By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives
Bank Whistleblowers United (BWU) makes its non-coveted Lemon award to the United Kingdom (UK) for actions harming whistleblowers and the world. BWU’s three principals are highly experienced financial experts with combined practical and academic experience of over 120 years. We are each unemployable in finance because we warned internally at are places of work and then externally about grave misconduct by the most senior financial and regulatory leaders that would (and did) produce terrible losses.
Liam Vaughan of Bloomberg wrote the article that prompted this award. The UK’s City of London is one of the world’s two largest financial centers. The City “won” the financial regulatory race to the bottom – barely nosing out Wall Street at the wire. This explains why the City is the epicenter of so many of the largest scandals in the recent crisis, even those at large Wall Street banks (e.g., JPMorgan’s London “whale”). The UK financial regulators failed routinely, consistently, and abjectly. The only bright spot was whistleblowers, including the workers at many of the UK banks whose managers coerced them to sell obscenely abusive products such as Payment Protection Insurance (PPI) to their customers.
The UK parliamentary inquiry into their crisis found that it was common for UK banks to retaliate against whistleblowers – and that there was no case in which the banking regulators even tried to prevent that retaliation. BWU members know from personal experience and academic studies that it senior financial whistleblowers will lose their jobs and will be unemployable in the industry – even after it is inescapable that their warnings were correct and that they represented the banks’ most exemplary officers. None of us received compensation from the government for blowing the whistle, but we strongly favor such compensation given the horrific financial price whistleblowers pay.
The U.S. had long taken the lead in providing at least partial compensation and, with the passage of Dodd-Frank, actual rewards. Liam’s article errs in dating this effort from 2011. The truth is that the passage of the False Claims Act in our Civil War represented the beginning of providing substantial awards to whistleblowers in cases where the federal government suffered losses. Liam’s article is correct, however, in noting that Dodd-Frank’s financial incentives have led to a substantial increase in well-founded warnings from whistleblowers to the SEC.
The UK knows about U.S. practices. The UK politicians and regulators are aware that the U.S. programs substantially increase the effectiveness of whistleblowers in protecting the public. As a result, the UK officials have ensured that the UK will not provide effective protection of whistleblowers, meaningful compensation, or actual rewards. Notice how the whistleblowers become the evil people in the UK financial regulators’ explanation for refusing to emulate U.S. policies they know have proven highly effective.
But in 2014 the FCA published a report with the Bank of England rejecting financial incentives for whistleblowers. The study said such a program would be too costly and complex and would create a “moral hazard” by giving rogue employees an incentive to fabricate misdeeds.
The UK banking regulators’ claims are entirely dishonest pretexts. It is vastly cheaper to get warnings from whistleblowers and act on those warnings to prevent the elite frauds, cartels, and unconscionable predation on customers that have characterized the City for nearly three decades. Financial frauds are fiendishly complex, so if complexity daunts UK financial regulators their only hope of avoiding disaster is to do everything possible to encourage whistleblowers. As to “moral hazard,” the City’s financial institutions routinely and massively craft “incentives” for their officers and employees to commit crimes and predate on their customers. The UK has refused to cut off compensation for bank officers and employees on that basis. The UK’s compensation reforms for senior bank executives are slightly stronger to the pathetic U.S. non-reforms, but they are still exceptionally weak. “Rogue employees” played no meaningful role in causing the financial crisis and the epidemics of fraud, cartels, and predation that dominated the City. Senior bank leaders created the perverse incentives. Rank-and-file officers that did what (almost) everyone else did in response to those perverse incentives were the problem
The UK response is also dishonest in imagining this specter of rogue whistleblowers – with no evidence – and implying that they could make millions by “fabricat[ing] misdeeds.” The second part is absurd. Whistleblowers have to prove their case to receive rewards. They are paid only if their warnings prove reliable. It is exceptionally difficult for a faux whistleblower to “fabricate” a corporate fraud, cartel, or program of predation such as PPI.
Economists always urge us to pay attention to “revealed preferences.” It is not what CEOs and regulatory leaders say that counts – it is what they actually do that reveals their true preferences. We know that financial CEOs refuse to hire whistleblowers with records of total integrity, correct predictions, and the courage to speak truth to power. We know that UK financial regulators are actively hostile to the reforms that would best encourage whistleblowers and protected the public. BWU bestows its Lemon award to the UK’s financial regulators with an unfavorable mention to the City of London financial leaders whose propaganda created the phantom “rogue employees” with an incentive “to fabricate misdeeds.” The City’s regulators and financial leaders have revealed that their great fear is not elite fraud, cartels, and predation by bank CEOs. Their real fear is the City’s most ethical, competent, and courageous officers and employees will blow the whistle on elite crime and predation.