Protection from the “Rogue Trader”

Share this story

The rise of the “rogue trader”
The issue of “rogue traders” has been highly topical over the last two decades, with wide coverage of high-profile cases such as that of Nick Leeson at Barings Bank and, more recently, Kweku Adoboli at UBS. Mr Adoboli, a trader in UBS’s exchange-traded funds business, was charged with fraud and false accounting over a three-year period, which cost the bank an estimated £1.3 billion. His trial is ongoing.

On 24 October 2012, the appeal of Société Générale rogue trader Jérôme Kerviel was dismissed. He has been ordered to spend three years in prison and pay back 4.9 billion Euros (£3.9 billion) to the bank.

Worryingly, according to a report published by securities litigation firm Labaton Sucharow, more than a quarter of financial services staff have witnessed misconduct and wrongdoing at work. Given the vast sums of money sometimes involved in these cases, it is becoming increasingly important for companies to protect themselves against such rogue employees. Employers should ensure that there are adequate controls in place to identify and deal with employee wrongdoing.

Assessing employee performance
The recruitment process offers employers a starting place to assess potential employees and to try to ensure they meet the standards expected of them. However, there will undoubtedly be issues which arise during the course of employment, and implementing a regular appraisal policy is recommended to highlight poor performance and also to motivate employees.
Although all contracts of employment contain an implied term that an employee will perform their duties to a minimum standard, a prudent employer should also include express terms outlining the required standard expected specific to the employee’s role.

Remuneration and reward
It is important that appropriate checks and balances exist in bonus and other reward-based remuneration policies. An unquestioning acceptance of trading performance should be avoided. Further, good practice under the FSA Remuneration Code is that employers should have clawback or “malus” provisions, whereby an employee will be required to repay all or part of a bonus if it should subsequently transpire that it was awarded on false pretences. Further, it would be sensible for the employer to defer a significant portion of reward-based remuneration for a number of years after its award.

Monitoring in the workplace
Where monitoring in the workplace is concerned, a fine balance needs to be struck between protecting the business and reputation of a company, and any negative impact caused by excessive intrusion on the employees. Employers should consider the negative effects monitoring may have on staff, whether the method is appropriate, and whether there are less intrusive alternatives available before engaging in any monitoring. In addition, an employer must have made all reasonable efforts to inform those employees who will be affected before the monitoring takes place.

Are employees under a duty to disclose their own wrongdoing?
An employee’s duties to the company will vary according to their individual contract of employment and their role within the organisation.

Under section 172 of the Companies Act 2006, directors are under a duty to promote the success of the company, which will include disclosing their own wrongdoing. Although this may not extend to everything that could constitute wrongdoing, it will be relevant for most behaviours that may have an adverse effect on the company and expose it to legal action.

To impose a similar duty on an employee, employers will normally have to expressly include it in the employee’s employment contract. The case of Item Software (UK) Ltd v. Fassihi [2003] suggests that an employee may be under a duty to disclose their wrongdoing as part of their duty of fidelity. However, unless the employee is a fiduciary, in practice this is highly unlikely.

In the recent case of QBE Management Services (UK) Ltd v. Dymoke and Ors [2012] the Court confirmed that, in respect of ordinary employees not subject to fiduciary duties, the implied contractual duty of disclosure is limited to reporting other employees’ misconduct. Even where a fiduciary duty is established there are very few cases in which an employee will actually divulge their own wrongdoing, and it can be very difficult for managers to spot such behaviour and take appropriate action.

Where employee wrongdoing has been admitted or discovered, employers may initiate disciplinary proceedings against the employee, which could ultimately lead to the employee’s dismissal. Note however that, even in circumstances where the wrongdoing has been proven, an employee may issue legal proceedings if they consider they have been unfairly dismissed, discriminated against or that a full and proper procedure has not been followed.

Reporting the misconduct of others and “whistleblowing” policies
In most cases other employees within the company will know, at least in part, that some misconduct is occurring. Employers should encourage reporting by ensuring that employees are aware of the protection granted to them under the Public Interest Disclosure Act 1998. Employees and workers who “blow the whistle” on wrongdoing at work are protected from dismissal or from suffering any detriment because of making a protected disclosure. This protection will apply provided the employee or worker makes the disclosure in good faith.

Employers should introduce a written whistleblowing policy which highlights why identifying misconduct is important; outlines the types of behaviours which should be reported; and reassures employees that these are protected disclosures. It may also be useful to run a training programme in conjunction with the policy.

Reports by employees should be investigated promptly and efficiently whilst maintaining confidentiality at all times. Note that there may be instances where claims are made by employees who feel that their disclosures have not been taken seriously enough and that they have suffered detriment as a result.

Turning a blind eye
Typically, where high-profile cases of rogue trading take place, it is alleged by the culprits that the organisation turned a blind eye or even passively encouraged traders to take risks. In particular it is often argued that managers were happy to ignore malpractice where profits were being achieved to the collective benefit of the individual trader, the trader’s managers and the financial institution. It is vital that such perceptions do not exist, and the importance of complying with the institution’s procedures is emphasised to all employees. Any perception that the organisation may be applying policies merely as a matter of regulatory protocol, rather than as an absolute prohibition on unauthorised activity, should be avoided, and a zero tolerance approach should be applied to breaches of policies, trading limits and regulatory requirements. A failure by the employer to rigorously enforce agreed limits and procedures will not only increase the risk of abuse but also expose the institution to liability towards shareholders, clients and other interested third parties.

Comment
It is widely accepted that the financial and reputational costs of failing to monitor employee conduct can be substantial; however there is often a reluctance to increase employee monitoring, particularly where there is no history of serious wrongdoing. There have been numerous high-profile examples in the City and in other financial centres in recent years of bad practice becoming systemic, such as the recent LIBOR scandal. Employees are often unwilling to jeopardise their own positions by raising their concerns regarding questionable practices. Employers should therefore carefully consider whether their existing policies would effectively identify employee wrongdoing at an early stage and allow them to take action. Further, it is important to create a culture within the organisation, and a bond of trust, whereby employees are confident that they will not be marginalised for raising concerns about malpractice.

The Author

Richard Nicolle is a Partner in the Employment & Benefits Practice at SNR Denton UK LLP

Help Keep HRreview Free with a Small Donation





Post Comment