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      Ethical behaviour is the norm

      Ethical behaviour is the norm

      The global financial reforms will remain incomplete and ineffective if they do not also fundamentally improve the behavioural norms of those working in finance and investments. These are the words of Nitin Mehta, managing director of CFA (Charter Financial Analyst) Institute for Europe, Middle East and Africa. LFF interviewed him after he attended the CFA-Charter Award Ceremony in Luxembourg.

      Ordinary people get upset when reading articles about CEO’s of banks earning a lot of money in the midst of a financial crisis. Is this envy or are these legitimate critics?

      The painful truth about the current social climate is that people don’t trust financial services. They are tired of reading about insider trading, mis-selling scandals, the manipulation of the LIBOR rate, regulations which are not working and short term attitudes to profit and gain in mind. When an industry loses credibility with the public, its professionals are culpable and it therefore follows that the duty to lead the investment business out of this crisis falls first on the investment profession. It rests on the shoulders of those with the highest levels of expertise, and professional and ethical standards because the stakes are extremely high.

      What is the social usefulness of financial markets?

      Following on from the previous question, one reason for this feeling of discontent is that the public cannot see the good work that thousands of investment professionals do every day and the contribution of the financial industry to society at large. Efficient financial markets are critical to achieving economic and social goals: they aid the development of financial centres, infrastructure, contribute to the wider economy through the payment of corporate taxes, and perhaps most importantly, encourage graduates and young professionals to further educate themselves through gaining academic expertise and professional qualifications. The financial crisis has shown that focusing on financial performance alone is no longer tenable and that greater professionalisation of works in finance should be sought as a remedy, which complements new regulations.

      More regulation is one way of making the financial system more robust to absorb the impact of the crisis. What else has to be done in order to learn the lessons from the crisis?

      The financial reforms that are in full swing around the world will remain incomplete and ineffective if they do not also fundamentally improve the behavioural norms of those working in finance and investments. Yet, the signs are that an unbalanced emphasis on new regulations and industry structures risks neglecting the equally important need to improve the values and conduct of practitioners. Much needs to be done urgently.

      Regulators should drive broader professionalisation of the financial sector; greater emphasis on professionalism must properly complement and balance the regulatory and industry overhaul reshaping finance. 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 and protect the public.

      Insider trading and the consequent judgements in court is another topic that is in the media on a regular basis. What are your remedies to prevent market abuse and market manipulation?

      Financial market integrity can only be improved when a number of measures are enacted, including professional codes of conduct; education to provide training and guidance; and regulation to ensure dialogue and action between regulators and policymakers. The foundation of our work is the Code of Ethics and Standards of Professional Conduct. All charterholders must sign the Code as it is fundamental to the values of CFA Institute in helping us to achieve our mission to lead the investment profession by setting high standards of education, integrity, and professional excellence necessary to maintain trust in financial markets.

      The financial damage caused by rogue transactions is one aspect. What about the collateral damage caused? (to the financial industry, economy, society…)

      The most obvious collateral damage is to the reputation of the financial industry, with the corollary risks of reduced savings or excessive risk aversion. Such extended damage may even amount to more than the actual financial loss suffered by financial institutions due to rogue traders. Trust underpins the efficient collection and allocation of capital, harnessing savings to support ideas and entrepreneurship. Confident use of markets allows risks to be transferred to those who can best bear it. Therefore, when reputational damage reduces the efficiency of the financial industry and markets, the whole economy and society suffer.

      How can you render ethical behaviour more appealing?

      Most people are decent and honest. In fact, ethical behaviour is the norm. Its appeal and importance are obvious. In all human societies, a mosaic of culture, rules and sanctions help to encourage the right behaviour. Yet, there are also transgressions. So, how can they be pre-empted amongst finance professionals? The same remedy applies to them: a combination of a professional culture, ethical training, monitoring processes, and the threat of penalties would help to promote ethical behaviour.

      In 2012, the CFA Institute conducted a survey on the introduction of a financial transaction tax. What are your comments and remarks on its results?

      The poll (in 2011) of 722 CFA Institute members in the European Union and Switzerland obtained feedback on the three taxation models which were under consideration by the European Commission: a Financial Transaction Tax (FTT); a Financial Activities Tax (FAT), levied on the sum of profits and wages; and a bank levy (asset-based or liability). The poll revealed that our members had two major concerns: The cost of the proposed tax will ultimately be borne by the end customer of financial services products. and if the FTT is not applied globally, the initiative will lead to regulatory arbitrage and undermine the competitiveness of the EU financial sector. We submitted the results of the poll to the European Commission to ensure that the investor perspective was fairly represented. CW