To anyone with a bank bashing bent, banker behaviour is the gift that keeps on giving. Revelations regarding JP Morgan and Madoff or RBS and Iran are but the latest additions to a lengthy list. Will it never end? All of which reminds me you are leading a new body to put standards and ethics back into banking. I wish you well. I understand your efforts will be independent of the banks that fund it. I wish you luck. Might it not be wise to balance the selfless generosity of your banking backers with financial support from the many groups who consume their services?
I believe your very first deliverable is a code of conduct. Here I have good news. Help is to hand. A model code is already available courtesy of the CFA Institute. As you will be aware, the Institute is the leading standards-setting body for the global investment profession. Members who pass a series of demanding exams earn the title Chartered Financial Analyst. The CFA moniker is highly regarded. There are over 10,000 charter holders in the UK and more than 110,000 worldwide. The curriculum has long incorporated a code of ethics by which the investment professional should operate. In 2005, the Institute extended this sense of duty to the level of the money management firm with the addition of an Asset Manager Code of Conduct. Signatories are required to formally attest to compliance. Some 900 firms currently do so. As you can imagine, many of these are investors or potential investors in the shares of banks.
Recently, the organisation went one step further and issued a Statement of Investor Rights. The purpose is to "advise buyers of financial service products of the conduct they are entitled to expect from financial service providers." The CFA's objective, like your own, is to help restore trust in the financial system. This bill of customer rights is pretty short and very powerful. It sports only 10 points to wit: consumers of financial services have a right to: 1) honest, competent and ethical conduct; 2) independent, objective and thoughtful advice; 3) the client's interest should take priority; 4) fair treatment with respect to other clients; 5) disclosure of conflicts of interest; 6) suitability of service in relation to client circumstances; 7) clear communication; 8) transparent, fair and reasonable fees; 9) confidentiality and 10) appropriate supporting records. No doubt you will improve upon this list. But should you be pressed for time, you could do worse than replicating it.
At the heart of the matter is how best to put the client first. Here, banks must answer – and clearly – two questions: 1) who is the client and 2) where does he rank in the pecking order? Regulators will insist that banks understand the former. Clients and bank shareholders deserve to know the latter. What a great opportunity you have to set the record straight.
I suspect this notion of "putting the customer first" will prove the most challenging part of your task. Banks serve multiple stakeholders – among which: executives, employees, shareholders, communities, society at large – and oh yes, customers. In the opinion of shareholders executives have ranked to near to top. In the opinion of customers, they have ranked pretty far down the roster. Given the plethora of penalties for misconduct it would be hard to argue otherwise. So you need to move the client up the list. Now, no doubt your silent banking backers will sheepishly suggest that doing so will conflict with their duty to the shareholder. And it is true that if short term profitability is a bank's main measure and motive, then putting the client first is indeed a problem.
However, if the objective is to build a solid enterprise which creates sustainable shareholder value, then putting the customer towards the top could well drive success for all. It just depends on one's time horizon for success. Naturally, bank executives would also have to be in it for the longer term and their incentives structured accordingly. But then, getting rich slowly would not be so bad for bankers would it? I mean, the "get rich quick" approach didn't really work out so well for most of the stakeholders on your list last time around – did it? And besides, banks are serious about all of this ethics and conduct stuff aren't they?
I look forward to reading your recommendations. Don't be timid. Your financial backers aren't.
Robert Jenkins is a Senior Fellow at Better Markets and a Governor of the CFA Institute. He recently served on the Bank of England's Financial Policy Committee