Financial services employers urged to address confidence issue with ethical leadership

Anthony Serhan

The financial services industry in Australia is at a turning point and the crisis of trust must be addressed now, with leadership from the top.

So says CFA Institute, the leading global association of investment professionals, which today applauded the role of government, regulators and the media in applying pressure to the industry, and highlighting gaps and challenges that CFA charterholders have been raising for years.

According to Anthony Serhan, President, CFA Society of Sydney, while reforms such as Future of Financial Advice (FoFA) have improved transparency, legislation alone is never enough to guarantee that all investment professionals will act in their clients’ best interests.

“What we really need is a multi-layered approach, by which I mean complementing legislation with other ways of ensuring that high ethical principles and professional standards inculcate the culture of our industry,” Mr Serhan said.

And, according to Mr Serhan, improvement is required on a global level, because the lack of trust in financial services extends far beyond our shores.

“The CFA Institute 2015 Global Market Sentiment Survey, which collated responses from over 5,200 global investment professionals, showed that 63% of all respondents (and 67% of Australian ones) said that a lack of ethical culture within financial firms was the single biggest reason for the current lack of trust,” he said.

Mr Serhan went on to say that when the same respondents were asked how they would address the problem, the answers were equally revealing. A third of respondents (31% globally, and 36% in Australia) said that compensation should be better aligned with investor objectives, and 27% (25% in Australia) said that a zero-tolerance policy by management for ethical breaches was essential.

“These results point to an issue that CFA Institute has been acting on for years, the fact that compliance is not a nuanced concept. If we are to earn trust from investors, ethical and literal compliance must be treated as equally important and equally enforceable.

“This means that employers must step up, create a culture of ethical compliance, and enforce it rigorously.

“That isn’t to say that the burden falls entirely on employers. Vigilant, proactive regulators are also crucial, but one of the most interesting revelations from this year’s survey is that ‘unethical firm culture’ is seen as the true culprit when it comes to lack of trust, more so than any failure of government regulation,” Mr Serhan explained.

At the same time, Australian investment leaders clearly want to see a stronger ASIC, better able to enforce current laws. On the other hand, they are generally positive about the quality of corporate governance. Twenty-six per cent of Australian respondents said that improved enforcement of existing laws and regulations would help improve investor trust at home, with 20% citing improved corporate governance.

This was in stark contrast with the situation in Japan, where the need for stronger corporate governance is clearly a much bigger issue. Fifty-six percent of Japanese respondents said that stronger corporate governance was crucial if investor trust is to be improved.

Mr Serhan agreed that good corporate governance is important, but said that employers who are serious about addressing issues of trust should understand that better education is a key plank in any improvement platform. It is an area in which CFA Institute is well qualified to comment.

“The CFA qualifications are among the most robust in the world – and not just from an intellectual standpoint. They encompass far more than quantitative-based investment skills that too often take the fore in discussions about qualifications and education. Unless ethical components are inextricably woven through the academic component – it’s no more protective of the profession than any other pure educational qualification,” he said.

“And, just as important as that initial qualification and education is the subsequent employment experience and the ethical culture it entails. It is precisely the area that we need role models and leaders.”