The recent publication of draft legislation for the Central Bank (Individual Accountability Framework) Bill by the Minister for Finance, Paschal Donohoe, is a welcome development. The main purpose of this Bill is to enable the Central Bank to hold senior executives in the financial services industry personally to account for regulatory failings on their watch. However, the proposed legislation deals only with potential sanctions once the regulatory authorities have identified wrongdoing. Regulators need more tools to help them effectively catch perpetrators of wrongdoing and to do so as early as possible.
Incentivised whistleblowing could be an ideal solution. Established in the United States since 2012, the efficacy of incentivised whistleblowing is widely acknowledged. Earlier this month the US Securities and Exchange Commission (SEC) confirmed that in total it had paid out more than $1 billion (€854 million) to whistleblowers and issued its second-highest ever award to a person for flagging wrongdoing. “Every single one of the whistleblowers has provided an important public service,” SEC chairman Gary Gensler said.
Cost of regulation
Regulation of financial services is both important and expensive. In Ireland, the Central Bank indicated that for 2019 the cost of regulating financial services was in excess of €204 million. By 2024 these costs will be fully met by the financial services industry. The guiding principle here is that the user pays. There’s another widely accepted principle that should be applied - the polluter pays. Bad actors in financial services should be fined heavily and their fines used to pay for some of the sector’s regulatory costs.
There are several reasons why incentivised whistleblowing is a valuable tool for regulators. Firstly, it can be very effective. Capable and motivated people can make it very difficult for any regulator to uncover wrongdoing. If we look at the two most recent scandals, Davy and tracker mortgages, it is often overlooked that these two scandals came to regulators’ attention only somewhat fortuitously. With Davy it was only the 2016 Commercial Court case initiated by the plaintiff which shone a light on the actions. With the tracker mortgage scandal, Padraic Kissane, a financial adviser, had been fighting for years on behalf of people wrongly removed from their tracker mortgages. His work enabled him to present convincing data to the Central Bank and from then on the tracker mortgage investigation and redress scheme gained real momentum.
Yet, in every scandal involving financial services over the decades, there has been one constant factor: someone always knew what was going on. Incentivised whistleblowing facilitates effective and timely notification of wrongdoing to the regulator. Better that the regulatory framework detects and stops wrongdoing rather than relying on fortuitous events. Again, the SEC experience in the US, according to its director of division of enforcement, is that the whistleblower programme “has been instrumental to the success of numerous enforcement actions since it was initiated a decade ago”.
Secondly, incentivised whistleblowing can lead to wrongdoing being uncovered and remedial actions initiated in a much shorter time frame. With the tracker mortgage scandal, more than 315 homes or buy-to-let properties were repossessed or surrendered due to customers wrongly being denied tracker mortgages from 2006 onwards. The investigation into this issue started in earnest only in 2015 and by 2019 the Central Bank had identified more than 40,000 customers who had been impacted by the scandal. Imagine the stress and hurt suffered by those families that could have been avoided had an effective whistleblowing scheme brought this to the regulator’s attention in the earlier years of the problem.
Thirdly, such a scheme would be cost effective as it should be financed mainly from fines levied on firms guilty of wrongdoing. In the US, whistleblowers can receive between 10 and 30 per cent of any sums collected as fines. These payments are fully financed by the fines collected and no public funds are required. In terms of human resources, establishing an incentivised whistleblowing programme could be facilitated by redirecting existing personnel to the programme. Any frivolous claims should be readily identified, and procedures put in place that would allow those who submit frivolous claims to be barred from the programme.
If we followed the SEC example when designing our incentivised whistleblowing programme, it could be a real game changer in terms of improved culture and behaviour across financial services. In the SEC programme, the whistleblower does not need to be an employee of the firm doing the wrongdoing, or even directly impacted by that firm’s wrongdoing. As long as the whistleblower provides “independent analysis”, and they provide a definition of that analysis, then anyone can be a whistleblower. This means that in the right circumstances, we can all act as whistleblowers. How powerful would that be as a deterrent? If that prospect doesn’t change culture and behaviour in financial service companies’ boardrooms, then I am not sure what will.
A modest amendment to incorporate incentivised whistleblowing in the proposed Central Bank (Individual Accountability Framework) Bill and potentially the Central Bank (Supervision and Enforcement) Act 2103 and Protected Disclosures Act 2014 could lead to both much improved behaviour by all financial service providers and consequently more ethical treatment and enhanced service for consumers.
I suggest that all stakeholders from the Government, Department of Finance, the Committee on Finance, Public Expenditure and Reform and the Central Bank investigate how incentivised whistleblowing could be incorporated into our current regulatory regime as a complementary instrument for effective and authoritative regulation of our financial services industry. This would be of significant benefit to all customers of financial service and society in general.
Vincent Digby is managing director of Impartial Financial Advice