When governance fails; why whistle-blowers are necessary

Whistleblowing is back on the regulatory agenda. Last month, new UK legislation came into force to encourage disclosure. At the same time, the Parliamentary Commission on Banking Standards Report highlighted that it does not happen often enough. Where governance fails, whistleblowing has a key role in exposing wrongdoing in banks and other organisations. Regulators need to show they are taking it seriously.

This time, will there be genuine change? Currently most whistleblowers face an uneven struggle against their employer, and ultimately lose their jobs. Often, opinion is divided, whatever the results. To some, Edward Snowden raised important privacy issues; others would put him on trial. Politicians who like the idea of whistleblowers in bad banks, have done little to stop gagging orders on those who publicise NHS failings or other public service issues. It is human nature to shoot the messenger.

If checks and balances always worked, whistleblowers would be unnecessary. Good citizens are expected to report crime without fear or favour. Similarly, it should be safe and acceptable to question organisational wrongdoing. Yet, in many corporate cases, whistleblowing may involve breaches that appear victimless or where evidence is difficult to gather and publish. The issues can be easy to fudge, often responded to by management as grey areas. The ambivalent attitude of society is shown by how little has been achieved in the 14 years since the UK’s first Public Interest Disclosure Act came into force.

The new Act introduces a public interest test for whistleblowers, and there is no longer a good faith requirement to give protection from dismissal. It brings greater risks for employers, and means that the focus is on how significant an issue is rather than questioning the whistleblower’s motives. But, the legislation does not introduce any new structures to protect employees, or effective penalties for employers. The updating of the law looks half-hearted. The financial and public sectors deserve better.

Good systems for whistleblowing should be based on practices that already work. Even before the latest update of the law, employees of financial institutions were bound to report internally any suspicion of money laundering to an identified authorised person.

There are big penalties for failing to deal with money laundering breaches, and it may be possible to mirror this with other types of whistleblowing. The Banking Standards Commission proposes a role for an independent director, who should be responsible for whistleblowing procedures and personally accountable for protecting whistleblowers. But this may not be realistic. Evidence points to the unwillingness of whistleblowers to go to their own senior management, but there has been greater success with routes that involve regulatory status, such as compliance. In financial organisations, and banks in particular, it may be that a regulated individual is made responsible for whistleblowers. If the responsible officer is employed by the same firm, only a direct responsibility to regulators or the chairman would prevail against the internal pressures.

Often whistleblowing highlights issues that are deeply embedded in culture and reach up to the highest levels of management.

Fortunately, more emphasis is now being placed on whistleblowing by the Financial Conduct Authority. It has said that whistleblowing should become a key part of its market intelligence. Martin Wheatley, FCA chief executive, , , floated the idea of offering large cash incentives to encourage more people to report concerns to the regulator. There is not yet any evidence that this US system will work, and it would underline the failure of simply “doing the right thing”.

FCA Chairman, Lord Adair Turner, said that the Libor scandal had highlighted the important role whistleblowers can play. Yet, even the FCA recently admitted that it did not have ready management information on how many whistleblowing reports in the most recent year actually resulted in enforcement action. To give the right signals, this should change.

Silence in the City?”, is a recent report from Public Concern at Work based on the records of 300 financial services workers who called its advice line. This provides the evidence needed to develop robust processes. It showed that 77% of whistleblowers in UK financial services felt their complaints were ignored. Typically most do not then go to the regulator. Many of the cases involved public harm and recurring behaviour, such as legal breaches, false reporting and fraud.

Surprisingly, this research showed that most of the whistleblowers are management, professionals, or other senior employees – not junior staff with a gripe. There is no clear pattern of complaints simply reflecting underlying employment issues.

Nearly all those whistleblowers who contacted the advice line said that there were other witnesses, but nevertheless were alone in raising concerns. Yet, when jobs are at risk, it is easy to see why the majority might remain silent.

Whistleblowing itself should be a last resort. Yet, all organisations typically protect their culture against attack, even if there is malpractice. Governance cannot be relied on to prevent that.

For whistleblowing in the financial sector to work it may need action by the regulator to force companies to account externally for their handling of these complaints. It will leave regulators with the tough task of separating the public interest and actual criminal behaviour from what is sometimes a background of general disgruntlement and employment issues. Can a framework be created that will not involve routine leakage of confidential information? Employees should not be able to negotiate the threat of publicity into hard cash. Until now, employers have been protected against disclosures made in bad faith, and have been able to take disciplinary action. But the new Act means that employers’ whistleblowing policies must recognise that even those seeking personal gain are still protected if the disclosures are reasonably believed also to be in the public interest.

Offering rewards by themselves could add to this danger of over-reporting of trivial issues. But, for a system to work, it must recognise that organisations themselves are not the best judges of materiality, or where to draw the line in grey areas. A detached and accountable individual should be involved at an early stage, even if not the very first port of call.

Embedding robust practice on whistleblowing, even in the financial sector, is a challenge. The public sector might be even tougher. But, it is clear that regulators must champion the role of whistleblowers, and attitudes need to change.

Professional bodies can help, too, with codes of conduct and a strong stance on ethics. Better status for this key role might start to achieve the PCBS’s aim of reforming banking culture.

A version of this article was published on July 22 by Financial News as an Op-Ed.


Disclosure: The opinions expressed in this article are my own, and may not represent the views of any firm or entity with which I am affiliated. Data and content provided are for information, education, and non-commercial purposes only. The information presented in this article has been obtained from sources believed to be reliable, however, I make no representation as to their accuracy or completeness and accepts no liability for loss arising from the use of the material. Articles and information do not represent investment advice.

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