An ethical framework for financial services

Professor David Jackman
Head of Industry Training and Business Ethics Adviser
Financial Services Authority

Ethics and Regulation

The FSA has constructed a framework of principles, supported by more detailed rules and guidance, and developed a risk-based approach to regulation. We do not seek compliance for its own sake. In any case, mechanical compliance has done little to prevent problems in the past, often with serious repercussions for those affected.

The principles - our high level standards - are based on ethical values. But it is not clear that this ethos is fully understood or applied consistently by everyone working in the industry.

The financial services sector is quick to seize on recent episodes at Enron and Allied Irish Bank and condemn them out of hand. But the public perception of most financial firms as interested in making money at the expense of all other considerations seems to be unchanging.

The sector undoubtedly feels the pressure. Take our new regulatory regime as an example - with a long and detailed Handbook. This highlights perfectly the crux of the issue. Surely, if the sector conducted its business in line with the overall standards and principles in the higher level sections of the Handbook, the progressive regulatory restriction felt by many would be avoided. However, some parts of the sector seem to be at the stage where the question is more likely to be "show me where it says we can't ...?" rather than "how can we improve our standards and conduct our business with integrity...?".

The 'Ethical Continuum'

Figure 1 offers a model for the development of values and culture, and the nature of the relationships between firms, consumers and us. The model works in terms of individual firms, or a sector, or the industry as a whole. It is also not assumed that firms move in one direction consistently, they may slip back or develop at differing rates at different times. However, the model gives a direction and an ethical dimension for firms/sectors/the industry.

We do not seek to make unsubstantiated, high-ground claims about how a moral case complements the business case - there may not be a pure business benefit every time. There is always perceived to be, even when there is not, a gap to bridge between a purely business case and doing the right thing. However, this doesn't mean an ethical approach is incompatible with increasing shareholder value.

There is the perception in relation to regulators' reactions, that 'the sins of the few spoil the virtues of the many'. Those firms that behave unacceptably always make things difficult for those who have displayed higher standards.

We are considering how we might differentiate between consistently good and consistently bad ethical behaviour, another reason for valuing the input of the sector.

An Ethical Framework for Financial Services

Financial services is an important industry, affecting the lives of most people. The industry needs not simply to provide the necessary expertise, but to do so with integrity.

It is not always easy to decide what the right course of action in a given situation is, especially where choices appear to have equal merit or where it is impractical to seek assistance or discuss the matter with colleagues at the moment of having to decide.

An Ethical Framework

The Financial Services and Markets Act and the FSA's principles and commitments embody a framework of core values. In summary they can be seen as:

• open, honest, responsive and accountable;
• committed to acting competently, responsibly and reliably;
• relating to colleagues and customers fairly and with respect.

The following questions are designed to help recognise, apply and balance values in everyday decisions and actions:

Open, honest, responsive and accountable

• Who is left out or kept in the dark? Why?
• How happy are we to be associated with our decisions/actions?
• Are we listening or just hearing?
• What can we learn? How do we help others to understand us?
• How do we recognise and deal with conflicts of interest?

Relating to colleagues and customers fairly and with respect

• Do we treat everyone as we would like to be treated?
• Do we deal with people with respect and without prejudice?
• How do we keep rights and obligations in balance and proportionate?
• When do we hold to our commitments and resist 'fudging'?
• Who benefits and who loses out? Should they?

Committed to acting competently, responsibly and reliably

• Do we do what we say we will do?
• Under pressure do we swap co-operation for coercion?
• Do we dither or delay? How is error treated?
• Do people trust us? If not, why not?
• Can we meet our commitments and plans?

To embed these values the following is needed:

Developing a vision and a values-led approach

• What needs changing? What prevents change?
• What is the long-term outcome? What is sustainable?
• Do we sufficiently recognise and act on our stakeholder responsibilities?
• How do we develop shared purpose, loyalty and fulfilment?
• Do we apply ethical criteria simply to gain an advantage or because we believe we should?

We want to consider how public perception might change, so that the sector continues to provide the necessary expertise, but does so with an integrity that fully responds to modern society's expectations and engenders mutual trust.

And we want to establish a clear and explicit, shared understanding about what integrity means in practice.

Taken from: Financial Services Authority's Discussion Paper 18: An Ethical Framework for Financial Services, issued October 2002.

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