Code of ethics demanded from industry
Following the big interest in the previous CFA Institute Global Financial Market Sentiment Survey, the results of the 2013 survey — shaped by input from nearly 6,800 CFA Institute members worldwide - are sure to raise some eyebrows. At the same time, the need for increased levels of trust has been recognized to be indispensable for market sustainability.
In part of the survey, people were asked about several characteristics related to their outlook for 2013. Many aspects could be measured this way, such as the degree of overall optimism for the local economy. For example, while in India about 69% of respondents thought that their economy would expand in 2013, the figure in Japan was a mere 11%.
Although the individuals surveyed provided their opinions about potential future events as they are relevant for the financial industry, what was extremely interesting and insightful, however, was their assessment of the status quo, especially in light of the currently prevailing ethical situation.
The top ethical concern for financial markets in the Asia Pacific region is market fraud (insider trading, bogus IPOs, to name but a few). Following closely on the heels of this general fraud concern is the age-old problem of mis-selling of financial products by financial advisers. These two ethical challenges have been chart toppers for years in the unsavory category of “bad ethics,” but the list is long. One-third (33%) of respondents chose market fraud, followed by mis-selling (25%) and the integrity of financial reporting (21%), with market trading practices, disclosure or use of financial derivatives, and investment management services or structure rounding out the dubious list. Sadly for the Asia Pacific region, concerns about fraud have risen by almost 30% over last year’s results, and the 33% level compares to only 19% on a global scale.
Looking at the individual market, the results are even more stunning. In Japan, for example, 59% of respondents cited market fraud as the top ethical concern within the industry in 2013. The obvious misconduct in a Madoff-style scandal involving AIJ Investment Advisors made headlines with news the firm had collected assets from pension funds with phony performance numbers seem to have had an impact. Other news about insider trading involving both buy-side and sell-side firms has clearly rattled confidence.
Market Fraud is Biggest Ethical Concern in the Asia Pacific region (Source: CFA Institute Global Market Sentiment Survey 2013)
Unfortunately Japan was not an exception. Next door in China, about half of the CFA Institute members responding to the survey (51%) also saw market fraud as the biggest ethical issue facing the financial industry there.
While this shift to general fraud marks a change from last year’s survey, when mis-selling by financial advisers was the top ethical concern in Asia Pacific, it hardly matters. The swing from one to the other seems more like picking your poison, as both conditions are serious detriments to market trust and confidence. By way of comparison to the Asia Pacific region, 36% of survey respondents in the Europe, Middle East, and Africa (EMEA) region and 26% in the Americas region identified mis-selling as the top ethical issue.
What is most striking is that almost all respondents (98%) acknowledge a strong lack of trust in the financial industry. When asked what was most needed at the firm level to improve investor trust and confidence, the vast majority of respondents, both globally and in the Asia Pacific region, said that strong ethical culture by top management and executives was essential along with increased adherence to ethical codes and standards. This figure, by the way, is especially high in India, where 82% of the financial experts surveyed are taking this stance.
What is interesting to note here is that CFA Institute members see much more negative impact to trust and confidence from bad internal actions than external shocks. That is good news in terms of having tangible ways to help fix and stimulate a better ethical conscience and reputation for our industry. The ethical and professional standards developed by CFA Institute offer a foundation for firms to demonstrate their commitment to put their clients’ interest first and integrate ethics into firm culture.
For example, the adoption of globally recognised standards and practices such as the CFA Institute Asset Manager Code of Professional Conduct and other demonstrable actions by corporate leadership can ultimately impact whether an organization behaves in an ethically sound manner. Efforts to establish integrity in the capital markets in this region must therefore come from within the financial organizations, and it must be initiated at the top.
Creating an organisational culture in which emphasis is put on ethics, as also demonstrated by compliance with a widely accepted ethical behavioral code at the corporate level, would certainly be helpful in establishing a financial market where ethical considerations are of a high standard, and restoring investors’ trust in the industry. The resulting market would be characterised by a high degree of integrity, which is a precondition for market sustainability. In such an environment it would then be easier to tackle ethical challenges in the future, and as a result support the sustainability of the financial industry.
Alexander Flatscher is a CFA charterholder, and Director of Codes and Standards at CFA Institute.