Reputation and trust are earned
“Poor ethics costs money and jobs,” says Claire Fargeot, Head of the Standards and Financial Market Integrity division of the CFA (Chartered Financial Analyst) Institute in Europe, Middle East and Africa, in an interview with LFF. She was invited to Luxembourg to speak at a conference on business ethics.
You participated in a panel discussion on the importance of ethics in business. What benefits can ethical behaviour bring to a business?
I think it may be easier to illustrate this point by turning the question on its head and thinking about the risks of unethical behaviour and reputational risk. We have seen many examples of this in the financial services industry of late: Barclays, HSBC, JP Morgan, RBS, Standard Chartered, Madoff, etc.
The current financial crisis is the catalyst for the restoration of trust, which will be delivered by reinforcing ethical behaviours, values and cultures. So, in addition to the regulatory changes taking place globally, it is important for individuals to take responsibility – they can make tangible changes too. For example:
- Investment professionals can advocate ethics within their own firms and block products or practices that are not in their clients’ best interests. Poor ethics costs money and jobs. Everyone loses out, as we are seeing now.
- Prioritize financial activities which enable economic and social progress, rather than focusing on finance as an end unto itself. The investment business exists thanks to a social contract granted in exchange for an expectation of professional services; in today's atmosphere of mistrust, we must reconnect the investment profession with the public interest.
- Build the competence of all professionals working within the industry. Knowledgeable, ethical, and experienced professionals lower the chances for poor judgment and behaviour.
What is more important for an investment professional: the protection of his client or the duty to his employer?
Clients’ interests must always come first and the time has come for the investment profession to take personal responsibility for restoring trust, no matter who they work for or their professional capacity within the industry.
Ultimately, if there is a collective effort for a greater focus on conducting business with ethics in mind, this will benefit society as a whole – industry participants should look to serve the interests of investors and the impact of their actions on society at large.
Reputation and trust are earned; therefore, we need to do more as an industry to regain the higher moral ground and demonstrate the value the industry contributes for the benefit of society.
One of the topics discussed was the enforcement of the CFA code of conduct. Who is responsible for enforcement and what power does that body have?
In a business based on trust and integrity, the CFA charter represents a commitment to ethical behaviour, a commitment that serves to enhance the charter’s recognition and reputation among clients, employers, and investment colleagues. For more than four decades, the CFA Institute has set and enforced the highest standards of ethics in the global investment profession through the combined efforts of members, staff, and volunteers. These include the:
Standards of Practice Council –which promotes ethical conduct, maintains the Code of Ethics and Standards of Professional Conduct, and provides interpretation, guidance, and education.
Professional Conduct Program (PCP) staff –who protect the integrity of CFA Institute membership, the CFA designation, and CFA exam process by:
- Monitoring compliance with the Code of Ethics and Standards of Professional Conduct and the rules and regulations of the CFA Program;
- investigating allegations of misconduct; and
- disciplining members and CFA candidates for violations.
Disciplinary Review Committee – whose members serve on peer-review disciplinary hearing panels regarding allegations of misconduct. The DRC also maintains the Rules of Procedure for Professional Conduct, which govern the disciplinary process.
Can you name the reasons that could make someone lose the prestigious CFA charter?
Association with the CFA Institute – as a CFA candidate or a CFA Institute member – carries with it the requirement to adhere to the investment profession’s most stringent codes of ethics and standards of professional conduct. Therefore, we discipline members whenever they violate the Code and Standards. Sanctions can vary from private reprimands, to timed suspension, or even to revocation of the charter.
Members lose their charters for serious professional misconduct, which could include violating one's duty of loyalty, prudence, and care of clients, or putting one's own interests ahead of those of clients.
During the conference in Luxembourg, you were also presenting a case study on LIBOR. If Libor rates can be so easily manipulated, why use them in the first place?
Indeed, LIBOR reform is long overdue; it has taken over four years for regulators to act since allegations of LIBOR manipulation were first raised by the Bank for International Settlements. The limited action taken by regulators to date has not only left many stakeholders feeling aggrieved; it has allowed a flawed system beset by opacity, inadequate controls and weak governance to fester.
Should Libor be replaced with another benchmark less susceptible to manipulation?
Reforming LIBOR will go a long way to remedying the systemic weaknesses of the LIBOR calculation process as well as the governance and oversight shortcomings. We conducted a CFA Institute global membership survey to obtain investment professionals’ views on the matter. In the survey, we asked CFA Institute members what the most appropriate methodology for the calculation of LIBOR is, ranging from the current method based on estimated rates, to actual transaction rates only, or some hybrid of actual and estimated rates.
56% of respondents thought that the most appropriate methodology for setting of the LIBOR rates would be an average rate based on actual inter-bank transactions only; a further 32% thought that a hybrid methodology using actual and estimated rates would be appropriate. Approximately half of the respondents who said that only actual transaction rates should be used felt that some use of estimated rates would be acceptable if the underlying market was very illiquid.
How does the Libor rate affect consumers?
We shouldn’t forget that Libor is the world's most important benchmark for interest rates. Roughly $10 trillion in loans – including credit card rates, car loans, student loans, adjustable-rate mortgages, as well as some $350 trillion in derivatives – are all tied to Libor. For example, If Libor goes up, your monthly interest rate payments may go up with it. If it goes down, some borrowers will enjoy lower interest rates; however, mutual funds and pensions with investments in Libor-based securities will earn less in interest.
What does the Libor case tell us about the company culture at Barclay’s and other banks involved?
Much has been written in the press about the culture of the banks involved in the LIBOR scandal. It is clear that there was an absence of integrity and that it had become routine for the individuals involved to place other interests ahead of that of their clients, the market and their profession.
What criticism does the British Banking Association (BBA) have to accept?
The BBA has already accepted that there was insufficient rigour in the administration of LIBOR. There were no challenges from the internal oversight committees and the BBA had conflicts of interest as it represents the banks.
Is the Libor case the result of a structural issue or rather a failure in behaviour and attitude?
Both - One of the fundamental weaknesses of the process is the fact that regulators have little legal jurisdiction over LIBOR. The daily fixings are carried out by the BBA, but outside of the scope of UK and EU, which makes it hard for the regulator to punish malpractice among the banks involved.
In our survey, 70% of our members thought this loophole should be closed by making the process of submitting rates a regulated activity. Finally, an overwhelming majority, 82%, think that regulators should have the power to pursue criminal sanctions over instances of LIBOR manipulation. We are hopeful that when the Wheatley reforms get implemented this will provide a more credible deterrent to market manipulation.
The behavioural aspect however cannot be overlooked. Investment professionals have made it clear that the process can be improved by using actual transaction rates and better oversight and what we need to see now is a strong, industry-wide commitment to ethical behaviour. It is only when both of these elements are fully in place that the reputation of LIBOR will be fully restored. CW