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Industry Ethics

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INDUSTR ETH RY HICS: ARE WE STILL IN S A W SELF-DENIA AL?
The Public Hates Financ Firm and O Members T c s cial ms Our Think T They y Know Why
By Kurt N. Schacht, JD, CFA S J more things change, the more they stay the same. c m y The m Thes words offer an astonishingly clear pic se r cture of the state of things some four ye ears since Ber rnard Madoff’s multi-billion ndollar scam and th worst finan he ncial crisis in decades rippe through th global mar kets, both lea d ed he aving a wide s swath of age w h rm nancial system and the world economy, m dama in their wake. Although we anticipated a long-ter impact on the global fin we did not expect the lack of fu undamental ch hange on Wa Street and beyond. In ot all ther words, it’ been business as usual ’s arge financial firms, which has left the gl h lobal financial system mos paralyzed by a crisis of confidence t stly f that began in for la 2007 7–2008 and has only intens sified since. With news about our industry’s ethical misst o s teps dominating headlines in 2012, it’s n surprise th the results of the 2013 no hat s ntiment Surve (GMSS) — which polled CFA Institut members o their outloo for world c ey d te on ok capital Global Market Sen mark kets in the com ming year — show that ma work is ne ajor eeded to resto market in ore ntegrity. Intere estingly, mem mbers think the e prima fix is to en ary ncourage a cu ulture of ethic inside finan cs ncial firms. Aske which facto has most co ed or ontributed to the current la of trust in the finance in ack ndustry, more than half (56 e 6%) of survey y respo ondents ident tified the lack of ethical culture within fin nancial firms. Surprisingly, conventional wisdom plac the blame l ces e for th industry’s low standing on market dis he o sruptions (faile IPOs, insid trading ca ed der ases, flash cra ash, etc.). Ou members ur rejec that notion. Their messag is clear: It is not market failures or a lack of gover ct ge t rnment action that has gott us to this n ten point — it is the cu t ulture of the financial indus itself. stry As if we needed any further confirmation of the challenge or urgency o ethical prac a e of ctice, the new isn’t any be ws etter in the 3 ust er. bal ures trust in in nstitutions, ind dustries, and 2013 Edelman Tru Baromete The newly released glob survey — which measu leade — found that banks and financial se ers t ervices remain the least tru n usted sectors worldwide, driven by poor performance r e and t perception of unethical behavior. In fact, more than half of sur the n l rvey responde ents (56%) sa they were aware of aid recen banking an financial se nt nd ervices scandals (including 78% in the U g United Kingdo ground ze for the LIB om, ero BOR scandal), with 59% blaming tho scandals on such inap % ose ppropriate beh haviors as cor rruption, poor corporate cu r ulture, and bad leadership. mains an uphi battle to res ill store trust, an though ma nd arket integrity won’t be rebu overnight, there are some obvious uilt It rem place to start. As es sked which firm-level action is most nee n eded in the co oming year to help improve investor trus and e st confidence, two-th hirds of GMSS respondent believe it is vital for top m S ts s management to establish a expectatio of an on essional integrity and to constantly remind all staff, no just execut ot tives, about th expectatio There is a hat on. also an profe impo ortant role for well-establish and pract hed tical codes of ethical condu One such approach th CFA Institute has been uct. h hat stron ngly encourag ging members and the indu s ustry at large to embrace is the Asset M s Manager Code of Professio e onal Conduct.

be g ent ent, , utions at the c center of the LIBOR storm, Mayb it is sinking in. In a rece developme Barclays, one of the fi nancial institu told its employees to either com s mmit to a new set of ethica standards o leave the organization. O w al or Only time will tell whether s f rmation or me erely public re elations. In an event, a str ny rong proclama ation from one of the this is evidence of true transfor world largest banks is a step in the right direction. d’s

In 2013, CFA Institute is rededicating its efforts to foster a more honest and ethical industry. In addition to the traditional advocacy work of the division, the entire organization is beginning its work to assess and reshape adherence to ethical constructs in finance through a new project called the Future of Finance. Stay tuned for further details on this project in the first quarter. For more on this and other industry developments, please follow us on our blog, “Market Integrity Insights.”

Kurt N. Schacht, JD, CFA, is managing director of Standards and Financial Market Integrity for CFA Institute.

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