The case of Mr Staley highlights a fundamental flaw in the status quo. The current approach allows firms to investigate and resolve concerns and complaints made against them; what could possibly go wrong?
FCA and PRA jointly fine Mr James Staley £642,430 and announce special requirements regarding whistleblowing systems and controls at Barclays
Whilst three lines of defence, improved systems and controls and senior management accountability have all assisted in raising standards, the Staley case is evidence that further steps need to be taken if the objective of exposing poor practice and misconduct is to be achieved.
The greatest hurdle to ensuring that complaints or concerns are adequately addressed and poor conduct is exposed is the clear conflict of interest that exists. In the case at hand, the FCA and PRA commented on Mr Staley’s personal conflict, suggesting he should have maintained an “appropriate distance”. The final notice suggested this included not involving himself in the investigation or putting pressure on the complainant. However, there is no clear definition of what constitutes an “appropriate distance” in this context. What distance is appropriate for a CEO who has overall responsibility for the firm and its staff including those who are tasked with the investigation? It is clear that any involvement or influence over proceedings by the subject of a complaint is unlikely to foster a sufficient level of confidence in those taking the difficult step to whistleblow or make a complaint, that their concerns will be adequately and independently addressed.
“He had a conflict of interest …, and should have taken particular care to maintain an appropriate distance from the investigation into it.” – FCA Final Notice – James Edward Staley
The largest firms may establish an “independent” function to investigate or oversee matters. However, how independent can it ultimately be with senior managers, who are responsible for the firm’s conduct, taking a keen interest in the outcome, albeit from an appropriate distance. Furthermore, given they are remunerated by the firm, it is difficult to see that full independence can be achieved, even if the will is there. In the case of smaller firms, they are unlikely to be able to resource an independent function and there, the conflict is even greater.
Whistleblowers or complainants can of course direct their concerns to independent bodies should the firm not address matters to their satisfaction, whether that be the Financial Ombudsman or the regulators themselves. However, the onus is firmly on the whistleblower or complainant to do so, and they may not be inclined to escalate, if they are concerned anonymity will not be maintained, or they just do not have the time or energy.
One possible answer would be to require firms to ensure they establish access to an external independent resource to act as the investigator or to subsequently review cases to ensure that concerns and complaints are investigated fairly and the objective of exposing poor practice and misconduct is achieved. Disclosure of findings provided to regulators to enhance appropriate exposure.
Aside from the conflicts of interest there is of course another way to possibly tip the balance to ensure whistleblowers are more likely to report and expose poor conduct: financially incentivising whistleblowers as is the current practice in the US. In July 2014, the FCA and PRA determined that financial incentives “would be unlikely to increase the number or quality of the disclosures” they receive. This is despite the fact that in the US the number of whistleblower tips, as well as the US government’s recovery from corporate fraud have increased significantly since the whistleblower reward scheme was implemented. Meanwhile in the UK there has been a decrease of 37 percent in whistleblower tips since 2014.
K&E can help firms with their approach to whistleblowing and complaints handling.
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Written by our strategic partners K&E Consultants.