The Magazine of Corporate Responsibility

Report: ‘Unethical Behavior’ Continues to Plague Financial Services Industry

By Larry Alton

A new report on the U.S. and U.K. financial services industry, The Street, The Bull and The Crisis, from researchers at The University of Notre Dame and the law firm Labaton Sucharow LLP, finds that the upswing in financial markets in the wake of the global recession hasn’t done much to improve public perceptions of leading financial institutions – mainly because the underlying behavior of those working in the industry has worsened over the years.

Wall_Street_Sign_Feature“Despite the headline-making consequences of corporate misconduct, our survey reveals that attitudes toward corruption within the industry have not changed for the better,” write the authors of the report. “(T)here is no way to overlook the marked decline in ethics and the enormous dangers we face as a result, especially when considering the views of the most junior professionals in the business.”

The survey was based on feedback from more than 1200 professionals working in the United States and the United Kingdom, representing “a broad spectrum of the industry, from young professionals to senior executives, investment bankers and investment managers, from San Francisco to Scotland.”

While the report did glean some minor improvements, the overall conclusion is that the financial services industry has a long way to go. Some key takeaways:

  • Approximately one out of every three people who have made more than $500,000 annually report they have “witnessed or have firsthand knowledge of wrongdoing in the workplace.”
  • A healthy 47 percent of respondents believe it’s likely that their competitors have engaged in illegal or unethical activity to gain an advantage (up from 39 percent in 2012).
  • One out of every four respondents would use private information to make a guaranteed $10 million if there was no chance of being arrested for insider trading.
  • More than 27 percent of those surveyed disagree with the idea that the financial services industry puts the client’s best interests first.

The list of powerful and jaw-dropping takeaways from the report goes on and on, but these four provide a pretty good sense of the problems uncovered.

Reform Needed

Financial services firms will  confront major challenges in repairing trust and reputation. The industry began to lose both of those things generations ago and will require a long-term effort to point things in the right direction.

According to the conclusion of the survey report, “Without an aggressive plan to stamp out misconduct, we are simply sitting and waiting for another financial disaster to strike.”  One of the strongest recommendations in the report is for increased protections for whistleblowers working within financial services firms.

Says the report:"The marked increase in whistleblower activity along with the strengthening of internal compliance procedures serve as a powerful deterrent to wrongdoers. Still, an alarming number of people report being subject to corporate policies and confidentiality agreements that they believe prevent them from reporting wrongdoing to outside authorities. These troubling policies and agreements can silence the reporting of all local, state, and federal violations. We applaud recent efforts by Congress and the SEC to address these questionable secrecy policies and agreements.”

However, experts say reform will require more than new laws and regulation. “Just more regulation without addressing the individual, organizational and industry-level factors probably isn’t going to have a very significant impact,” Professor Lynn Stout, a Cornell Law School expert in corporate ethics, recently told NPR

In other words, it’s going to require a new mindset. Rebuilding reputation and trust will require a broad range of new policies and practices, including new training procedures, more third-party accountability, and a shift in education at the university level. It’s going to have to start from the bottom, with the next generation of financial leaders.

Ultimately, it will come down to each individual. Members of the financial services industry need to start looking out for the best interests of their clients. Employees need to call out their peers for doing the wrong thing. Consumers and clients need to speak up and make their voice heard. Enforcement agencies need to invest in stricter rules and better monitoring.

It will take all of these things combined to turn the industry around. Unfortunately, though, if history is any indication of the future, this uphill battle may be far too steep to climb.

Larry Alton is a freelance writer and consultant.

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