Views on improving the integrity of global capital markets
29 June 2015

Ethical Behaviour Should Complement the Law in Financial Services Profession

Publication of the Fair and Effective Markets Review (FEMR) by the UK Financial Conduct Authority on 10 June 2015 could not have come at a better time. Just in the past month, consumers across the globe have been told about record fines in the financial services industry on various cases of misconduct and negligence. We have heard how several traders used to manipulate the markets over private chat-room negotiations, and how a man is suspected of having manipulated interest rates from his parents’ home. The allegations and revelations of misconduct now seem so frequent that many have almost become numb to them.

Why should we care about ethics in finance? Why would it matter whether a finance professional acts according to certain high standards, as long as they follow the wording of the legislation?

Following not only the word of the law, but also the spirit of the law, is important because we expect, and we should expect, the same golden standards and good behaviour in the financial services profession as in any other profession. For example, we want our lawyers to get to know our case in the most thorough fashion to represent us fairly. We want them to respect the confidentiality privilege that we place on them, and guide us through in the technical specificities that govern the legal profession — an area of knowledge that most do not have. We also expect our doctors to prescribe medicines that are optimal in taking care of our health, not because they receive a commission on that specific drug. Even if no laws as such have been broken, we may feel deceived by the individual if our best interests and expectations have not been met. In other words, we want workers in all professions to go beyond the minimum procedures that are legally required of them. We expect them to be the champions of their respective vocations.

How to Define Responsibility and Accountability?

The question of adequate professional standards is relevant when legal requirements have been followed, but negligence is revealed. Who is responsible and accountable when the lines have been blurred? Some of the cases revealed in the press have not been a question of legality, but of ethics. Investment advice is a case in point. When the value of the investor’s investment portfolio unexpectedly crashes, who is to blame? How do you separate misconduct and inappropriate advice from simply bad advice?

In the same fashion, many have become so desensitized by the amounts paid in fines, that billions off a bank’s balance sheet seems almost insignificant — it is almost a mere cost of doing business. The public now wants — perhaps unjustifiably — to see the face of the wrongdoers and to hear their story of greed. For that reason many have applauded FEMR’s recommendation of bringing the focus back to the individual wrongdoer, not merely the institution where they work. To achieve that, the review proposes extending the definition of individual responsibility in market abuse cases and lengthening individuals’ prison sentences.

The Oxford Dictionary defines responsibility as having a duty to do something; a moral obligation to behave correctly. Accountability means adhering to specific standards, for being liable for any harm caused by one’s actions. It also sets expectations for certain behaviour, and requires one to report, explain, and be answerable for resulting consequences. Beyond regulation, firms’ organizational culture should thus also include adequate tools and mechanisms to assess individual accountability and responsibility.

An Ever-moving Target

In the context of the publication of the Fair and Effective Markets Review, Bank of England Governor Mark Carney warned that if improvements are not made voluntarily by the industry, “more restrictive regulation is inevitable.” Nonetheless, it is interesting to observe that despite the efforts to regulate for professional conduct, some individuals always seem to be running ahead of the curve by seeking to abuse any potential loopholes in regulation.

Indeed, due to constant changes in the industry and in financial innovation, legislation needs to be updated periodically to reflect the developments. In the European Union (EU), some misconduct challenges have been tackled by the Market Abuse Directive and Regulation updated in 2014 following the LIBOR benchmark manipulation scandal. While some EU Member States already have in place a legislative framework against market abuse and market manipulation, these twin laws aim at harmonising the definitions of abuse and the sanctions regime. For example, the directive provides an indicative list of high-frequency trading strategies which are considered as market manipulation, and the regulation extends the scope of market structures where the market abuse framework applies. Only with the two-tiered approach of up-to-date legislation and fundamental ethics we can ensure investors’ trust in the industry.

If further legislation is not the omnipotent solution — a point recognised by regulators at the 2015 IOSCO annual conference — should we instead move towards a “Hippocratic oath” in the financial services as doctors take in their profession? One way financial services professionals could comply with such a pledge could be the CFA Institute Code of Ethics and Standards of Professional Conduct. The Code and Standards maintain, among other things, that CFA Institute members and candidates must place the integrity of the profession and the interests of the clients above one’s own interests, and that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit. The emphasis placed on ethics, in addition to financial education and competence, are a fundamental sign of commitment to higher standards of conduct by CFA charterholders.

In the end, as in any other profession, our trust in our finance professionals’ appropriate conduct is at least as valuable as their technical knowledge and skills.

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About the Author(s)
Maiju Hamunen

Maiju Hamunen was an analyst for the Europe, Middle East, and Africa (EMEA) region in the Capital Markets Policy Group at CFA Institute. She was responsible for developing research projects, policy papers, articles, and regulatory consultations that advanced the policy positions of CFA Institute.

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