The US Securities and Exchange Commission has had some successes in unveiling illegality at firms by awarding compensation to people who alert the authorities about it under the Dodd-Frank Act, but Britain's financial regulators are having none of it.

The US Securities and Exchange Commission has had some successes in unveiling illegality at firms by awarding compensation to people who alert the authorities about it under the Dodd-Frank Act, but Britain's financial regulators are having none of it.

The Financial Conduct Authority - backed by the Prudential Regulatory Authority - has just published a policy statement which says that "introducing significant financial incentives for whistleblowers to come to the regulator rather than raise their concerns within the firm risks undermining our supervisory approach as well as the improvements in culture we want to encourage."

Few investigators would think this a wise move for a regulator that wants to do something about insider-dealing, market manipulation, churning, fraud, money-laundering, corruption and uncompliant behaviour in general. This is, however, a wise policy for any regulator that wants to ensure 'career collapse' for those who expose wrongdoing at financial firms.

Two heroes; one salutary lesson

In the UK, such heroes include Paul Moore, the former group head of regulatory risk at HBOS, which bullied him and then sacked him for warning senior directors and the regulators about excessive risk-taking. His warnings were not heeded and the bank collapsed in 2008. Moore spent years afterwards on the lecture circuit, occasionally contemplating suicide. The same happened to the career of Martin Woods, an eminent money-laundering reporting officer at Wachovia who was disciplined for trying to alert his superiors to Mexican drug cartel money-laundering in an epic style similar to that uncovered at HSBC, and reached a settlement after a claim for unfair dismissal. Unlike Moore, he spent months worrying about his personal safety into the bargain. Coutts toyed with the idea of hiring him, but was overcome with trepidation, probably over the fact that he had alerted people to the problem at his old job, and dropped the idea.

Both men became consultants - possibly the only serious career route open to them in the financial services world. HBOS collapsed and Lloyds took it over, with taxpayer's help, to the tune of £20 billion; Wachovia was fined $50m and made to surrender $110m in proven drug profits. Nobody from HBOS or Wachovia went to jail, but the lives of the tale-tellers, whose very job it was to warn, were turned upside-down.

The FCA gives reasons, such as they are, for not offering US-style incentives. These are the following.
* "Incentives in the US benefit only the small number whose information leads directly to fines (from which the incentives are paid). They provide nothing for the vast majority of whistleblowers." As a reason for inaction, this is less than feeble; the purpose of incentives is not to benefit the tale-tellers but to facilitate the tale-telling.
* There is as yet no empirical evidence of incentives leading to an increase in the number or quality of disclosures received by the regulators. This is, of course, impossible to prove.
* Introducing incentives has been accompanied by a complex, and therefore costly, governance structure. This is a criticism of the American system, not any kind of proof that the UK could devise a less cumbersome one.
* The incentives system has also generated significant legal fees for both whistleblowers and firms. This, too, is rather disingenuous as it would be simplicity itself for the FCA to ban its firms from taking legal action against people who raise concerns, in much the same way as it prevents them from taking out insurance policies against its fines.
* Incentives offered by regulators could undermine the introduction and maintenance by firms of effective internal whistleblowing mechanisms, which both the regulators and the Parliamentary Committee on Banking Standards want to see. The FCA seems to offer nothing at all to back up this extraordinary claim.

A problem for all compliance officers

Towards the end of its paper the FCA does present a fact that stands up to historical analysis: "a well-remunerated individual in the financial industry might expect their career prospects to be harmed by reporting other insiders and being associated with criminal acts." Later this year, both the FCA and the PRA will publish reports about the intelligence they have received and the action they have taken because of it. A full and frank set of 'war stories' seems unlikely, although we must keep an open mind.

All compliance officers are potential informers, representing as they do the control mechanisms that prevent their institutions from breaking laws and guidelines. The editor would welcome comments from readers about their views on this matter. Feel free to contact chris.hamblin@clearviewpublishing.com