Ethics becomes a bank training issue

Following the recent public shaming of US equity analysts and the fines imposed on their employers, the reputation of financial services professionals may have hit record lows.

Specialists have responded by suggesting that ethics is included in company training courses. It is no longer enough that bond sales staff understand pricing or that corporate financiers know how to put together a rights issue. They must also be told how to tell right from wrong.

The UK's Financial Services Authority (FSA) demonstrated its concern about ethical standards in a discussion paper published in October. This recommends a framework of moral values, encompassing honesty, openness and treating customers with respect. The regulator's document also presented ethically-challenging scenarios, including one in which a corporate financier is asked to visit a client's hotel room to give them "the personal touch".

David Jackman, business ethics adviser at the FSA, says: "It is not a question of laying down rules but altering behaviour. We want to present people with case studies and to encourage them to think for themselves, instead of preaching about what they should and shouldn't do."

Craig Smith, associate professor of marketing and business ethics at the London Business School, says ethics training works best when it is not prescriptive and focused on rules, but based on building individuals' integrity.

"Most people don't recognise that they are in an ethically challenging situation until it's passed. Ethics training is about encouraging people not to be opportunistic and using integrity-based values to influence their decision making," he says.

Given the scandals of the past year, the historical effectiveness of ethics testing is questionable. In the US, candidates sitting the Series 7 and Series 3 financial regulatory exams have to take an ethics module.

Similarly, equity analysts taking Chartered Financial Analyst (CFA) exams answer multiple choice questions concerning ethical issues. However, the Association for Investment Management and Research (AIMR), which administers the CFA, has pointed out that shamed analysts such as Henry Blodget of Merrill Lynch were not CFA holders.

If a real difference is to be made in an organisation's ethical culture, most think it should start at the top. Neil Hoskings, a former training and recruitment specialist at Lehman Brothers and Morgan Stanley, has set up a company to offer ethics training to investment bankers: "Organisations need to identify and actively manage the key risks to their reputation. Fundamental to this is aligning individuals to the espoused organisational values and having senior management walking and talking these values," he says.

Citigroup says it gives lectures in ethics to graduates when they join. But banks, including Credit Suisse First Boston (CSFB), Goldman Sachs, Merrill Lynch and Morgan Stanley, declined to say whether they offer specific training courses in ethics.

However, John Mack, chief executive of CSFB, called for more ethical behaviour in a report on the global banking industry last October. Hank Paulson, chief executive of Goldman Sachs, was moved in June to reflect that: "Integrity is the cornerstone, if not the bedrock, upon which all financial markets are based."

Meanwhile, the FSA is soon to offer an ethics training course specifically aimed at senior financial services staff. Jackman says advance bookings are already being made. For a fee of 4,000, the regulator will run a tailored course for boards and senior management teams that will encourage them to "think outside the box" about ethical issues.

Hoskings says "high-level verbalising" about ethics is insufficient to ensure that values permeate an organisation. There is often a discrepancy between the values espoused by senior staff and the real organisational values used by employees every day.

Espoused values should be made explicit and referred to when conflicts of interest arise. This requires training around value-based decision making, says Hoskings.

Ethics training is all the more important in investment banking because the incentives to behave unethically may be greater than in other industries.

Philippa Foster Black, director of the London-based Institute of Business Ethics, which promotes high standards of behaviour, says large year-end bonuses can act as a temptation to pursue short-term financial gains.

Andrew Newton, author of The Handbook of Compliance - making ethics work in financial services, says investment banking presents unique challenges in terms of ethical behaviour: "The complexity of the activity and the compressed timescales in which decisions have to be made make it especially hard for individuals to identify and work through particular values-related issues."

John Romeo, a consultant in the capital markets division of Oliver Wyman, the strategy firm, says the temptation to misuse confidential information may increase in a difficult market. "As market conditions and customer business decline, banks seek to get the most out of their assets, including maximising the commercial value of information," he says.

The relationship between traders working on customer accounts and proprietary traders is a case in point, says Romeo. If proprietary traders learn of customer flows from their colleagues across the floor and take positions as a result, that would clearly be unethical.

But if proprietary traders learn of customer flows indirectly, through secondary research, ethical standards are maintained. One thing is clear - behaving ethically in many situations means extra work.