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The second point we wish to underline is that ethics implies a striving towards order. It is never final, never perfect. We might also respond here to Mandeville’s thesis – that private vices can generate public benefit. His Fable of the Bees, 1713-1724, recounts the decadence of a swarm of bees. Having been a thriving community based on deceit and vice, the bees condemn their own behaviour and become honest and virtuous. Their society collapses and dies. Mankind is in constant tension between virtuous order and the chaos of passion, and ethics is precisely this search for order.
When we talk about the ethics of finance or financial ethics – which comes down to more or less the same thing – we are not therefore dreaming of finance at the service of good but thinking of well-ordered finance.
Let us just be clear about what we understand by finance. It is the systemic organisation of flows and exchanges of goods and value beTrust and Ethics in Finance tween people – by definition a means of intermediation between resources and projects. Finance has no moral flag to fly – though the resources used and the projects to be financed may have a moral tinge. Finance does however have to do with ethics, as its goal is to channel resources to projects that in turn will create new resources. If valuable resources are to be channelled into the most promising projects, finance must be well-ordered.
On the other hand, the purpose of ensuring that abundant resources are distributed is not miserly and sterile accumulation in a strong-box.
These resources should be a vector for common wealth. That is basically what finance aims to achieve. And the need for ethics is all the greater, given that the purpose of finance is to organise exchanges between individuals, but with a collective goal that is closely related to hedonism – to provide material well-being by encouraging wealth creation.
Basically then, finance has to do with the idea of exchange, of trade, upon which the notion of financial flow is based. Trade takes place when two people driven by two complementary needs agree on the value of an exchange. This presupposes a relationship of trust and recognition of interdependence within a common structure in order to create a world. Our entire human history has depended on such progress.
We have taken the trouble to define our terms here in order to demonstrate that finance does not really require any moralising, i.e. does not need to have rules of moral conduct imposed on it from outside. If we want finance to be ethical, then surely the first requirement is that it should be true to its own vocation as an intermediary of value?
The distortion of ends and means If finance starts to believe that it is an end in itself and begins to indulge in self-worship, this will undermine its ethics. When it loses sight of the broader horizon, that of common well-being, which financial activity is really all about, and starts to come up with elaborate intellectual Ethics and Order 83 arguments that enable it to think of itself as a mechanical process that produces wealth all by itself, then finance becomes detached from the real world and constructs a sort of parallel universe that ends up imploding – before rising re-born from the ashes once more, but that’s another story.
One of the causes of this tendency to confuse ends with means probably lies in the vast multiplication of transactions that has turned financial activities in these last few years into a concentrated and centralised – almost industrial – process in which the means of production are the traders’ brains and the product is money.
Finance is therefore losing its intermediary status and the virtue we
mentioned a moment ago as fundamental in ethics finds itself inverted:
from a force in the service of a cause, it is becoming a force looking to find its objective in its own existence, money producing money. Its virtue is then no longer a force for action. No longer aiming to master passions, it glorifies them.
It is the triumph of pride, the hubris of which Greek tragedy has much to say, that leads those whom it possesses into excess: ever bigger, ever more complex, more, always more.
Lack of ethics, lack of thought
Might this turning-upside-down of values perhaps be due to a lack of thinking? Intelligence might well be the primary tool in finance, but in the technical field not in terms of consciousness. In the same way that manufacturing industry, driven by competition to unceasingly improve its productivity, gradually harnesses the strength of the worker to that of the machine and ends up making man an adjunct to the machine, the financial mechanics, which have grown way beyond the volume of real trade, begin to get the upper hand over human intelligence, which thus becomes a mere production tool.
84 Trust and Ethics in Finance The reason we are interested in this whole question of thinking is that what we are trying to do in this paper is to bring finance back within the domain of human responsibility. Now, if you make widespread use of a kind of brainpower that works without thought, without looking at the consequences, without questioning itself at all, this is obviously going to pose a problem as regards responsibility. We have an ethical question relating to the behaviour of financial market players. The kind of brainpower that the financial sector calls for is not required to bring under control the technical processes that have already been developed but to develop them even further, to plunge in and gather together those ultra-fine threads and weave them into an inextricable, delicate, fragile lacework of figures and algorithms. People are expected to apply their intelligence, but not to think. Now, any extreme division of tasks, a characteristic of the industrialisation of processes, where an individual does not see what he’s producing, tends to lead him or her to lose all sense of responsibility. And we’re already close to that situation in those areas of the financial world where what is produced is something nonmaterial. The individual is then no longer really a stakeholder in terms of conscience; he is a cog in the wheel of an industry in which his intelligence is engaged but not his mind. Just carrying out this kind of job can lead to a divided self, where a sort of disconnect comes about between the intellectual capability that is required of a person and the need s/he feels to think for him/herself. This need is pushed aside, and all too often the person then loses the physical and mental capacity for this type of thinking, since the mind is entirely taken up with extremely demanding short-term concerns, which require permanent attention.
The first step in any initiative to foster ethics in the financial world must, we believe, be of a structural nature. A solution must be found to the status of the individual, who is caught up in a mechanism that makes use of his or her brainpower without calling for any exercise of personal responsibility towards either one’s working environment or the common Ethics and Order 85 good. In our view, in order to solve this problem, we need to create a new framework, which would attach importance to ethics and make ethics a must in all financial activities.
We also invite you to imagine a sphere of activity where people would simultaneously see themselves as stakeholders in the world of finance and in society, where everyone’s interests would be safeguarded and financial ethics guaranteed. This would mean establishing an Order of Finance Professionals. We believe that this is the best way to inculcate a professional ethic. The Order would be responsible for drawing up a charter of professional ethics, monitoring its application and imposing sanctions on any members of the Order who deviated from the rules.
Inclusion of “non-financial” cultures
In practical terms, the Order of Finance Professionals would operate at national level. It would be divided into distinct chambers representing the various segments of the profession: portfolio managers, financial analysts, hedge fund managers, etc. As each segment has its own constraints, objectives and risks, and even sometimes differing interests – for instance, the lending business and portfolio/asset management do not have a great deal in common – each chamber would be organised in a relatively autonomous manner, with its own representatives elected by its own members. On the other hand, in order to avoid excessive lobbying by each individual arm of the profession, the representatives of each of the different chambers would enjoy the right to be informed about the demands being made by the other chambers.
The Order would be governed by a representative council composed of elected representatives of the various professional chambers. This council of specialists could be supplemented by persons with other types of skills: bringing in independents from outside the financial culture might be a second way to guard against lobbying. The idea here would be to co-opt on to the Order’s governing body academics that do not 86 Trust and Ethics in Finance have any specific training in the financial field, but are recognised in philosophy studies, sociology, history, law, etc. This diversification of expertise within the Order would encourage the airing of criticisms and points of view that plead for the common good. For example, philosophy experts specialising in the theory of ethics or logical analysis could be of great help in understanding the cognitive systems underlying certain types of behaviour and a professional historian, with his knowledge of the main trends in our history, the various stages of human progress and past crises, might be able to see more clearly what is going on and explain the new upheavals our society is facing.
On the other hand we do not think it would be appropriate to appoint any government representatives to the council; the Order should mark a clear distance from state bodies such as the AMF (France’s financial markets regulatory authority) but should of course nevertheless dialogue and cooperate with such bodies.
Procedures for joining the Order
Entry to the financial professions would be regulated in two stages.
As a first step the Order would recruit candidates on the basis of a nonfinancial examination, whose purpose would be to assess their intellectual maturity, their ability to adapt and to reason for themselves. The Order would at this stage verify that each candidate espoused the idea of an ethical basis for finance. This selection method, intentionally nontechnical, would serve to open the profession to a diverse range of applicants, both in terms of their academic training and their intellectual profile, thus helping to avoid bias based on a sort of sectarian elitism.
Specific professional training would then be carried out internally, and each recruit would have to pass an examination in order to obtain a licence to practice the profession from the chamber that s/he was applying to join. This is somewhat along the lines of what happens in the legal profession for advocates pleading at the bar and is in the spirit of what Ethics and Order 87 the AMF is trying to set up in France. The new system of examining knowledge – targeting the key functions carried out at investment services providers, especially portfolio management companies – was put in place by a decree of 30 January 2009, amending the AMF’s general regulation, entering into force on 1 July 2010. To help candidates prepare for this examination, which would cover both technical and ethical matters – to which we shall return – universities would create, in partnership with the Order, appropriate training modules.
Candidates who pass the examination would be accepted into the Order at a highly symbolic ceremony designed to make the recruit aware that he now belonged to a group, with close links between his professional life and the chamber. In fact, following the creation of a professional Order, financiers will no longer be seen by their clients merely as individuals or as employees of such and such a company, but also as members of a professional chamber whose reputation affects that of all its members.
This solidarity phenomenon whose source we have just explained led French stock brokers in the nineteenth century to set up a joint guarantee fund. The Paris Bourse was the scene of an unfortunate speculation on interest rates in the autumn of 1819. In order to avoid a systemic crisis, the Stock Brokers Association took out a loan from a group of bankers.
The association set up a joint account to receive the repayments that each broker was expected to make towards reimbursing the loan.1
Solidarity and risk sharing
Three years later, when the debts were entirely expunged, the Association debated whether to maintain this guarantee fund. In the interval, experience had demonstrated the advantages of this fund. “It gave the Association a force and power that exerted a positive influence on public For further details, see Lazuech, Gilles/ Moulévrier, Pascale, Contributions à une sociologie des conduites économiques, Paris: L’Harmattan press, 2006.
88 Trust and Ethics in Finance lending in general” (Lazuech and Moulévrier, 2006). So the Association decided (unanimously, the study underlines) that the joint account would be continued.
One might easily envisage a similar system today: each professional chamber would set up its own guarantee fund. A tax would be levied on every transaction carried out by a member of the chamber and would be paid into the fund. This tax might also be set in proportion to the risk of the transaction. For example, the methods set out in the Basel II accord for calculating regulatory capital might be applied here. The Basel II rules apply to all financial products without exception. The riskier the product, as assessed in accordance with the rules, the more capital the bank is required to hold. The ratio of capital to risk assets must be higher than 8%, i.e. for every hundred euro invested, the bank must have at least eight in its accounts.
This would help to improve balance sheet transparency by the simple fact that every transaction – whether on- or off-balance sheet – would have to be reported to the Order. The information reported to the Order would mention only the volume/value of the transaction, for obvious reasons of competition and confidentiality. In addition, the principle of a variable commission taking account of the balance sheet status of the entity carrying out the transaction could serve to prevent any financial institution from taking excessive risks. Such a system would encourage members to practice efficient self-regulation in order to limit the risk of a financial institution going bankrupt.
The primary task of the fund would of course be to finance the Order’s expenses, including general administration, human resources, recruitment tests, continuous training, etc. One might also envisage that the Order would help to promote academic research into financial ethics by granting bursaries and supporting conferences.
Ethics and Order 89 The fund might also be used in more exceptional circumstances. We are thinking here of the scandals that arise almost every day in the financial news and cast a shadow of doubt over the collective ethics of finance professionals. The fund would insure all transactions – including over-the-counter deals – that today are by no means exempt from counterparty risk, extending the concept of the indemnification tribunal that already exists for organised markets. The fund would step in for the defaulting counterparty, with the primary mission of safeguarding professionals from any actionable misdemeanours committed by their colleagues.
Drafting a code of ethics
Secondly, if one of the members were to be judged liable for his/her clients’ financial loss, the Order could, within the limits of its means, contribute to indemnifying the victim. This would, to a degree, help to uphold the honour of the profession. We should be clear that the Order would not take over liability for the actions of the financial professional involved, who would incur professional sanctions from the Order and perhaps, in addition, penal sanctions.