Internal investigations are on the increase at financial firms, while employees are increasingly 'blowing whistles' to the detriment of their compliance officers. How is this affecting the efficacy of compliance officers' vital 'directors and officers' cover?

British financial regulators are actively promoting the blowing of whistles, during which process employees speak up when they suspect that fraud or unlawful conduct on the part of their employers is taking place. The regulators want to ensure that their concerns will be investigated without any personal repercussions.

The Serious Fraud Office (SFO), Action Fraud (the national fraud and cyber-crime reporting centre operated by the City of London Police) and the Financial Conduct Authority have all reported increases in the volume of whistleblowing reports that they have been receiving.

Critics have raised concerns about funding problems for these regulators. During the 12 months ending on 31st March 2014, the SFO only opened 12 new investigations into suspected fraud and corruption despite receiving 2,508 reports through its 'whistleblower service' over a similar period.  Action Fraud received more than 210,000 reports in 2013/14 and only 544 investigations into financial crime followed. Of course, not all whistleblowing reports will contain the high-quality information needed to justify a full investigation, but critics are suggesting that this data shows that the SFO lacks the resources to pursue a decent number of leads.

Nonetheless, we understand that the SFO has been able to secure additional funding from the Treasury for large cases, and with the regulators' focus on senior decision-makers, we expect more regulatory claims in the future.

These developments are troublesome for directors and officers - including compliance directors and officers - and their insurers for a number of reasons.

In the US, where the legislation is more advanced, studies have shown that whistleblowers have helped the regulators to obtain judgments that they would not otherwise have obtained and to impose higher penalties than would otherwise have been the case.

Although fines and penalties are not typically covered under most D&O policies, especially since the old Financial Services Authority banned British financiers and compliance officers from benefiting in that way in 2004, any insured compliance officer will want to think seriously before jeopardising any cover in respect of the defence costs of expensive investigations and litigation. Insurers may also want to consider the scope of available cover in the light of the likely increase in internal investigations (as opposed to formal investigations).

Also, the question of whether a particular admission made in a whistleblower's report or a settlement with the authorities in exchange for leniency could trigger off a policy exclusion will depend on the specific wording of the policy. If the exclusion only occurs if there is "deliberate" misconduct, then it may be possible for the insured to phrase an admission carefully so as avoid any suggestion that the misconduct was "deliberate". Where, for example, a "final adjudication" provision in the policy is determinative of whether or not there is to be an exclusion, then the process surrounding the admission (e.g. whether a court order will be obtained) will be relevant.

In the US, more worryingly, the culture of whistleblowing has led to an increase in frivolous complaints against companies, resulting in distraction, burden and expense for businesses. This could also lead shareholders to indulge in litigation and companies to pursue civil claims against their own board members.

* William Allison is a partner at the law firm of DAC Beechcroft in London. He can be reached on +44(0)20 7894 6440.

Editor's note: an increase in frivolous complaints against companies

Four years ago, at an anti-bribery conference, veteran investigator Mike Comer threw some light on the origin of frivolous disclosures that employees might make in the guise of 'whistle-blowers.' He said: "The problem with 'whistle-blowing' is that it completely overlooks the nature of collusion. If you are involved in a corrupt relationship with a third party, you are certainly going to keep it pretty confidential. You are not going to broadcast the fact that you are up to this skulduggery with somebody else. The people who know about corruption, generally speaking, are those who are involved in it directly, or who are related so closely to it that you can't see any light between them. Therefore, the art of 'whistle-blowing,' the art of getting reporting procedures in place that really work, is to try to fragment collusive groups, to break away people who are involved in the collusion and get them to 'blow the whistle' against their conspirators.

"We maintain a hotline for a very large Gulf state company and everything comes in to that from the Internet or through hotlines. 95% of things on that hotline are employee relations matters. They are nothing to do with fraud; most of them are a complete waste of time. You have to break up collusive groups and only money can do that."