be a waste of tax dollars, the SEC wants the discretion to reduce the size of the award. Under the SEC’s proposal, you could only reduce an award over $30m and the reduction cannot result in the award going below the statutory floor of 10 percent of the monetary sanctions recovered.
Will the UK ever change its stance?
CH: I don’t think it ever will, it seems very much enshrined, for policy reasons, in the regulatory ethos that we will not go that way. The FCA is very sure it would not be right to do that.
“The FCA believes that providing financial incentives would not encourage whistleblowing particularly; nor would it improve markets.”
The FCA’s considerable research has shown that providing incentives does not raise either the number or the quality of whistleblowing disclosures within financial services. Instead, the FCA has decided to require firms to have effective whistleblowing procedures – and to ensure that senior management is fully accountable for delivering these.