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Nitin Mehta, CFA Managing director, EMEA, CFA Institute

“Over recent decades, secular shifts in values have resulted in too much emphasis on profits and not enough on professionalism”

Consider these results from a recent survey of financial services executives worldwide(1).

• The majority (54%) claim it is “difficult to make career progression at my firm without being flexible on ethical standards”;

• Most investment bankers (70%) believe that the financial services industry enjoys a positive reputation;

• A small minority (7%) reckons their firm’s profitability would be the main beneficiary of an improvement in the ethical conduct of their colleagues.

Five years after the onset of what some have termed a financial crisis of ‘ethic’ proportions, these responses provide a jolt. Consumers of financial products and services may wonder what “being flexible” on ethics would entail, what cocoon investment bankers are hibernating in, and why doing good would not also result in doing well, especially for an industry that is founded on trust.

Compare these results with another recent survey of investors worldwide(2).  In that study, investors stated that “trust to act in my best interest” was the most important attribute they sought in their investment manager, well above the ability to achieve high returns; any ethical ‘flexibility” may then jeopardise the required trust. Also, financial services was rated as the least trusted industry – hardly supportive of a positive reputation.  Earlier still, a Watson Wyatt study(3) concluded that shareholder returns were significantly higher at companies with high trust levels.

These contrasting views of investors and financial services agents illustrate the trust challenge. Underlying it, there is the ever-present tension between the competing needs to serve clients by putting their interests first, and to serve shareholders by raising profitability. How a balance is struck will determine whether finance can fulfil its proper role and purpose to benefit the wider society.

Helping to achieve a better balance, the major protagonists will have to play their part – the finance and investment profession, the industry, the regulator and individual practitioners, all need to work together to provide investors with a warranty of trust and protection. The start of a new year is usually a juncture for committing to good resolutions. We should use that opportunity well.

Professional bodies typically establish the norms for ethical conduct by providing standards and guidelines for their members. The CFA Institute Code of Ethics and Standards of Professional Conduct are an example. As part of their professional obligation, members have to learn the code, behave accordingly and attest to an adherence regularly. Such a normative approach answers the question: what should finance and investment professionals do in order to be ethical?

Though useful, a set of standards alone would have a limited impact. A profession must also provide a process by which individuals can learn the codified behaviours through building awareness of the ethical dimension of work, conduct analysis of ethical situations and dilemma, and practice resolution.  

Given that most professional bodies related to finance and investments already take a normative approach to regulating ethical behaviour with their codes, standards and training, what more can they do? Perhaps a greater emphasis on descriptive and prescriptive methods would better complement the existing approach. Empirical studies of real-life ethical situations aimed at gaining a deeper understanding of how practitioners actually make ethical decisions – good or bad – could inform the compilation of guidelines for members.

Professional bodies should consider employing psychologists and pedagogical experts to improve the ethics training for finance and investment professionals. Finally, bridging the understanding of how ethical decisions are actually made, together with principles and standards for what professionals should do, professional bodies should provide the industry with greater guidance on how to create the environment for promoting ethical behaviour. The profession could act as consultants to the industry by advocating and sharing best practices.

Investment banks, investment managers and other financial services organisations have not rested in response to the ethical challenge. The survey of financial executives mentioned at the beginning of this article found widespread evidence of companies building a stronger environment, processes and incentives to promote a culture based on integrity. The industry is showing a sincere intention to change its ways even while some past misdemeanours still come to light. The establishment of a banking standards body in the UK is an example.

Good intentions need to be backed by action. Employers should ensure that their employees have appropriate qualifications. Moreover, in order to raise standards, they should insist that those with professional obligations join professional bodies and become bound by a code of ethics.

In turn, regulators should require organisations under their purview to adopt the appropriate culture and provide guidance from the top which signals expectations of professional conduct and practices. They should also look to older professions, such as those in the medical and legal fields, to learn lessons for raising standards and ensuring customer protection. Whatever works for healthcare should be considered also for ‘wealthcare’.

Finally, what can practitioners do to regain the trust of customers and investors that has been eroded in recent years? Quite simply, as a minimum, they need to put the clients’ interest first, ahead of those of their firm and their own. In addition, investing in their own human capital through education and maintaining a good reputation for fair dealing would help them to do their job professionally.

Looking back, the global financial crisis revealed how serious flaws developed in the culture of finance. Over recent decades, secular shifts in values have resulted in too much emphasis on profits and not enough on professionalism, an excessive celebration of innovation and entrepreneurship, and not enough of ethics, and an unhealthy focus on building a career, instead of character and competence. In other words, there was a swing in favour of business success and away from professional values. This arc now needs to be reversed.

Much needs to be done urgently. Regulators should drive broader professionalisation of the financial sector,  while greater emphasis on professionalism must properly complement and balance the regulatory and industry overhaul reshaping finance. Professional bodies should support the industry with provision of more opportunities for training in ethics and continuing education, as well as advice on creating the right culture and processes to encourage ethical behaviour.

At the same time, employers should require their most valued employees to actively seek professional status as a condition of employment. Long-term competitive advantages and investor confidence could be built in this way. And individual practitioners should adopt the higher standards and obligations of a profession, transforming their work into a vocational calling. Nothing less than such co-ordinated action will reshape the future of finance for the better.

 

Footnotes:

1. A Crisis of Culture: Valuing Ethics and Knowledge in Financial Services is an Economist Intelligence Unit report, sponsored by CFA Institute, 2013

2. CFA Institute and Edelman Investor Trust study, 2013

3. Watson Wyatt, WorkUSA: Weathering the Storm, 2002

 

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