The Blog

Forex Investigation: Just the Latest Tremor for an Industry Still Trying to Catch Its Balance

The hits just keep on coming when it comes to the global investigation into potential manipulation of the global foreign exchange market. Last week, the Swiss competition regulator Weko made the latest move, announcing that it would launch an official investigation into the practices of several global banks and asserting that "evidence exists that these banks colluded to manipulate exchange rates in foreign currency trades." This is on top of the nearly 30 traders at the top global investment banks that have been suspended over the last few months. The idea of corruption in the forex market - in which $5.3 trillion is traded every day - is a frightening prospect.

Perhaps even more frightening, though, is the sense that this "sprawling" investigation is just the latest and largest tremor for an industry that hasn't managed to catch its balance since the 2008 crisis. We've been telling ourselves that things are getting better, and it is true that the global economy is showing signs of positive recovery. But has the industry learnt the lessons it needs to from a past it would rather forget?

In the years immediately following the crisis, investigations into misbehavior in financial services focused on individual cases - Bernie Madoff, SAC Capital, the London Whale trader. It was arguably easier for the industry to explain these scandals as the corrupt actions of individual actors, rather than as exemplars of deeper, systemic problems - and to believe that with each uncovered scandal, financial services was taking steps back to the solidly ethical, socially responsible sector it should be.

In recent years, however, it's become more difficult for the industry to maintain that position, or for the public to believe that ethical behavior is improving. Investigations - and, more insidiously, suspicion - have zeroed in on the potential for large scale manipulation of the fundamental building blocks of the capital markets: Libor, foreign exchange and (if the rumours are true) select commodity spot rates. Fear of corruption is no longer limited to one or two individual cases, but to markets and systems that interact daily on a global basis.

Of course, it is impossible for systems to be corrupt or for manipulation to occur - no matter on how grand a scale - without the direct involvement of individuals, but the point remains that the industry's cultural behavior over the past several decades has contributed to the scale and breadth of these problems. These endemic cultural weaknesses enabled widespread compromise on values and the rise of the wrong incentives - creating an environment that encouraged some to focus on acquiring more wealth at any cost. This short-term "addiction" to wealth, competition, and personal success at the expense of professional integrity plagued the financial services industry for at least two decades, and it contributed to the damaging short-termism that partly led to the 2008 crisis. It must stop.

Those within financial services, the vast majority of who are ethical employees who believe in upholding the integrity and social purpose of our industry, recognize the daunting challenge this presents. This past December, CFA Institute released the results of our 2014 Global Markets Sentiment Survey, which asks our members about anticipated trends in the investment industry in the coming year. When asked to identify the most serious ethical issue facing global markets, the highest percentage of respondents (24 percent) chose market fraud - the first time in the past three years of the survey that it's been the top issue of concern, and a significant increase over the 19 percent who ranked it highest in 2013.

It may be tempting to think that extensive and broad regulation could fix these problems - and one could argue that systemic problems require systematized solutions of that nature. However, for change really to take hold, industry leaders must drive and embrace profound cultural change, at all levels of management and as professionals.

Thankfully, there is growing evidence of momentum that suggests the industry is making progress. In his recent speech at the World Economic Forum in Davos, Bank of England Governor Mark Carney echoed comments he'd made privately to some of the top banks when he said: "Banks must recognize that only exemplary behavior can confer social license to global financial capitalism." Banks themselves are also beginning to take action; Barclays received major coverage last year when the bank implemented a mandatory code of ethics that all employees had to sign. New CEO Antony Jenkins, in his memo to employees announcing the initiative, denounced the false dichotomy of choosing between profits and values. "Unless we operate to the highest standards and our stakeholders trust us to behave with integrity, no business--and certainly no financial institution---can continue to be successful." These are important steps, but more must be done.

Hopefully, the ongoing foreign exchange investigation, and other pending investigations, will serve as an additional alarm clock to the industry as a whole: things aren't getting better quickly enough. The industry needs courageous leaders to accelerate the cultivation of a fiduciary culture that rewards long-term thinking rather than short-term gains, and promotes the responsible acquisition of wealth in full alignment with the values and objectives of clients. This may result in a difficult phase of attrition and profit volatility as those that view longer term compensation schemes, more deliberate product transparency, and a higher profile code of ethics as a "straitjacket" pursue other interests. As Robert Potter, the chairman of the City HR Association in the UK, recently argued--cultural changes requires "hiring a different sort of person." But this is a necessary chapter of "creative destruction" that will pay long term dividends for the reputation and credibility of the industry. Every new era begins with a few pioneers that are willing to break from the past, redefine the rules of engagement, and set the new course. Restoring the public's trust and the future of finance depends on this urgency of action. History will reward you; the time is now.