In October 2019, the European Union approved the Directive 2019/1937 on the protection of whistle-blowers (the Directive). As analysed in my previous blogpost and, in more detail, in my article ‘A New Enforcement Tool: A Directive to Protect Whistle-Blowers’, the whistle-blower is an enforcement tool for the better implementation of EU law in specific sectors such as the capital markets. The advent of the Directive does not mean that the EU had not adopted any measures on whistle-blowing before. Several sectoral provisions on whistle-blowing had been adopted in the area of capital markets facilitating whistle-blowing for certain situations such as reporting of infringements of the Market Abuse Regulation (MAR) under Article 32. For this blogpost, the focus will be on the capital markets and the aim is to present certain remarks on the interaction between the Directive and the sectoral provisions highlighting their complexity and confusion for the whistle-blower.
In the first place, the Directive adopts a lenient approach in relation to the channels for disclosure. The proposal of the European Commission provided for a strict three-tier system for the disclosure where the employee was obliged to report internally at first, and, as a second choice, report to the authorities. This point was debated during the negotiations of the Directive and, finally, the employee may report either internally or to the authorities with the same requirements for protection. The strict hierarchical structure of the Commission’s proposal was replaced by a lenient approach. This begs the question if this solution is optimal for the business sector or not. Although the Directive demands internal whistle-blowing structures for companies with more than 50 employees, it excepts the banking and financial industry where all the institutions should have internal whistle-blowing channels. It is up, then, to every institution to assign this function to a specific department such as the Compliance Department. The paradox lies to the fact that these institutions will invest on developing internal whistle-blowing structures but they will fear that the employee may report to the authorities without leaving them the opportunity to receive and rectify the wrongdoing. This lenient approach reflects the US approach where whistle-blowers should report to the Securities and Exchange Commission (SEC) in order to be granted protection under the Dodd-Frank Act. The implementation of this point, in the near future, will provide more insights and debate.
In the EU banking and financial sector, certain provisions about whistle-blowing existed, before the adoption of the Directive, such as the MAR or the Capital Requirements Directive (CRD IV). Sectoral provisions facilitate whistle-blowing in order to ensure the correct enforcement of the relevant Union law. The Directive on the protection of whistle-blowers, in Article 3(1), highlights that these sectoral provisions take precedence over the Directive and are to be treated as lex specialis whereas the Directive as an horizontal general legal framework. This, in practice, means that the employee, in this sector, should first search protection under the sectoral provision and, only in the absence of it, seek protection under the Directive. This interaction between sectoral provisions and the Directive presents a certain degree of complexity for the future whistle-blower which may harden his or her path of reporting. An additional layer of complexity comes with the reporting channel and more specifically, whistle-blowing to the relevant authorities.
The Directive states that the employee may report to the relevant national authorities and it seems that it entails, also, the relevant European authorities. In the banking and financial sector, due to the specific provisions aforementioned, the employee has the possibility to report directly to the European Central Bank (ECB) or to the European Securities Market Authority (ESMA) for certain matters. For example, under article 23 of the Single Supervisory Mechanism Regulation (SSM Regulation), the ECB must establish a whistle-blowing mechanism in order for employees of supervised entities to report breaches of the acts referred to in article 4(3) of the SSM Regulation. In this example, the employee should report to the ECB that provides for a higher level of protection than the Directive offers (the employee should report in good faith, an element that the Directive does not entail). In the scenario that the employee would not be able to be protected under this sectoral provision, will the protection of the Directive be applied? It seems that the answer is positive as European authorities are considered relevant competent authorities for the purposes of the Directive. The Directive has a low threshold of requirements in order to offer protection to a whistle-blower. On the contrary, the sector-specific provisions have stricter requirements for protection. This begs the question: will the sector-specific provisions become, in practice, void as the employee will search protection, in most cases, under the Directive? The protection of the Directive is detailed and clearer than the sectoral ones. This is an important advantage of the Directive in relation to the sectoral provisions.
The aforementioned are only some examples of different complex situations that may arise with whistle-blowing to the relevant authorities. It may be that, at the end, the whistle-blower will not be protected but even before that, the whistle-blower may not be able to discern what is the right channel. This legal complexity and ambiguity may lead to the discouragement instead of encouragement of whistle-blowing. An optimal solution would be that the sectoral provisions are abolished and replaced by the Directive. This will ensure uniformity and certainty as the whistle-blower should refer to one EU legal act without entering into complex analyses of his or her situation. It is clear that, during the implementation period and afterwards, new problems may arise or old problems may be resolved. In any case, the Directive presents an important step towards an horizontal protection of whistle-blowers at the EU level and it does not only bring legal changes but also cultural and social changes in relation to whistle-blowing.
Dimitrios Kafteranis is a PhD candidate at the University of Luxembourg.