11 April 2017 by William Granger
New rules for whistleblowing spell cultural change for all regulated firms
On 7 September 2016, the Financial Conduct Authority and the Prudential Regulation Authority announced new whistleblowing rules for banks, building societies, credit unions and some investment and insurance firms, in response to public demand for greater banking accountability.
The rules are part of a range of new accountability measures, including the Senior Managers and Certification Regime (SMCR), and changes to remuneration structures, conduct rules and market abuse protection.
The FCA wants to roll out the accountability measures across all regulated firms. On 7 March (the first anniversary of the SMCR) the regulator confirmed this roll-out will be implemented from next year, following a consultation during the second quarter of this year. The lessons to be learned from the banks and the question of proportionality as it applies across the sector are being reviewed.
Under the new regime, financial services companies must identify, appoint, train and resource a whistleblowers’ champion. This will be a regulated and accountable ‘senior manager’ (under the regime) and probably a non-executive director. The champion will be tasked with personal responsibility for ‘ensuring and overseeing the integrity, independence and effectiveness’ of whistleblowing policy and process. The champion must also produce an annual whistleblowers’ board report, which will be available to the FCA.
“A whistleblowers’ champion will be identified, appointed, trained and resourced”
Firms must also devise and implement an updated whistleblowing policy and procedures. The regime also extends the scope of whistleblowing to a wider range of workers and to ‘any concerns’ they may raise. This includes breaches of regulations and breaches of the firm’s policies and procedures, and harm to the firm’s reputation or financial well-being.
The regime also requires the opening of an independent hotline of communication for whistleblowers, including the ability to raise anonymous and confidential disclosures.
There is also a requirement to communicate clearly that workers are free to go directly to the regulator if they prefer and that the firm will offer protection from victimisation for those who come forward. Settlement agreements also need to repeat this right and are no longer able to require workers to warrant that they have not already blown the whistle or to confirm the points they have disclosed. In addition, any tribunal whistleblower finding against firms must be reported to the regulators.
Employment contracts and templates for other procedures need updating under the new regime and there is increased liability for those who harm whistleblowers, and could call into question the fitness and propriety of any individuals and firms responsible for doing so (rule 18.3.9). Regulatory reporting obligations and protections will trump other agreements.
The regulators have also improved their approach to dealing with those whistleblowers who come to them, improving on the anonymity, dialogue, confidentiality and other protections it can offer. Firms are also required to inform workers about this service.
It remains to be seen how far the new rules will help accelerate the cultural change needed. The rules are intended to promote change to a culture that discourages and intercepts problems before formal compliance steps are needed.
Like other change management levers, too much negative reinforcement around liability and punishment can overlook the need to focus on positive change. Effective whistleblowing policies will dovetail with a culture in which speaking up and challenging is normal and encouraged.
“Culture goes beyond compliance and can be a valuable differentiator for financial services firms”
Many firms are finding it easy to adapt. Others are finding cultural change a much longer process. Some will do no more than pay lip service to the rules and remain at risk. Some say the rules and the risk of further toxic scandals will help catalyse change. Others say that protection for those who come forward is still insufficient and the personal risks too great, and so bad banks will again ‘game’ the regulations.
Charles Russell Speechlys has produced a report entitled ‘Cultural Risk within the Financial Services sector: Is the risk of breaching regulation driving better behaviour and is an increasingly risk-averse culture damaging entrepreneurial spirit?’ This was written following a survey and panel debate hosted by the firm, chaired by the Wall Street Journal, and including the Institute of Business Ethics.
There were several key themes and takeaways from the event and survey. It was generally agreed that culture goes beyond compliance and can be a valuable differentiator for financial services firms. It was also agreed that good culture needs to address more than the codes, regulations, duties to customers, conduct rules and the administration of justice.
Values and good culture drivers should come from the top, and then become ‘lived’, part of the fundamental assumptions, beliefs and motivations of all in the firm – the tone from the top, the tune from the team. It should also be a natural part of a sustainable business model for firms to put the client at the heart of the business. Adopting a structure that encourages and rewards staff to serve the customer in line with the firm’s culture is critical.
A significant proportion of participants said they believed regulation is stifling innovation and damaging entrepreneurial spirit within the sector. Fear has driven some firms to overcomplicate the compliance process which has led to a negative or less-than-ideal culture. Some firms need to simplify by working out their shared values, attitudes, standards and beliefs, and then align them across the firm’s goals, strategies, structure and approaches to its people, customers, investors and the greater community.
The new rules are now in the handbook and are already applicable to all 600,000 authorised firms on a non-binding basis. The regulators are imminently starting consultation on the details for extending these rules to all firms, with a target implementation date of early 2018. One of the aspects of the consultation will be proportionality on applying a regime across such a wide variety of firms.
“A significant proportion of participants believe regulation is stifling innovation and damaging entrepreneurial spirit within the sector”
There are concerns over an increase in bad-faith whistleblowing for personal rather than public interests. Currently all political parties want to hold the financial and health services accountable and we can expect no let up for whistleblowing.
Although non-binding, the whistleblowing section of the handbook is now part of firms’ dialogue with both whistleblowers and regulators. For firms with past whistleblowing problems, and dialogue with the regulator over implementing governance or policy improvements more widely, change now is something the regulator may expect.
Many firms are already engaging with the future implementation of the SMCR prior to it becoming mandatory. Most firms will consider matters now, make some adjustments, and plan for the introduction of a new full policy and training, and the appointment of the whistleblowing champion, soon after the regulations for all firms have been finalised and the 2018 deadline set.
The new rules are already having an effect on termination, settlements, investigations and disputes. New approaches to termination technique and settlement terms for whistleblowers are needed now. Firms are finding it increasingly hard not to use the handbook template wording for settlement agreements with the effect that employees are not being required to confirm that they have not gone to the FCA or that they have told the firm all they are worried about. Not only is the new template for agreements gaining traction for many firms already, the landscape of claims, reputation and regulatory risk has also changed.
Firms should tool up for whistleblowing investigations and must monitor the new self-certification and the referencing regimes which will also apply to all. Firms’ deadline for first issuing certificates for individuals under the certification regime was 7 March. The final rules on this were due now, but are stuck in consultation on key points.
If, as seems likely, firms are required to keep records for six years, which will include investigations into any whistleblowing investigations into any authorised individual, how those investigations are handled and documented is relevant now.
It could directly affect the ability of authorised individuals to be certified, promoted or move firms. Whistleblowing investigations can often be complex, time-critical and labour-intensive. They can sometimes do considerable harm by themselves if mismanaged, regardless of the outcome. Training up on new skills will be needed, including how in-house or outside counsel can make use of privilege in their advice.
It is sensible to keep an eye on an increase in whistleblowing. The increased regulatory protection is available now. Some are going to see the new rules as a troublemakers’ charter. Others will see the increased volume of concerns being raised as a sign of a positive culture so that issues can be resolved at an earlier stage. For regulatory investigations one eye needs to be on who did, or who should have, come forward with concerns raised to the regulator and how they were treated.