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Ethics in the financial services world – urgent action needed

Ethics in the financial services world – urgent action needed

By Michael Dolan.

During the past week, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (1) has heard some disturbing evidence about certain business practices embedded in various financial services institutions including major banks and other organisations – what has emerged  appears to show a  failure of corporate ethical culture and behaviour towards customers, many of them vulnerable people who trusted the advice they received. What lessons can we as lawyers learn from this? 

It is easy for us as lawyers to understand what ethical behaviour means in our work because it is the bedrock upon which the practice of law rests, and it was taught to us initially at law school and subsequently by our mentors in the legal profession.

A key objective of the Legal Profession Uniform Law (2) which sets the statutory framework for legal practice in Victoria and New South Wales is to  ensure that “lawyers are competent and maintain high ethical and professional standards in the provision of legal services.”

As officers of the court we are required to engage in ethical behaviour in everything that we do in the practice of our profession. In order to renew our annual practising certificates we are required to have undertaken compulsory professional development training in ethics in the preceding 12 months.

The Royal Commission

What the Royal Commission evidence has demonstrated during this past week has been a complete lack of ethical behaviour within the financial services institutions in the instances outlined in the public hearings. It will be up to the Royal Commission to evaluate all of the evidence presented to it, make findings, and offer the Australian Government recommendations for the future.

What has become glaringly obvious already is that instilling a culture of ethical behaviour in financial services institutions with appropriate Board and Senior Management support and endorsement and the implementation of intensive  staff training and incentives for such good behaviour may well turn out to be a key finding and recommendation of the Royal Commission.

Learning from others

Of course, it is trite to say that often we do not learn from history or other countries. Perhaps, in this instance, we may have something to learn from the United Kingdom.

In January 2013 a paper was published in the UK outlining a roundtable event of key stakeholders to discuss creating an ethical framework for the financial services industry in that country. (3)

The Herbert Smith Freehills and London School of Economics Regulatory Reform Forum held a roundtable event to discuss creating an ethical framework for the financial services industry. The event was attended by senior members of the financial services industry, academics, lawyers and key policy makers.

 This paper summarises some of the matters discussed, including:

  • What does an ethical financial services industry look like?
  • How can ethics be instilled?
  • Where does the balance of responsibility between firms and individuals lie?
  • What should the role of lawyers be?
  • Does the regulator need more powers or should it be using its current powers in a different way?
  • Is enforcement the right focus point?


 The discussion was subject to the Chatham House Rule and as such none of the comments have been attributed to the participants. The views expressed in this paper do not represent the views of the group as a whole.”

The paper concluded:

There is little doubt that ethical standards across the financial services industry have been called into significant question across all areas, from the setting of benchmarks including Libor, to sales to retail investors. There is also little doubt that embedding ethical cultures within firms is a difficult task. Whilst regulation has a role to play in providing deterring unethical conduct and promoting appropriate behaviour, ultimate responsibility has to lie with firms themselves, including their shareholders. Firms need to focus on their incentives and remuneration structures to ensure that compliant and ethical conduct is rewarded, and provide clear and practical guidance on how it can be achieved.”

Conclusion

There is an urgent need for financial services institutions to look inwards to their ethical obligations towards their customers and shareholders and to commit to honest and transparent behaviour in the future in order to regain the trust which has now been shown to have unravelled so badly to the detriment of our society. Being ethical is not only about obeying the law, it is about doing the right thing when no-one is looking.

References

  1.  Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
  2. Legal Profession Uniform Law Application Act 2014
  3. Black J and Anderson K, Creating an ethical framework for the financial services industry, London School of Economics and Herbert Smith Freehills, 2013