Rebuilding trust in financial services and institutions

By Eugene Clark
0 Comment(s)Print E-mail, September 10, 2016
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The current U.S. presidential election is notable for the low levels of trust that many U.S. citizens seem to hold about either main candidate.

Yet, human beings are increasingly interdependent. For society to function effectively, citizens need to trust their basic institutions -- government, banks, educational institutions, law, the political process, fairness of regulation, etc.

Events such as the Global Financial Crisis (GFC), corruption and growing disparity between the few who are rich and the many who are poor, and many other factors appear have led to a collapse in the level of trust in relation to institutions in many capitalist economies. This is the central argument in an excellent recent book entitled "Capital Failure: Rebuilding Trust in Financial Services" edited by Nicholas Morris and David Vines and published by Oxford University Press.

Trust in institutions such as financial services matters. For example, without trust people won't put aside their savings, entrepreneurs desiring to create the next Apple will not have the capital to fuel their risk taking and new jobs and industries will not be created.

Beyond the economy, in almost every profession -- law, accounting, journalism, finance, medicine or academia or running a small business -- people rely on professionals to do their jobs. When that trust is breached, especially on a significant scale, society as a whole suffers. As popular writer, Stephen Covey, writes: "Trust is the glue of life. It's the most essential ingredient in effective communication. It's the foundational principle that holds all relationships."

The case of financial institutions and the GFC: Why did the breach of trust occur?

Even measured against past financial crises, the GFC shocked because of its global effects, the degree that financial institutions got wealthy by taking enormous risks and the apparent lack of both remorse or accountability for the breach in trust and consequent harm.

Many factors led to this crisis. Financial institutions were seen solely in terms of "market" and "products" with the goal of maximising return to shareholders. Financial institution relationships with customers were replaced with a focus on "sales," employee bonuses and high commissions that gave little thought to long term sustainable investments.

Financial institutions and other players engaged in excessive risk taking while taking advantage of information asymmetries as a result of products that were increasingly complex and involved excessive risk. Protection (such as secured deposits) created to counter previous financial crises led to consumer complacency. Ratings agencies further compounded the problem by giving AAA Ratings to investment schemes they should have known were unacceptably risky.

The end result was a shattering of the trust between citizens and established financial institutions. The subsequent government bailout of institutions deemed 'too big to fail' added to public scepticism as did the failure of regulators to hold people accountable for harm caused.

Strategies to re-build lost trust:

The authors suggest a number of strategies to rebuild trust in our financial institutions.

1. Systems approach. In a world that is increasingly inter-connected our approach to solutions should treat society and the financial system as one and address the various relationships between components and stakeholders within it.

2. Learning from the past. It is important for us to understand how and why the GFC happened. Students commencing their university studies in economics need to know how economists got it so wrong. Sadly, most economics curricula today give scant attention to economic history.

3. Profit plus purpose. Part of the problem leading to the GFC was the fact that leading companies lost their business purpose. The long term interests of customers gave way to obsession with return to shareholders and short term results.

4. Strengthen competition laws. Mere change in regulation while not in itself enough, is nevertheless important. Law reform requires more invigorated laws governing fiduciary relationships, stronger laws in relation to unconscionable and unreasonable contracts, and a new concept on laws governing duties of ratings agencies and financial institutions to members of the public whom they know rely upon their information.

5. Developing ethical organizational cultures. Regulatory reform, however, will have limited impact unless we also address organizational cultures. Unfortunately organizational cultures such as that parodied in "The Wolf on Wall Street" put greed and profit above everything else.

6. Enhancing professional ethics. Lawyers, accountants and other professions working in the financial industry also must renew their values which emphasize the protection and promotion of their client's interests coupled with a wider duty to the highest professional ethics and service of the profession to society.

7. Use of technology for auditing and transparency. There are many different types of trust. One form of trust comes with having in place a system of audits, reporting and transparency. New and ever more powerful technology, enhanced regulatory processes and big data analytics will play important roles in rebuilding trust in our institutions.

8. Global governance principles. In a global economy with its greater risks of contagion, governance can no longer be confined to one nation. Instead, we need the adoption of global governance principles that will be reflected in the legal and regulatory regimes of all countries through international bodies such as the United Nations, UNCITRAL, OECD, APEC and the World Bank as well as groups focused on the private sector, such as the International Corporate Governance Network.

Eugene Clark is a columnist with For more information please visit:

Opinion articles reflect the views of their authors only, not necessarily those of

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