Ethical Challenges Alicja Choma

digitales archiv ZBW – Leibniz-Informationszentrum Wirtschaft ZBW – Leibniz Information Centre for Economics

Book Changing frontiers of ethics in finance

Provided in Cooperation with: Open Access Documents

This Version is available at: http://hdl.handle.net/11159/4253

Kontakt/Contact ZBW – Leibniz-Informationszentrum Wirtschaft/Leibniz Information Centre for Economics Düsternbrooker Weg 120 24105 Kiel (Germany) E-Mail: [email protected] https://www.zbw.eu/econis-archiv/

Standard-Nutzungsbedingungen: Terms of use: Dieses Dokument darf zu eigenen wissenschaftlichen Zwecken This document may be saved and copied for your personal und zum Privatgebrauch gespeichert und kopiert werden. Sie and scholarly purposes. You are not to copy it for public or dürfen dieses Dokument nicht für öffentliche oder kommerzielle commercial purposes, to exhibit the document in public, to Zwecke vervielfältigen, öffentlich ausstellen, aufführen, vertreiben perform, distribute or otherwise use the document in public. If oder anderweitig nutzen. Sofern für das Dokument eine Open- the document is made available under a Creative Commons Content-Lizenz verwendet wurde, so gelten abweichend von diesen Licence you may exercise further usage rights as specified in Nutzungsbedingungen die in der Lizenz gewährten Nutzungsrechte. the licence.

https://creativecommons.org/licenses/by-nc-nd/4.0/deed.en

Leibniz-Informationszentrum Wirtschaft zbw Leibniz Information Centre for Economics Ethical Sieve

Changing Frontiers of Ethics in Finance

Changing Frontiers of Ethics in Finance Ethics & Trust in Finance Global Prize Awards 2012–2017

Edited by Paul H. Dembinski Josina Kamerling Virgile Perret 1

Changing Frontiers of Ethics in Finance Ethics & Trust in Finance Global Prize Awards 2012-2017 2 3

Changing Frontiers of Ethics in Finance Ethics & Trust in Finance Global Prize Awards 2012-2017

Edited by Paul H. Dembinski Josina Kamerling Virgile Perret

Globethics.net Ethical Sieve No. 1 4 Globethics.net Ethical Sieve Director: Prof. Dr Obiora Francis Ike. Executive Director of Globethics.net and Professor of Ethics at the Godfrey Okoye University Enugu/Nigeria. Series Editor: Prof. Dr Amélé Ekué. Prof. Dr Amélé Ekué is a Protestant theologian and Globethics. net Academic Dean

Globethics.net Ethical Sieve 1 Paul Dembinski, Josina Kamerling and Virgile Perret (Editors), Changing Frontiers of Ethics in Finance Geneva: Globethics.net, 2019 ISBN 978-2-88931-317-4 (online version) ISBN 978-2-88931-318-1 (print version)

© 2019 Globethics.net with Observatoire de la Finance © Observatoire de la Finance – ISSN 1422-4658; with permission to republish texts published in the Financial Ethics Review: Finance & common good/finance & bien commun.

Managing Editor: Ignace Haaz, Assistant Editor: Samuel Davies Layout and proofreading: Hannah Soissons

Globethics.net Ethics & Trust in Finance Prize International Secretariat C/o Observatoire de la Finance 150 route de Ferney 16, chemin des Clochettes 1211 Geneva 2, Switzerland 1206 Geneva, Switzerland Website: www.globethics.net/publications Website : www.ethicsinfinance.org Email: [email protected] Email: [email protected]

The electronic version of this book can be downloaded for free from the Globethics.net website: www.globethics.net.

The electronic version of this book is licensed under the Creative Commons Attribution-Non- Commercial-NoDerivatives 4.0 International License (CC BY-NC-ND 4.0). See: https://creativecommons.org/ licenses/by-nc-nd/4.0/. This means that Globethics.net grants the right to download and print the electronic version, to distribute and to transmit the work for free, under the following conditions: Attribution: The user must attribute the bibliographical data as mentioned above and must make clear the license terms of this work; Non-commercial. The user may not use this work for commercial purposes or sell it; No derivative works: The user may not alter, transform, or build upon this work. Nothing in this license impairs or restricts the author’s moral rights.

Globethics.net retains the right to waive any of the above conditions, especially for reprint and sale in other continents and languages. Disclaimer The opinions expressed in this publication are those of the authors. They do not necessarily reflect the opinions or views of the Jury or members of the Jury of the Global Prize “Ethics & Trust in Finance” or the official policy or position of any agency, organization, employer or company. 5

The regulation of the financial sector has been significantly tightened up. Arti- ficial intelligence, Blockchain and fintech offer opportunities. The “tone from the top” has grown in strength. But “banks do not always know best” as put it the 2016-2017 winner of the global Prize “Ethics & Trust in Finance”. That is why the “echo from the bottom” sent by the young academics and professionals competing for the Prize is crucial: ethics must permeate practices, technology, strategy and culture in financial institutions.

François Villeroy de Galhau, Governor of the Banque de France

Technology has brought human interaction from far apart, faster. These benefits pose the risks that the parties might misunderstand their different values, which ensure trustworthiness and ethical principles. This information is not likely to be transferred as fast as the financial assets. Language and signals may differ and raise conflicts rather than agreement. Explanation of these differences is crucial to peaceful and trusting interaction in finance. The book «Changing Frontiers of Ethics in Finance» offers this crucial knowledge to the international financial actors and I believe will impact international finance.

Tamar Frankel, Professor of Law Emerita, Boston University School of Law

When the Ethics in Finance- Robin Cosgrove Prize was launched in 2006, Pro- fessor Dembinski and I took a leap of faith, dedicated to the memory of Robin, a young banker who believed passionately that the finance sector could and should be a force for good in the world. Between 2006 and 2015 we gradually built the reputation of the Prize, leading to the IMF in 2015 recognising the Prize as a significant contribution to encouraging global awareness of the role of ethics in finance. Now the Ethics and Trust in Finance Prize has stimulated an exceptional range of analysis, published in this second collection of nominated papers which I am happy to recommend.

Dr. Carol Cosgrove-Sacks, Honorary Member of the Prize Jury and formerly co-Director of the Ethics in Finance - Robin Cos- grove Prize 6 7

Changing Frontiers of Ethics in Finance

The Ethics & Trust in Finance Prize ...... 13

Introduction Paul H. Dembinski, Josina Kamerling and Virgile Perret ...... 15

Part I Conceptual Challenges

Epistemological foundations for the relationship between ethics and finance German Scalzo ...... 25

When Banks do not Always Know Best Babatunde Valentine Onabajo ...... 37

Behavioural Ethics and the Next Generation in Finance Ross Murdoch ...... 51

Ethics at the New Frontiers of Finance Martin Foo ...... 65

Financial Services as a «Common» Good Camille Meyer ...... 79

Objectivity - a Pipe Dream ? Mariusz Maziarz ...... 95 8

Is Moral Hazard Always Immoral? Emilia Klepczarek ...... 111

Dirty Hands and Dirty Money: Towards a Framework for Fi- ghting Pollution in Finance Mar Pérezts ...... 121

Common Sense Elia Breijo Pena ...... 139

Part II Ethics, Technology and Innovation

Hard Coding Ethics into Fintech Brett Scott ...... 151

Making Innovation in Finance Ethical Anne Godbold ...... 165

The Digital Panopticon: a Chance for Ethical Change Charmaine Fernandes ...... 181

Big Data in Finance: Ethical Challenges Alicja Choma ...... 193

The blockchain Revolution Witold Gromala ...... 207

Blockchain Technology for Reputation Scoring of Financial Actors Brett Scott ...... 223 9

Bringing In the Underbanked Tara Annison ...... 235

Moving Upwardly: Lessons from Mobile Payments in Kenya Josh Glendinning ...... 251

Will e-Government Reduce Corruption in Public Tendering? The South African Case Study Chiedzsa Musvosvi & Marlyn Anthony-rajah ...... 263

Part III Ethics, Regulation and Culture

Corporate market responsibility: ethical regulation for orderly financial markets Rafel ARP Gomes ...... 279

Lessons from LIBOR: moving beyond compliance to explore the dynamics of ethics in banks Prabhay Joshi ...... 297

The Ethical Challenge of Systemic Financial Distrust Friedemann Bieber & Dr. Juri Viehoff ...... 311

Ethical Leadership and Ethical Legacies Bibi Mehtab Rose-Palan ...... 327

Can Complex Firms Be Ethical: an Argument for Simplicity of Financial Institution Christian Buckson ...... 343 10

Banking, ethics and sustainability: the need for a self-critical look at corporate social responsibility strategies Beatriz Cuevas Fernandez ...... 359

Why even good people are likely to do bad things in finance – it’s not the people that are flawed, it’s the culture Krysztof Osesik ...... 371

Part IV Exploring Avenues for Action

Online Interbank Funding Platform for social-impact projects Angel Lopez Ortega ...... 387

Pour un marché du crédit aux particuliers plus éthique: l’introduction d’une composante conjoncturelle anticyclique dans le coût du crédit Fabien Hassan ...... 399

The need to make ethics part of finance: a new dimension in corporate governance in Latin America Guadalupe del Carmen Briano Turrent ...... 411

Primum non nocere (first do no harm): can the principles of medical ethics be applied to finance ? Joanna Givens ...... 421

Can Design Thinking Help Enhancing Empathy in Finance Mehta Anshuman ...... 429 11

Finance ethics with a Massive Open Online Course John Francis Diaz ...... 445

Visually Enhanced Ethical Thinking Gomez Gutierrez Christobal Miguel ...... 461

Suppose we change the (meta)rules of the game? Ewa Kruchowska ...... 473

Appendices

The Global Prize Jury ...... 487

The Ibero-American Jury ...... 496

The Polish Jury ...... 499

Observatoire de la Finance ...... 505

Staff Team ...... 506

Globethics ...... 507 12 13 Ethics & Trust in Finance The Ethics & Trust in Finance Prize – until 2015 “Ethics in Finance – Robin Cosgrove Prize” – promotes greater awareness among young people throughout the world of the benefits of the strengthening ethical approaches in all aspects of finance. It aims to encourage high-quality management of banking, insurance and financial services based on trust and integrity and also excellence in related academic research and regulation and policy making. Launched in 2006 and now preparing for the 8th edition of the Prize. This global competition for innovative ideas on ethics, responsibility and trust in financial activities is open to young people, aged 35 years or younger, from throughout the world – professionals as well as young academics. The mission of the Prize is to stimulate innovative ideas for promoting ethics and integrity in the finance sector. The Prize reaches out to young people familiar with the banking, finance and investment sectors, with special attention to emerging markets, to attract innovative ideas, proposals and projects which could be promoted to major players in the business community. The aim is to strengthen the sustainability of ethics in banking and finance and to reinforce its implementation, especially in emerging markets throughout the world. The competition invites creative short essays setting out analyses or proposals for innovative ways to promote ethics & trust in finance. The Jury made of 25 experts, authors and academics selects the winning essays and allocates the prize money of USD 20,000 among the authors. The Prize today is a well-recognized and highly respected endeavour. To date, in its global edition, the Prize has awarded 26 distinctions to outstanding authors coming from all continents. In 2015, the International Monetary Fund [IMF], co-hosted a special-event and the award ceremony for the 5th edition (2014/2015) of the global Ethics in Finance Prize at the IMF headquarters in Washington, USA. Ms. Christine Lagarde, Managing Director of the In- ternational Monetary Fund, gave a keynote address and congratulated the Prize laureates. In January 2018, the award ceremony of the 6th edition (2016/2017) was hosted by the Banque de France at its headquarters in Paris. The Governor of Banque de France, Mr. François ViIlleroy de Galhau and Mr. Angel Gurria, the Secretary-General of OECD, gave keynote addresses and congratulated the winners. In Novembre 2019, the award ceremony of the 7th edition is scheduled to co-hosted by the OECD at its headquarters in Paris. Mr. Angel Gurria, the Secretary-General of OECD, will give a keynote addresses and congratulate the winners.

www.ethicsinfinance.org

ETHICS & TRUST IN FINANCE 14 15

Introduction Paul H. Dembinski, Josina Kamerling and Virgile Perret

We are pleased to introduce this book that represents the second volume of collected essays gathering the nominated papers of the 4th, 5th and 6th editions of the global Prize “Ethics & Trust in Finance” between 2012 and 2017. A first volume of collected essays, entitled “Trust & Ethics in Finance”, was published in 2012, in cooperation with Globethics.net in Geneva. This publication, freely accessible online, brings together the nominated essays of the first three editions of the Prize between 2006 and 20111. Remarkably, it has been downloaded more than twenty thousand times. This impressive number could not have been achieved without the recommendation of the International Monetary Fund that selected this publication in its “Recommended Readings” in 20142. The present (second) volume pursues this effort of synthesis and valorisation of the best contributions to the Prize. By offering the young generation from all over the world the opportunity to submit an essay on ethics in finance every two years, the global Prize “Ethics & Trust in Finance” provides a unique and incredibly rich source of innovative insights on the key themes in ethics in finance. The themes addressed, from one edition to another, mirror the transformations of the financial sphere and work somehow as a “barometer” of ethical concerns in finance.

Finance, technology and the new frontiers of ethics The frontiers of ethics in finance are constantly moving in response to changes and innovation in financial activities. In the first edition of the Prize (2006-2007), compliance, micro-credit, ethical investment and corporate social responsibility were the predominant themes. These texts were written before the financial crisis and explored what may be termed “alternative finance”. Since the financial crisis of 2007-2008, things changed. The chosen themes place more weight on issues that arose during the crisis, the scandals and the failures of markets, financial management and regulation. Some authors

1https://www.globethics.net/documents/4289936/13421039/OnlineLibrary_GlobalSeries_6_ TrustAndEthicsInFinance_text.pdf/6dfbc602-2716-4036-9010-a94c65215b08 2 https://www.imf.org/external/am/2014/pdf/AM14_recreading.pdf

INTRODUCTION 16 pushed their analysis far beyond finance, while others focused on specific possible remedies. The mix of analysis and proposals for action is, without doubt, one of the welcome characteristics of the “Ethics & Trust in Finance” Prize. In the last edition of the Prize (2016-2017), young authors still express deep concerns about the persistence of financial misconduct, scandals and manipulation and the resulting “trust deficit” in banks and financial institutions, but their contributions place more weight on issues related to ethics and technology. This new thematic orientation is interesting, not only because technology is impacting every aspect of our lives, but also because, if a great deal has been written about the digital transformation of finance, very little has been said about its impact from an ethical perspective. At the same time, it is increasingly recognized that new technologies bring structural changes “disrupting” the financial sector. After the Internet and all kinds of related technologies, today it is automation that is considered as a new “revolution”. This will have a deep impact on our economies and societies, in the same way as the industrial revolutions in the past. In effect, finance has become a “high tech business”, with electronic trade platforms, new digital currencies such as Bitcoin and blockchain technologies, as well as algorithmic trading, in which computer programmes decide and execute trades for investment banks and pension funds. In light of these evolutions, instead of asking how humans can better deal with the financial system they create, it is worth investigating how the creation and application of these technologies impact human relations, and more specifically, finance ethics. Indeed, technology itself is challenging our value systems, pushing financial actors to discover new frontiers of ethics and responsibility. Along these lines, it can be argued that technological changes create “moral and social distance” which make it more difficult to exercise and ascribe responsibility in global finance. On the one hand, humans have less control since the transactions are delegated to algorithms; on the other, they are far removed from the environments, people, goods, and places influenced by their trade and investment activities. This “moral distance” or “moral blindness” is one the consequences of technologies, which create a setting in which ethical behaviour becomes more difficult3. As reflected in the present volume, these concerns stand out in the contributions of young authors.

3 Marc Coeckelbergh, Money Machines. Electronic Financial Technologies, Distancing, and Responsibility in Global Finance, London, Routledge, 2015.

CHANGING FRONTIERS OF ETHICS IN FINANCE 17 The evolution of the global Prize The “Ethics & Trust in Finance” global Prize was first launched in 2006. The award ceremony took place in 2007 just as the global financial crisis was starting. Twelve years later, in August 2019, the Prize is thriving globally and the award ceremony of the 7th edition is forthcoming. Throughout all these years, the Prize has accomplished an impressive journey, to the pride and joy of its initiators. It has become today the world reference in the field of ethics in finance. Since it was established, the Prize has stimulated a global debate on the role of ethics and integrity in finance. More than 270 papers have been submitted on the question of ethics in finance and more than 300 young finance professionals or academics from more than 110 countries have reflected on this topic. What contributed to the interest is that the topic “ethics in finance” is routinely present in internal discussions of companies, institutions and human resource development organizations which are concerned with the training of finance professionals, especially post crisis. In practical terms, largely dueto the recognition they have won thanks to the Prize, the laureates have gained higher status – both in the finance sector and in the academic world – which has increased the impact of their insights and proposals. Alongside the global competition, the Prize has expanded through the continuing development of “linguistic chapters”, in collaboration with partners sharing the same commitment to ethics in finance. The development of “linguistic editions” pursues three objectives: • It allows candidates to write in their mother tongue, which is very important when speaking about ethics, a theme that is nuanced and subtle. • It guarantees at a global level the expression of a variety of themes and sensitivities. The concept of “ethics in finance” is not the same in London, Geneva, New York, or in Buenos Aires, Johannesburg or New Delhi. • It creates the possibility of award ceremonies at both the global and the local levels, which increases the visibility and the proximity of the Prize. Today, we have the following three ongoing linguistic chapters that are largely autonomous with their own budget and supporters: • A Francophone chapter – open to all French-speaking authors (notably France, Belgium, Luxembourg, Switzerland, Canada, Africa, Vietnam, Romania). • A German-language chapter – open to German-speaking authors (mainly Germany, Austria and Switzerland).

INTRODUCTION 18 • A Polish chapter – open to Polish-speaking authors. Each of these linguistic chapters collects essays in the given language, has its own Jury and has its own series of awards and a ceremony. The winning papers are translated in English and enter an advanced stage of the global competition. Conditions to participate are the same as for the global Prize. In order to keep a common level playing field, the Jurys overlap to some extent. During the period (2012-2017) covered by the present volume, the Prize has gained in visibility and recognition thanks to prestigious financial institutions hosting the Award Ceremonies. In particular, the Award Ceremony of the fifth global competition (2014-2015) was co-hosted by the International Monetary Fund on 21 September 2015 at its headquarters in Washington. Ms. Christine Lagarde, Managing Director of the International Monetary Fund, gave a keynote address and congratulated the Prize laureates. Similarly, the Award Ceremony of the sixth global competition (2016-2017) was hosted on 15 January 2018 at Banque de France, in Paris. The Governor of Banque de France, Mr. François ViIlleroy de Galhau and Mr. Angel Gurria, the Secretary-General of OECD, gave keynote addresses and congratulated the winners. In conclusion, it should be recalled that, in 2015, after ten years of hard work as well as fruitful and close collaboration with the Observatoire de la Finance, Mrs. Carol Cosgrove-Sacks decided to step down as co-president of the Prize, to have more time for her family and other activities. In order to express her continuing support for this initiative, Mrs. Cosgrove Sacks accepted our invitation to remain as an honorary member of the Jury. At the same time, Mrs. Josina Kamerling – Head of regulatory Outreach for EMEA at CFA Institute, – accepted to become the co-president of the Prize and has acted in this capacity for the sixth and seventh editions. Reflecting this change, the name of the Prize was adapted, in 2016, to “Ethics & Trust in Finance” with the mention “previously Robin Cosgrove prize”.

About this book The thirty-three nominated papers for the various competitions for the global Prize “Ethics & Trust in Finance” between 2012 and 2017 offer a wide range of innovative ideas and stimulating insights on ethical issues in finance. The objectives pursued with the publication, in 2012, of the first volume of collected essays are still highly relevant in the context of the publication of this second volume, ethics being still insufficiently integrated into financial activities. Indeed, this book aims to:

CHANGING FRONTIERS OF ETHICS IN FINANCE 19 • advance the vision of ethics in finance, by offering a synthetic overview of the best essays submitted to the Prize • stimulate a global debate among the young generation regarding ethical issues in finance • promote the Prize as an agent for change, going beyond compliance to promoting real value. Of the thirty-three papers selected for publication by the global Prize Juries between 2012 and 2017, eleven are from the 4th edition (2012-2013), eleven from 5th edition (2014-2015) and eleven from the 6th edition (2016-2017). They came from thirty-five authors – two papers had combined authorship – emanating from a wide variety of countries: Argentina, Australia, France, Germany, Mauritius, Mexico, Panama, Philippines, Poland, Portugal, South Africa, Spain, United Kingdom, the USA and Zimbabwe. The book is organised in four parts which do not follow the chronological order but which revolve around 4 predominant themes. Part I reflects on the “Conceptual challenges” related to the analysis of the relationship between finance and ethics. Ethical issues are often neglected in the study of financial activities – notably in insurance and fintech - and most of the papers in this part try to fill the gap by building on new approaches and conceptual tools with a view to obtain a more precise diagnosis of current problems. Such theoretical reflections are indispensable on the one hand to define remedial measures and on the other to promote more relevant education in training institutions concerned with finance. Part II is entitled “Ethics, Technology and Innovation” and collects the nominated essays that focused on the ethical issues raised by fintech, such as blockchain solutions, biometric technology, artificial intelligence or mobile payments. Can fintech substitute for some ethical concerns due to the automation of traditional finance? Or does fintech require additional ethical standards to control it? What are the compliance and ethical concerns around the adoption of fintech? The diverse contributions show that fintech offers opportunities, for example mobile banking for the underbanked, but it also creates new challenges, for instance in the field of Big data and privacy protection. Part III brings together nominated essays dealing with the theme “Ethics, Regulation and Culture”. Several authors investigate various episodes of financial misconduct or manipulation that have occurred since the 2007- 2008 financial crisis, such as the LIBOR rate-rigging scandal, stressing the

INTRODUCTION 20 persistent breakdown of public trust in the financial industry. They pose the question of what type of regulation should be adopted and what measures should oblige financial operators and their collaborators to go beyond strict legal requirements and compliance with them to reconsider ethics in their strategies, professional behaviour and their business models. Several papers also stress the influence of organisational cultures on ethical decision- making. This is a key element which shapes the regulators and practitioners. It is there, at the level of organisational cultures, that with or without the various technological tools, the future of ethics in finance will be played out. Part IV, entitled “Exploring avenues for action”, gathers papers whose common denominator is to propose reforms, measures or mechanisms with a view to enhance the implementation of ethical standards into the operation, management and regulation of financial activities. Should the financial system be regulated as a common good? Could an online Interbank Funding Platform improve the financing of social-impact projects? One of the essay looks at using a MOOC that could treat ethics on global scale. Another one proposes to apply the principles of medical ethics to finance to help professionals to make better choices. The proposals are as varied as they are innovative and stimulating. They show impatience that changes go too slowly in the opinion of the young authors who wish to advance good order in their profession.

Conclusion “Changing frontiers of ethics in finance” offers a collection of fresh and innovative insights emanating from the best candidates whose essays were nominated for the “Ethics & Trust in Finance” global Prize between 2012 and 2017. We hope that it contributes to fill the gap in the literature about ethics in finance while providing a diverse and interdisciplinary contribution to the topic. The organizers and promoters of the Prize have successfully sought to exert influence above their weight and have been motivated to print the results of the competition, edition after edition, in a spirit of commitment, service and concern for the common good. Despite its growing appeal, the Prize remains, however, a fragile enterprise, organized and coordinated with limited resources, beyond the energy and commitment of its co-presidents, the members of the distinguished Jury and, by no means, the candidates themselves.

CHANGING FRONTIERS OF ETHICS IN FINANCE 21 Therefore, the support of the strategic partners and contributors to the Prize (CFA Institute, Euroclear, OECD, Swift Institute & Swift, ACCA) is crucial and we would like to express our gratitude as it is their contributions that render the competition possible. We also would like to record our sincere appreciation of the commitment of the members of the Juries who have worked intensively on the analysis of the essays by devoting their free time. Considering that they are all highly-placed, distinguished persons who already carry a heavy workload, their contribution is all the more commendable. The seventh (current) global competition (2018-2019) was launched on 18 September at the OECD headquarters in Paris and the award ceremony is foreseen for the end of 2019. We hope that the continuing success of the Prize will lead to a third volume of collected essays bringing together the future nominated essays of the 7th, 8th and 9th editions.

INTRODUCTION 22 23

Part I

Conceptual Challenges 24 25

pistemological foundations EEfor the relationship between ethics and finance

Ethics in Finance, Robin Cosgrove Prize Iberoamerican edition 2012-2013

First Prize ex-aequo

Germán Scalzo ‘Even though they are specia- due to a failure in understanding Argentina lists, financial professionals can these activities, and ultimately to PhD in Government also learn something by conside- a misunderstanding of humanity and Organizational ring their activities in a broader itself. Although this growing aver- Culture and a mem- intellectual context’ sion leads many to dismiss theoreti- ber of the Philoso- cal reflection in favour of action, the phy and Economics Ramiro de Maeztu, reality is that, without appropriate research group at El sentido reverencial del dinero Spain’s University of theoretical foundations, practice gets Navarre* lost in good intentions. Reflecting on the relationship The economy’s present identity between ethics and finance is cu- crisis is the result of its continuous, rrently an oxymoron and not just in progressive shift away from reali- scientific terms but also, and above ty toward an impersonal, objective all, in terms of what ordinary people and universal (in-human) science think – in other words, in terms of that is not so much based on a true common sense. Luckily, the most anthropology, but rather on a reduc- elementary common sense tells us tive, pragmatic and ideological view when something is wrong, as is clear of humanity. In what follows, I will * The views expressed from the general public’s growing attempt to explain the ultimate cause herein are those of the author and do not criticism of ‘the system’. In my view, of the contentious relationship bet- necessarily reflect those the now widespread distrust of an- ween finance and ethics in modern of the Organization he is ything connected with the economy thinking and, in doing so, I must affiliated to. and business – let alone finance – is first analyse the technical nature of

EPISTEMOLOGICAL FOUNDATIONS FOR ETHICS AND FINANCE 26 finance and its relationship to hu- understands the economy (oikono- La méfiance désormais man activity, so that we can truly mike) as ‘household management’, généralisée à l’égard de speak of ethics. tout ce qui concerne and to refer to this idea he uses a l’économie et les The private dimension word derived from oikos, which entreprises est due à of the economy means dwelling, home or family. une défaillance dans la The economy is an art and an ethic compréhension de ces In classic Western thinking, man of private life, for the family obtains activités, et finale- is considered a social being by his ment, à une mauvaise what it requires to meet its basic, compréhension de very nature. Aristotle defines him as limited needs. Within the manage- l’humanité elle-même. a ‘political animal’ (politikon zoon), ment of the home, Aristotle identi- A travers ce texte, je i.e. a being devoted to the good of the fies chrematisticschrematistike ( ) vais tenter d’expliquer city (polis). But, before being a po- as the component devoted to acqui- la véritable cause de litical animal, he is a ‘householding sition rather than use, (Aristotle. Po- la relation controver- 1 sée entre la finance animal’ (oikonomikon zoon) and litics, 1256a) i.e. it is at the level of et l’éthique dans la Aristole’s analysis of the configura- means. There is a natural chrematis- pensée moderne. Pour tion of the home, known as ‘domes- tics, which concerns what is needed y parvenir, je dois tic economy’, constitutes his most for the home and good living (and d’abord analyser la innovative contribution to the his- hence has a limit), and another, un- nature technique de la finance et sa relation tory of economic thought. Thus we natural chrematistics, which seeks to avec l’activité humaine, may say that ‘Aristotle was the first acquire that which is unnecessary, afin que nous puissions analytical economist... It was he who or superfluous. (Aristotle. Politics, véritablement parler laid the foundations of science and 1257a). d’éthique. who first posed the economic pro- Seen in this light, the economy blems with which all later thinkers Aristote, qui peut être is not just an organization of ins- 2 considéré comme le have been concerned.’ From a phi- truments or means, not just a tech- premier économiste losophical point of view, the history nique, but also includes an ethical analytique, décrit of economic thought is a dialogue component. It is concerned with the l’homme comme un with Aristotle.3 good of man and the community animal politique, consacré au bien de sa The meaning Aristotle gives to (the common good). Chrematistics, maison puis à celui de the economy is very different from on the other hand, has no end, for la ville où il vit. its meaning in modern times.4 He its object is not need, but money and Pour Aristote, la ges- if it is not then subordinated to eco- 1 See Eudemian Ethics, VII, 10, 1242 at 22-3. tion de l’économie est nomics, it boosts human desire, as avant tout une éthique The noun zoon means ‘living being, animal’. 2 Roll (1950), p. 33. de la vie privée, qui Aristotle illustrates in a poem taken 3 Berthoud (2002), p. 60. from Solon: ‘No bound to riches has implique la quête des 4 Modern economic theory is considered to besoins relatifs à la have begun with the publication of Adam been fixed for man (Aristotle. Poli- maison et au bien être. Smith’s The Wealth of Nations (1776), which tics, 1257b). Wealth, then, when it A l’opposé de l’enri- to some extent represents its independence is seen in terms of the abstraction of chissement personnel, from moral philosophy and hence the start money, rather than in terms of the superflu et inutile. of value neutrality. Cf. Finley (1973), pp. 17- 20. reality of things, becomes aimless.

CHANGING FRONTIERS OF ETHICS IN FINANCE 27 Indeed, ‘ethical questions refer to nant modern economy6 – and who, L’économie comporte the way in which man wants,’5 and in The Republic, ends up abolishing donc un volet éthique money – (Plato. The Republic of car elle concerne aussi so education is needed if we are to Plato, V 464d), Aristotle was aware le bien être de l’homme want the right things. et de la communauté of the importance of exchange for dans laquelle il vit. The public dimension the development of the city. Yet, he of the economy realized that the logic of do ut des Dans leurs écrits, Pla- (‘I give that you may give’) is not a ton et Aristote ont été While the private aspect of the sufficient basis for the unity of the les premiers à relater la economy appears at the start of Po- city, which is why he mentions the première crise écono- litics – as a condition of possibility spirit of grace, the ‘gift’, as it were, mique, qui était avant tout une crise de la vie for the polis – its political dimen- that is present in all exchange and publique. Aristote était sion is discussed in Book V of Nico- transcends its technical aspect: ‘This déjà conscient de l’ im- machean Ethics, which deals with is why they give a prominent place portance des échanges justice. Here Aristotle distinguishes to the temple of Graces – to promo- pour le développement between universal and private juste the requital of services; for this is de la ville. characteristic of grace – we should tice, and within the latter he distin- serve in return one who has shown Le principal problème guishes between distributive justice grace to us, and should another des échanges est de (equality according to geometrical définir le montant time take the initiative in showing proportion) and commutative jus- d’un bien pouvant it’ (Aristotle. Nicomachean Ethics, être échangé contre tice (equality according to arith- 1133a). un autre sur une base metical proportion). Immediately The main problem of exchange équitable et juste. Les afterwards, in Chapter 5, and in the is how to determine which amount notions de nécessité et context of commutative justice, he d’utilité sont ici essen- of a good to exchange for another tielles. La solution, qui discusses the subject of justice in ex- on a fair basis; this is known as va rendre les échanges change as a form of reciprocity that the ‘problem of commensurability’ possibles, est l’argent, keeps the community together (Aris- (Aristotle. Nicomachean Ethics, soit une représentation totle. Nicomachean Ethics, 1132b). 1133b). Strictly speaking, things in conventionnelle de la themselves are incommensurable, nécessité. Although rationality in the an- i.e. they cannot be compared from cient world was very different from the ontological point of view, but in what it is today, in this particular terms of need (chreia) or usefulness case we could say that Plato and (for instance, St Augustine shows Aristotle were reflecting on the first how a mouse is ontologically more economic crisis, which was a crisis valuable than wheat, and yet we pre- of public life. However, unlike his fer the latter for its usefulness to hu- master Plato, whose solution not 6 There is no technical solution to the problem only inspired socialist currents of of social order, and any claim to the contrary thought, but also pervades the domi- leads to the tyranny of turning the city into a ‘big family’ where all things are held in com- 5 Cruz Prados (1999), p. 159 mon.

EPISTEMOLOGICAL FOUNDATIONS FOR ETHICS AND FINANCE 28 man life). The solution that makes In the city, men ‘exchange with En analysant les exchange possible is money (no- one another the necessaries of life différentes formes misma), which comes to be a con- and nothing more’ (Aristotle. Po- d’échanges, Aristote ventional – not by nature but by law litics, 1257a). In this way Aristotle conclut qu’ils sont de deux natures: (nômos) – representation of need presents the need for exchange and l’une naturellement (Aristotle. Nicomachean Ethics, the first form it takes: barter, i.e. propre au bien être 1133b). There are those that claim exchange of goods that does not inde l’homme dans la Aristotle laid the foundations for the volve money, represented by C-C´ communauté, et l’autre analytical treatment of money, yet, (commodities). This kind of exchan- qui ne l’est pas, le pro- as Aristotle worried, the introduc- ge is necessary in order to supple- blème étant de pouvoir tion of money7 into exchange poses ment natural self-sufficiency; but distinguer les deux. Le it logically leads to the other kind, troc est ainsi opposé à a risk to the city. l’échange qui implique involving money: a good is sold (C- de l’argent. The development M), and the money it is sold for is of exchange used to buy another good (M-C´). This is represented by C-M-C´, and In Book 1 of Politics, he analyses as long as things are sold in order to the birth of exchange and identifies buy other things, money is a means various forms of it: barter, or ex- of obtaining a good that one wants to change that does not involve money; La nature même de consume. Aristotle accepts the C-M- l’argent est très falla- using money to acquire something C´ circuit,9 since its end is consump- cieuse car elle pousse one needs; buying and selling in or- tion; but when things are bought (M- l’homme à accumuler der to earn money; and lending mo- peu à peu, à devenir ney at interest (known as usury).8 C) in order to sell them for a larger riche pour être riche, He examines the development of amount of money (C-M´), i.e. when soit un système sans relations of exchange over time, and the M-C-M´ circuit is created, money limite qui corrompt en investigates the nature of exchange is pursued for its own sake, and Aris- poursuivant une fin totle considers this unjust. inappropriée. value and its impact on human behaviour. As regards the end (telos) The nature of money of these forms of exchange, he concludes that they are of two different The difference between C and C´ kinds: one that is natural to man’s in the first case is qualitative (they good life in the community, and one are incommensurable) and they re- that is not. The problem of course fer to things that are used in different remains how to distinguish between ways. But the difference between M the two. and M´ is quantitative; M´ is neces-

7 See, for example, Polanyi (1977), Schumpe- 9 The distinction that Aristotle makes between ter (1954), or Moreau, (1969). exchange value and use value may create am- 8 Nowadays the term ‘usury’ means lending bivalence on this issue, for the exchange value money at excessive rates of interest. However, of a good is not its ‘proper and particular’ use. Aristotle does not admit differences in degree: Yet Aristotle does not use the term ‘unnatural’ all interest is usury and, given its purpose, is (para phusin), and the fact that something is intrinsically bad and equally unjust. not ‘proper and particular’ does not mean that it is bad.

CHANGING FRONTIERS OF ETHICS IN FINANCE 29 sarily a larger amount because this promotion of the end they think all Le fait de pouvoir is the only possible difference bet- things must contribute’ (Aristotle. échanger générant ween two amounts of money, which Politics, 1258a). des abus potentiels de is commensurable. So the risk here pouvoir et de l’injus- The key to grasping the differen- tice, il faut réduire au is that if M can be turned into M´ ce lies in the relationship to money minimum les effets in- there is nothing to stop it from in- and the distinction between goods désirables des rapports creasing further to M´´, and so on presented in Ethics. Natural chre- d’argent. La question ad infinitum: ‘there is no limit of matistics pursues useful things, for est de savoir si l’argent the end, which is riches of the spu- est un moyen ou une their use value; but unnatural chre- rious kind, and the acquisition of finalité en soi. matistics – which includes trade wealth’ (Aristotle. Politics, 1257b). (kapelike) – is guided by exchange Aristote distingue The fourth type of exchange invol- value, which is ultimately the same trois types d’activités ves money but no goods, i.e. M-M´, as desire for money. Exchange value humaines, chacune or usury. ‘The most hated sort, and quantifies things, assigning them a régie par un type de with the greatest reason, is usury, logical category different from that rationalité. La contem- which makes a gain out of money plation est ainsi régie which is naturally theirs (the abili- par la raison théorique, itself, and not from the natural ob- ty to satisfy a need). The essence of l’action par la raison ject of it... interest is money from money is to be an exchange value, morale et la production money… that is why of all modes of and as such has no inherent limits (it par la raison technique. getting wealth this is the most unis a quantity, not a quality), which Chacun des différents natural’ (Aristotle. Politics, 1258b). is why it cannot become an end in usages de la raison Money produces interest, yet it was donne lieu à un genre itself. not invented for that purpose, but différent de la connais- What is certain is that money, rather to facilitate exchange. For an- sance. although ambivalent, is nonetheless cient Athenians, lending money was necessary and cannot be eradicated.11 a sign of friendship, and its purpose Instead, its adverse effects must be was to keep the polis stable.10 In the minimized, for the possibility of ex- same way, any activity or profession change opens the door to abuse of can be corrupted by pursuing an power, injustice, violence and lack inappropriate end: ‘The quality of of reciprocity. The great problem of courage, for example, is not inten- usury (M-M´) is the claim that tech- ded to make wealth, but to inspire nique can, by itself, ensure gain, dis- confidence; neither is this the aim of torting the idea of wealth. As Aristot- the general’s or of the physician’s art; le saw it, the city is viable as long as but the one aims at victory and the chrematistics does not predominate other at health. Nevertheless, some and this duality remains a latent ele- men turn every quality or art into a ment in modern economic thought. means of getting wealth; this they conceive to be the end, and to the 11 This is what Plato and Marx expressly claim, but it is also implicitly derived from 10 See Millet (1991) and Meikle (1995). the theory of Walrasian equilibrium in which, paradoxically, money is logically unnecessary.

EPISTEMOLOGICAL FOUNDATIONS FOR ETHICS AND FINANCE 30 Neoclassical economists tried to sol- its study. Theoretical reason enables Toute pratique étant ve this duality by creating a concep- us to know the essence and causes normative, elle doit ré- tual link to the notion of utility. If of things, which is fundamental for fléchir sur les moyens utility is the only purpose of action, an overall view of things. Practical et les fins. L’économie devient donc une they postulated, its results matter reason enables man to reflect on his science pratique. more than action itself and the ques- actions so that they are organized to tion of whether money is a means or their own perfection. That is why all an end becomes irrelevant.12 practice is normative, and must reflect on means and ends. Technical Three kinds of reason, on the other hand, only mo- rationality ves in the realm of means, and is ai- Aristotle identifies three kinds of med at results. human activity (energeia): contem- Seen in this light, economics is a plation (theoria), action (praxis) practical science, whereas chrematis- and production (poiesis), each go- tics is a technical one, meaning that verned by a different kind of rational it cannot lay claim to the clarity of excellence (arete). Thus contempla- the exact sciences, as most positive tion is governed by theoretical reason schools of thought suggest. In Nico- (sophia), action by moral – practical machean Ethics, Aristotle warns that – reason (phronesis) and produc- ‘Our discussion will be adequate if it tion by technical reason (techne). has as much clearness as the subject- Aristotle does not contrast thought matter admits of, for precision is not with activity, recognising that all to be sought for alike in all discus- complex human activity is marked sions … We must be content, then, by unity between conception and in speaking of such subjects and with execution, and that in relation to this such premises to indicate the truth there are three kinds of thought (dia- roughly and in outline … for it is noia): theoretical thought, which the mark of an educated man to look speculates on something; practical for precision in each class of things thought, which works; and produc- just so far as the nature of the sub- tive thought, which makes (Aristotle. ject admits’ (Aristotle. Nicomachean Metaphysics, II 2 y VII 1). Ethics, 1094b). Each of the various uses of reason Understanding the economy in (theoretical, practical and technical) this sense presupposes a difference gives rise to a differentiated kind of between action (praxis) and pro- knowledge – or science in the broad duction (poiesis), which are two sense – depending on the object of different ways of doing things (Aris- totle. Nicomachean Ethics, 1140a). 12 Basically, utilitarianism insists on quanti- Even though the way in which Aris- fication in monetary terms, for it maintains that there are no incommensurable ultimate totle makes this distinction has been values. Williams (1972), pp. 96-112. greatly criticized (in his day the diffe-

CHANGING FRONTIERS OF ETHICS IN FINANCE 31 rence was not just internal, but rather lent and can be used badly. Aristotle Pour Aristote, l’analyse external, since production was a job refers to this second meaning of art de la technologie est for slaves), there is certainly an impli- as a mere faculty (dynamis), for he nécessaire: il s’agit cit reference to the relationship bet- d’une sorte de vertu, is loath to state that something can be car orienté vers la no- ween technical reason and moral rea- intellectually good but morally bad.13 tion de bien, mais elle son (phronesis and techne), which is In order for techne to be a virtue, it one of subordination. In any case we peut aussi être utilisée must be subordinated to phronesis.14 de mauvaise manière. are faced with two kinds of teleology: Technical reason certainly requires Les questions instru- ‘For while making has an end other moral reason in order to be good, but mentales deviennent than itself, action cannot; for good donc toutes des ques- the latter also needs the former in or- action itself is its end’ (Aristotle. Ni- tions morales. Selon comachean Ethics, 1140b). der to achieve good, for ‘practical wis- lui, dans tous les arts et dom is a virtue and not an art’ (Aris- les sciences, la fin et les moyens devraient être Epistemology of totle. Nicomachean Ethics, 1140b). sous notre contrôle de technology Thus phronesis, as a moral and inte- manière équilibrée. There is some ambiguity in the llectual virtue, includes and perfects term techne, alternatively translated techne, allowing for a human use of as ‘art’ or ‘craftsmanship’, i.e. to refer it (Aristotle. Nicomachean Ethics, both to manual or industrial arts and 1141a, 1141b, 1142a, 1143b, 1153a). to instrumental methods – used by Ultimately, all instrumental ques- people who are skilled at something tions are moral questions, but the – in order to achieve ends. Aristotle ends must be human – they cannot sometimes refers to techne as a state be relegated to mere mechanical cau- (hexis) and sometimes as a faculty sality. ‘There are two things in which (dynamis). In the first sense, ‘art, then, as has been said, is a state con- all well-being consists: one of them is cerned with making [poietike hexis], the choice of a right end and aim of involving true reasoning, and lack of action, and the other the discovery of art [atechnia] on the contrary is a the actions which contribute towards state concerned with making, invol- it… In all arts and sciences both the ving a false course of reasoning; both end and the means should be equally are concerned with the variable’ (Aris- within our control’ (Aristotle. Poli- totle. Nicomachean Ethics, 1140a). tics, 1331b). Here he defines techne as a kind of virtue (or vice) that does not lead to Action and production the morally good, but to the intellectually correct – i.e. techne provides Aristotle’s distinction between ac- the most efficient means of achieving tion and production had major con- the proposed ends, whether these are sequences for the modern economy, good or bad. This is a ‘kind of virtue’, 13 Dynamis, unlike hexis, can be used for oppo- for virtue is strictly directed towards sing purposes. the good, whereas techne is ambiva- 14 Murphy (1993), p. 106.

EPISTEMOLOGICAL FOUNDATIONS FOR ETHICS AND FINANCE 32 often owing to misinterpretation.15 La distinction d’Aris- Modernity and the When he says that, in addition to an reign of technique tote entre l’action et internal end, production has an end la production a eu outside itself, whereas action does The autonomy of reason is by far d’importantes consé- the most characteristic feature of mo- quences pour l’écono- not (it is an end in itself), he is thin- mie moderne. king of the rationality that underlies dernity. Indeed, there has been a radi- Les techniques sont every kind of activity. As Crespo says, cal change in the understanding of the moralement ambigues. echoing Agazzi, ‘The practical dimen- rational, which lost its profound sense Telles une expression concerns itself with knowing and of openness to truth and has become an sion de la capacité de justifying the end, a value in itself that instrument for the pursuit individual l’homme à faire les implicates all action. This of course certainty. This change resulted in the choses, elles sont deve- consideration of man as an individual, nues plus complexes et involves means, but only insofar as plus puissantes au fil they are implicated in an end, which who can act only by using his thinking du temps. Il n’y a pas is what leads to action. In reality, mind, as seen in Descartes, without de technique neutre when moving into the practical field, any need for tradition or community. et objective: elle est these are not really means, but rather Those who set out in pursuit of certain- toujours guidée par parts of the end. Practical rationality end up abandoning the language of des intérêts humains ty does not address means as means, culture and tradition in favour of a sup- et la finance ne fait posedly universal, objective language, pas exception. Je vais but rather in themselves, as particu- whether in its natural form (physics) or vous démontrer que la lar ends that must be in harmony in prétendue neutralité de a horizon of totality. This totality is a its abstract one (mathematics), finally la science et de la tech- certain way of conceiving life itself.’16 applying it to human action, which is reduced to a mere externality. nique est une illusion. We can thus conclude that tech- L’ autonomie de la niques are morally ambiguous. As an For Hegel, the political economy raison est de loin l’élé- of the Scottish Enlightenment repre- ment le plus caractéris- expression of man’s ability to make sented the science of modernity tique de la modernité. things, they have become more com- per plex and powerful over time, capable excellence, whereas Kant believed of determining future possibilities and that Newton’s physics were the leading making it difficult to correct wrong science of modernity. Although there decisions. There is no such thing as were other schools of thought, modern Orienter l’action economic theory originally arose in res- depuis l’extérieur, a neutral, objective technique, but rather is designed and driven by hu- ponse to the need to explain the mea- comme cela se pratique ning of society. Yet, it seriously erred habituellement dans man interests – and finance is no le monde physique, exception. Thus, in the next section, in designing the political economy est problématique car I will turn to demonstrating that the as a kind of ‘social physics’, forcing a cela revient à annuler supposed neutrality of science and te- hypothesis of man that has caused all l’action. Ce qui deter- chnique is a fallacy. kinds of problems. This hypothesis mine l’action est pour- considers man as an isolated, pre-social tant bien son caractère 15 The interpretation was that production has individual, a concept that is known as subjectif, soit ce qui se a tangible purpose and action an intangible ‘methodological individualism,’ and passe au sein du sujet one; this is reflected in Smith’s notions of pro- gave rise to the famous notion of qui agit. ductive and unproductive labour. homo 16 Crespo (2006), p. 28. oeconomicus.

CHANGING FRONTIERS OF ETHICS IN FINANCE 33 Modern physics (Galileo, Newton, depriving it of its meaning, i.e. ‘When Le problème n’est pas Descartes) has been so idealized becau- human action is reduced to a mathe- dans les technologies se it reveals an order behind the seeming matical decision-making problem, qui sont appliquées, chaos of nature, an order that, moreo- the agent disappears. He does not act mais plutôt dans la or even think; rather, his action is mentalité dominante, ver, admits mathematical expression, basée sur la technique, as observed in astronomy. Yet, approa- thought for him; he does not move, ’17 et dans la manière dont ching the coordination of individual but rather is moved. The purpose la finance est utilisée decisions as a mathematical problem of the economy is not consumption, pour retrouver une requires an a priori theoretical rationa- which by definition is concrete and dimension pratique de lity, reducing human action to an ex- limited, but chrematistic produc- l’action. ternal theory of decision-making. It was tion, understood as a mathematical not until the late nineteenth century, function that is dominated by calcu- when Lagrange’s model of mechanistic lation. As for technique, it is nothing equilibrium in mathematical physics more than instrumental domination. influenced the German empirical phi- Constructing a kind of ‘neutral’ losophy of Weber and Fechner, that foundation for society is seriously pro- some economists, such as Jevons, Ed- blematic because a semblance of order geworth and Walras, attempted to exis achieved by eliminating multiple plain the meaning of society by turning views of the common good, which – political economy into mathematical however paradoxical it may seem – are psychics. Yet the ‘flight from psycholo- precisely what keeps a political com- gism’ initiated by Pareto and concluded munity together. Inevitably, econo- by Debreu was needed in order for a mics – or rather its chrematistic aspect new axiomatic mathematics (Hilbert) – becomes a substitute for what was to develop, so that action could be once meant by politics. Making it part deemed a mere externality. This led to of a theory turns the human acquisiti- what has been called the ‘formalist reve process into an autonomous, neu- volution’ in economic theory. tral activity, ratifying the moral neutrality of the maximization of gain, ‘a The impact of the manifestation of the European spirit’s formalist revolution move toward individualism, subjectivism and rationalization.’18 Action theory comes down to a priori calculation of plans that maxi- As Koslowski points out in his fa- mize individual advantages not on mous essay Ethics of Capitalism, the the assumption of personal interest, liberation of the economy from mora- which presupposes a degree of in- lity leads to justification of contracts tentionality, but as a mathematical on the basis of mere formality rather property. The problem in guiding ac- than their substance (which is justi- tion externally, as usually happens in ce), probabilistic morality – in other the physical world, is that, instead of words, laxity – as an expression of maintaining action’s decisive, subjec- 17 Martínez Echevarría (2012). tive character, it cancels action out by 18 Koslowski (1997), p. 31.

EPISTEMOLOGICAL FOUNDATIONS FOR ETHICS AND FINANCE 34 subjectivism, and loss of control over way finance is used lies in a return to Le caractère éthique de interest payments (in accordance with the practical dimension of action. l’économie dépend du market forces rather than conditions This has major implications. Mo- fait que la politique, of justice).19 Ultimately, this is a con- activité pratique dont dern economic rationality, as it has sequence of not facing up to the com- le but est le bien com- developed, is an attempt to control mun, ne perde pas son plex problem of value, by transferring reality, whether theoretically or tech- caractère dirigeant. it to the individual and reducing the nically, by claiming to predict the fu- Il faut mettre en avant incommensurable to common terms ture in absolute terms. In this sense, les efforts conjoints (with money acting as a ‘common de- the problem of coordinating a multi- des hommes pour se nominator’). Ultimately, ethics in eco- tude of individual decisions ends up procurer les moyens nomics, and hence financial ethics, is as a regression to infinity, as can be de mettre leur capacité only possible if politics – a practical seen in game theory. Human ratio- productive au service activity whose purpose is the com- et à la disposition de la nality develops within practice, and mon good (including partial and ins- société. hence is uncertain. That is why eco- trumental goods, and hence all tech- nomic theory systematically fails in its nologies) – retains its governing role. precise approach to human existential A return to time, for it has to develop more and practical reason more hypotheses in its attempts to explain reality in terms of models. Such an extensive theoretical dis- Reason is a single power with two cussion to arrive at general, straight- uses: theoretical and practical. Theo- forward conclusions may seem unne- retical reason is open to truth and cessary and even absurd. It is indeed clings to it once it possesses it; it is very typical of modern thought to thus more thoroughly and definitively give priority to action. Yet, as we have updated than practical reason. Practi- seen, it is theory that guides practical cal reason, on the other hand, is open and technical action. When there are to many possibilities and so is never no firm theoretical foundations for re- ‘closed’, not even to error (theoretical ality, i.e. when we do not look more reason does not make mistakes, only closely at causes, we cannot move the person who reasons), which is beyond the mere level of means. This why it has to be corrected. A re-eva- is clearly seen in the repercussions of luation of practical reason requires economic crises (especially the one in the present tense, for practical reason 2008), when analysts solely discus- cannot hope to know reality without sed issues of financial engineering action.20 Practical reason enables us – whereas all crises reflect the vast number of personal decisions that are 20 However, acts of practical reason are not made in society. The problem is not actions but acts, and their known objects are mental forms commensurate with their in the technologies that are applied, acts. Reason has four feasible acts: practical but rather in the prevailing ‘technicist’ concept, counsel or deliberation, practical mentality and the key to changing the judgement and precept or command. Thomas Aquinas, Summa Theologiae II-II ps., q. 153, 19 Koslowski (1997), p.46. a. 5, co.

CHANGING FRONTIERS OF ETHICS IN FINANCE 35 to compare contingent goods that are tradition and culture as they really within our control and are open to are. New financial trends are moving many different possibilities – ultima- further and further away from stock tely, means – in order to find the best markets and complex derivatives, to among them (practical counsel), to focus instead on initiatives that in- be aware of our deliberative ability, to volve communities and acknowledge assess our acts, to correct them when their real needs and capabilities. The they do not improve reason, and to ‘anti-community’ gains that resulted differentiate between what is urgent from speculation and the efficient use and what is important (euboulia); of ‘language’ are increasingly being to judge what is probable (particular, replaced by communal efforts to put contingent, possible and plausible), its productive capacity at society’s dis- arranging the order of things with posal. The concept of capital, synony- more or less good sense and experien- mous with wealth until most recently, ce (practical judgement); to choose is now expanding to include relatio- – decide on – the most appropriate nal, cultural, intellectual and moral of possible actions, and finally to re- aspects, with a growing cooperation ceive a mandate to work towards an and respect for nature. With a true end (precept). The key to progres- anthropology to guide it, technique, sing in this direction lies in an appro- finance in particular, can be geared priate anthropological underpinning, toward the service of man and its po- which implies understanding reality, tential will then be truly remarkable. •

References Thomas Aquinas (2006). Summa Aristotle (2004). Rhetoric. New Theologiae. Cambridge: Cambridge York: Dover Publications University Press Aristotle (2009). Nicomachean Arendt, H. (1958). The Human Ethics. Oxford: Oxford University Condition. Chicago: University of Press Chicago Press Aspe Armella, V. (1993). El con- Aristotle (1982). Eudemian cepto de técnica, arte y producción Ethics. Oxford: Clarendon Press en la Filosofía de Aristóteles. Mexi- co City: Fondo de Cultura Económi- Aristotle (1988). Politics. Cam- ca bridge: Cambridge University Press Austin, M. & Vidal-Naquet, P. Aristotle (1999). Metaphysics. (1977). Economía y Sociedad en la London: Penguin Classics Antigua Grecia. Barcelona: Paidós

EPISTEMOLOGICAL FOUNDATIONS FOR ETHICS AND FINANCE 36 Berthoud, A. (2002). Essais de Martinez Echevarria, M. A. (1983). Philosophie Économique: Platon, Evolución del Pensamiento Econó- Aristote, Hobbes, A. Smith, Marx. mico. Madrid: Espasa Calpe Arras-Lille: Presses Universitaires du Septentrion (2012). Filosofía, Economía y Po- lítica (manuscript) Crespo, R. (1993). La concepción aristotélica de la economía. Philoso- Marx, K. (1867). Capital phia Meikle, S. (1995). Aristotle’s Eco- Crespo, R. (1997). La economía nomic Thought. Oxford: Oxford Uni- como ciencia moral: nuevas perspec- versity Press tivas de la teoría económica. Buenos Aires: EDUCA Millet, P. (1991). Lending and Bo- rrowing in Ancient Athens. Cambrid- Crespo, R. (2006). Las racionali- ge: Cambridge University Press dades de la economía. Cuadernos de Empresa y Humanismo, 96 Moreau, J. (1969). Aristote et la monnaie. Revue des Etudes Grecques, Crespo, R. (2012). Filosofía de la 349-364. Paris: Association pour economía. Pamplona: EUNSA l’Encouragement des Études Grecques

Cruz Prados, A. (1999). Ethos y Murphy, J. B. (1993). The Moral Polis: bases para una reconstrucción Economy of Labor: Aristotelian The- de la Filosofía Política. Pamplona: mes in Economic Theory. New Haven EUNSA and London: Yale University Press

Dembinski, P. (2009). Finance: Plato (1991). The Republic of Pla- Servant or Deceiver? Financializa- to. New York: Basic Books tion at the crossroads. Basingstoke: Palgrave Macmillan Polanyi, K. (1977). The Livelihood of Man. New York: Academic Press Finley, M. (1973). The Ancient Economy. London: Chatto & Windus Roll, E. (1950). A History of Eco- nomic Thought. London: Faber and Gillespie, M. A. (2008). The Theo- Faber Ltd logical Origins of Modernity. Chica- go: Chicago University Press Schumpeter, J. (1954). History of Economic Analysis. New York: Koslowski, P. (1996). Ethics of Oxford University Press Capitalism. Berlin: Springer-Verlag Sison, A. (2003). The moral capital Langholm, O. (1983). Wealth and of leaders: why virtue matters. Nor- Money in the Aristotelian Tradi- thampton: Edward Elgar Publishing tion. Bergen: Universitetsforlaget Williams, B. (1972). Morality: an Mansuy Huerta, D. (2008). Na- introduction to ethics. Cambridge: turaleza y comunidad. Cuadernos de Cambridge University Press Anuario Filosófico, 209

CHANGING FRONTIERS OF ETHICS IN FINANCE 37 WWhen Banks do not Always Know Best

Ethics & Trust in Finance Global edition 2016-2017

First Prize

th Babatunde The highly esteemed 20 century contactless cards by banks and other Valentine British novelist C.S. Lewis once financial institutions. We are told Onabajo remarked that: “a tyranny sincerely that contactless cards “are good for United Kingdom exercised for the good of its victims us” and we need not question our Public Affairs may be the most oppressive” (Lewis, supposed “betters” who know more Executive, 1987). He went on to explain that than we can ever hope to know with London Internet this is because a tyranny that exists regard to our payment preferences. Exchange (LINX)*, for the sake of evil can only be evil Those who want to opt out of using London for so long – “It would be better contactless technology are told to live under robber barons than they have no choice in the matter under omnipotent moral busybodies. (Collinson, 2015). The robber baron’s cruelty may sometimes sleep, his cupidity may at Why is this a problem? some point be satiated”. A tyranny This is problematic as it is exercised by people he referred to as underpinned by what is known in the “moral busybodies”, however, would academic literature as “paternalism”. “torment us without end for they do Paternalism1 is defined as an so with the approval of their own “interference of a state or an individual * The views expressed conscience” (Lewis, 1987). herein are those of In many respects, such sentiments 1 The etymology of the term is also indicative the author and do not describe the situation in the financial of its meaning. It is ultimately derived from necessarily reflect those the Latin word “pater”, meaning “father”, and of the Organization he is technology (fintech) world today is also the root word for other words such as affiliated to. with regard to the mass issuance of “paternal” and “paternity”.

WHEN BANKS DO NOT ALWAYS KNOW BEST 38 with another person, against their 2009). It entails allowing people to will, and defended or motivated by a be technically free to choose, but claim that the person interfered with permitting the government or an will be better off or protected from organisation like a bank to “nudge” harm” (Dworkin, 2017). In its more people in the “right” direction extreme forms, which some authors (Bovens, 2009). This usually Une « tyrannie sincè- distinguish as “hard paternalism”, this involves exploiting certain cognitive rement exercée pour entails using force to alter a person’s biases such as our tendency to be le bien de ses victimes actions (Dworkin, 2017). This can reluctant to give something up once peut être la plus range from punishing children for we already have it (endowment oppressive », a affirmé eating unhealthy food, to holding effect) or our apparent preference C.S. Lewis, parce que back a depressed man who is about to to read from left to right (left to les « bienfaiteurs kill himself by jumping off a bridge. Its right bias). In the case of contactless moralisateurs » « nous tourmenteraient counterpart, that is soft paternalism, cards, the bias that banks and other sans relâche car ils le is distinct from hard paternalism in financial institutions primarily seek feraient en toute bonne that it at least seeks to persuade and to exploit is what is known as the conscience ». communicate the consequences of the “default effect”. That is, individuals, Concernant l’émission action to the person in question but as a number of experimental studies massive de cartes sans does not prevent them from following have shown (Kahneman, 2013), are contact par les banques through with their intended action if biased towards what is known as the et autres institutions they still wish to do so. Thus, it would financières actuelle- “default” option. That is to say, if a ment, on nous dit que allow children to eat unhealthy food certain option is given as the default, les cartes sans contact if they wish to, even after telling them there is an increased likelihood that « sont bonnes pour the health risks, or permit a depressed it will be chosen, even by those who nous » et que nous man to jump off a bridge even after would not have chosen that same n’avons pas à remettre he has heard why that might not be a option in an alternative world. In the en question nos suppo- good idea (Dworkin, 2017). case of contactless cards, the default sés « supérieurs » qui effect is seen because people who connaissent mieux que Libertarian paternalism nous nos préférences would not have chosen contactless de paiement. On dit Thankfully, cases of hard cards as a means of payment à ceux qui ne veulent paternalism are few and far between nevertheless remain with it as they pas utiliser la technolo- in the fintech world today. But don’t – either because of laziness, gie sans contact qu’ils this poses problems of its own as it ignorance or some other factor – n’ont pas le choix. allows other instances of paternalism opt out. Outside of finance, the to go unchecked. The paternalism default option bias has been utilised that describes the mass issuance of to increase organ donor rates, boost contactless cards is referred to in the newsletter subscriptions and combat academic literature as “libertarian obesity. Sometimes referred to as paternalism” (Dworkin, 2017). “nudge policy”, it played an important This was first coined by behavioural role in the policymaking of the British economist Richard Thaler and legal Government during David Cameron’s scholar Cass Sunstein (Bovens, premiership (Bovens, 2009).

CHANGING FRONTIERS OF ETHICS IN FINANCE 39 The relevance of The mentality behind paternalism to ethics contactless technology The issue of paternalism strikes at represents a slippery the heart of applied ethics (Dworkin, slope Ce manque de choix est un problème parce 2017). Most immediately it calls into However, we find today that qu’il est sous-tendu question the ability of people (or banks are acting very much like a par le paternalisme. what ethicists refer to abstractly as government as portrayed in classical Le paternalisme est “moral agents”) to be truly rational. liberal literature, in that they offer une « ingérence d’un The notion of rational moral agents individuals little to no choice in Etat ou d’un individu arises from the argument of the how they pay. Individuals are simply dans la vie d’une autre German philosopher Immanuel personne, contre told they must adopt contactless son gré, et au motif Kant that morality is nothing else technology for their apparent benefit que la personne qui than obedience to the categorical or do without (Collinson, 2015). subit cette ingérence imperative and that we ought to follow Again, it should be stressed that this is se trouvera dans une the course of action that we wish to no small matter: if banks can effectively meilleure situation ou have universally applied everywhere “dictate” that people use contactless sera protégée contre le (Kant, 2008). If people are not truly technology, what stops banks in the mal. ». Dans ses formes rational, if they behave in ways that les plus extrêmes, il future from requiring people to insert can even at times seem contradictory implique le recours à an implant in their body if they wish la force pour modifier or suboptimal, then this raises many to enjoy the services that the bank les actions d’autrui. questions not only about being moral has to offer? Indeed, there is an entire Le paternalisme qui in our day to day lives, but even raises genre in Christian eschatology on this sous-tend l’émission a fundamental question about the very matter2. Furthermore, the issue de masse des cartes discipline of ethics itself. sans contact est décrit of contactless cards was highlighted Yet the issue of contactless cards dans la littérature by the Financial Conduct Authority académique avec la being issued by banks by default also (FCA), the independent financial notion de « paterna- touches upon other issues such as regulatory body in the UK (Salmon, lisme libertaire » et ne the classical liberal belief that people 2017). The FCA insisted that banks comprend pas l’usage ought to be able to enjoy an ability ought to make it easier for customers de la force. En finance, to pay in a variety of ways. The 20th to opt out of contactless technology, cela implique géné- century Austrian political philosopher reflecting the fact that this issue is now ralement d’exploiter and classical liberal Friedrich Hayek certains biais cognitifs one of growing regulatory concern tels que notre réticence argued that an economy should (Salmon, 2017). à abandonner quelque have competing currencies issued 2 Consider the words in Sacred Scripture that chose une fois que by private issuers as opposed to one a number of Christian groups interpret as an nous l’avons déjà en currency mandated by a government omen for the future: “And he causeth all, both notre possession. (Hayek, 1976). Not only does this small and great, rich and poor, free and bond, have the advantage of promoting to receive a mark in their right hand, or in monetary stability, it also ensures that their foreheads: And that no man might buy or sell, save he that had the mark, or the name there is diversity to accommodate of the beast, or the number of his name.” (Re- people’s preferences (Hayek, 1976). velation 13:16-17, King James Version)

WHEN BANKS DO NOT ALWAYS KNOW BEST 40 Does paternalism framework developed by thinkers necessarily lead to the such as Amartya Sen and Martha Nussbaum (Robeyns, 2016). right decisions being made? The capabilities approach argues that development and human Dans le cas des cartes Then there are other issues with flourishing should be seen as an sans contact, le biais contactless cards and paternalism. expansion in human freedoms and que les banques et One of them is whether it is, the ability for people to live a life autres institutions indeed, pointing people in the “they have reason to value”. This financières cherchent right direction. There are some paper argues that if banks and other principalement à psychological studies that show that financial institutions are to really exploiter est connu contactless cards make people spend sous le nom de « l’effet make a positive impact, then they par défaut ». L’effet more (Poulter, 2016). This can be should not judge themselves on par défaut décrit le fait problematic at a household level – whether they have made people’s que les personnes qui households may find it difficult to lives easier in the form of increased n’auraient pas choisi live within their means – and could convenience or reduced costs – les cartes sans contact potentially be problematic at the though these factors, of course, play comme moyens de aggregate level for an economy in a part – but rather, they should judge paiement continuent terms of macroeconomic stability. It themselves on whether they have néanmoins à les utili- was overstretching, after all, that led expanded people’s freedoms. In the ser du fait qu’elles ne décident pas - soit par to the financial crisis of 2007-2008. context of contactless cards, this paresse, ignorance ou When this is considered, then one means the real possibility of being d’autres facteurs – d’en can say that a paternalistic attitude able to opt for a non-contactless sortir. to contactless cards has “unintended card, if one so wishes, and that this consequences”. opportunity should be made as transparent as possible. An overview of this paper What is libertarian La FCA a insisté sur paternalism and how is le fait que les banques This paper argues that a devraient permettre paternalistic attitude by banks when it relevant to contactless aux clients de se retirer it comes to contactless cards is cards? plus facilement de unjustified: the benefits arising from Libertarian paternalism la technologie sans greater adoption of contactless card contact, montrant par advertises itself as distinct from là-même que cette technology, such as the potential for other forms of paternalism in that question est une préoc- increased convenience and reduction it simply changes the way choices cupation réglementaire in queues, pales in comparison to are presented to people, as opposed grandissante. ethical considerations, cybersecurity to eliminating choices, or forcing concerns as well as the potential people to accept particular choices financial implications involved. It (Dworkin, 2017). Underpinning instead argues in favour of what is libertarian paternalism is the notion known in the academic literature that people are bad decision makers as the “capabilities approach”, a (Dworkin, 2017). They can make

CHANGING FRONTIERS OF ETHICS IN FINANCE 41 irrational decisions, or contradictory as getting the “best of both worlds” decisions, or decisions that are – allowing people to be free and to plainly incorrect. However, with have a full range of choices available the help of findings in disciplines to them, but still indirectly managing such as behavioural economics and them to achieve certain social psychology, people can be “nudged” outcomes. into making the correct decision. Indeed, the very term “nudge” is The relationship apt as it overlaps with the notion between libertarian that harks back to Adam Smith of paternalism and an “invisible hand”. This has come contactless technology to frequently feature in libertarian Libertarian paternalism is literature only that, in this context, relevant to contactless cards for two the invisible hand is being used by reasons. The first is that contactless policymakers to achieve certain cards are issued by banks with the Le paternalisme social outcomes. belief that the technology is in their libertaire se présente There is ample evidence in the interest. One major bank insists comme étant différent des autres formes de academic literature that people that customers are automatically paternalisme, dans la can make what might appear to given contactless cards because they mesure où il modifie be “wrong” decisions – everything are quick, convenient and secure simplement la façon from psychological pricing to the (Salmon, 2017). The bank goes so dont les choix sont Allais paradox shows this3. Consider far as to believe that this benefit is présentés aux gens, the following question: Would you large enough to justify phasing out plutôt que d’éliminer prefer being paid £10,000 at the end non-contactless credit cards entirely. les choix des gens ou That means that those customers de les forcer à adop- of every year forever, or £200,000 who wish to use non-contactless ter certains choix. now, both compounded annually at a Cependant, la liberté 5% interest rate? Most people would credit cards are simply unable to do est fondamentale à opt for the first option, but from so (Salmon, 2017). l’éthique. a purely mathematical standpoint The second reason is that there is no difference between the the issuance of contactless cards two and thus a person should actually exploits a cognitive bias, one well be indifferent when presented with documented in the literature: the such a scenario. And in the case of a default option. That is to say, rather person who lives a finite number of than customers having to “upgrade” years (i.e. all of us), it is in fact better to a contactless card, they are given to go for the £200,000 now. one from the outset, and this is the default option. Given that people Libertarian paternalists point are inclined to stay with what they to such lack of rationality as a are given, banks and other financial justification for intervention. institutions can advertise that uptake Libertarian paternalism can be seen of contactless cards has increased 3 See also Kahneman (2013) even though this is actually less to do

WHEN BANKS DO NOT ALWAYS KNOW BEST 42 with people’s innate preferences and rules, freedom is also emphasised more to do with the psychological very strongly – as one sees in the reality that people generally remain writings of many of its thinkers. with the default option. For example, John Callanan notes that much of the reasoning behind Does offering Immanuel Kant’s agnosticism (Kant contactless cards being a deontological ethicist), can intrude on freedom? at least be partially explained by the The 17th century British historical context in which he lived. En outre, la théorie Kant helped form the thinking of the des choix publics nous philosopher John Locke posed a problem: imagine waking up in a Enlightenment period and he sought enseigne qu’à l’instar a system that embraced tolerance at des gouvernements room that you do not know is locked et des politiciens, les but that is, in fact, locked (Rickless, a time when religious persecution banques et autres insti- 2015). To think that one has was still an issue (Immanuel Kant, tutions financières sont freedom in such a situation would 2016). Freedom also features aussi susceptibles de be mistaken: one is certainly free prominently in the writings of some commettre des erreurs. to remain in the room, but has no of Kant’s followers, such as Johann Nous avons relevé que freedom to leave because the room Gottlieb Fichte. Even in utilitarian les cartes sans contact ethics, the branch of ethics that soulèvent une grande is locked. Therefore, it is mistaken to emphasises the maximisation of variété de problèmes describe the man in the room as free, de cyber-sécurité, inasmuch as it is mistaken to describe happiness and is traditionally seen allant du « clonage » a man who is paralysed as “free” as the branch of ethics most divorced de cartes, à la possi- to move his or her limbs (Rickless, from an emphasis on freedom, bilité de dépenser un 2015). Any belief in “freedom” in this certain branches of the paradigm montant illimité dans context is illusory. Locke’s account highly emphasise the importance of une devise étrangère, of the man in the locked room has freedom. en passant par le vol fascinated philosophers ever since. de carte et l’autorisa- Infringing on freedom is tion du détenteur de Freedom is fundamental to no small matter la carte à dépenser de ethics. Without the ability to act l’argent sans avoir à freely, it is disingenuous to speak Given the importance of freedom composer un numéro of ethical behaviour. The concept of in many ethical worldviews, it de code PIN. freedom is fundamental to virtually naturally follows that violating every ethical system. In Christian another person’s freedom is looked ethics, it is taught that free will is a upon extremely unfavourably. gift from God and that furthermore, Herein we encounter the controversy a “Christian life” is the highest surrounding paternalism: to interfere expression of freedom. Hence with someone else, and thereby St. Paul writes: “Where the spirit with their freedom, is considered to of the Lord is, there is freedom” undermine that person’s integrity. (Philippe, 2007). In deontological Therefore, when it comes to having a ethics, the normative branch of paternalistic policy, there needs to be ethics that emphasises adherence to sufficient justification for interfering

CHANGING FRONTIERS OF ETHICS IN FINANCE 43 with the freedom of others, even if it children. This is because only the is, indeed, for their benefit. children most eager for it will seek In the case of contactless cards, and the unhealthy food. By placing the bearing in mind the words of Locke unhealthy food away from eye level, as mentioned previously (Rickless, schools can achieve the objective of 2015), it could be argued that the reducing consumption of unhealthy automatic provision of contactless food among children whilst at the cards, based on a paternalistic same time preserving their freedom mentality, is an infringement of the (or at least so libertarian paternalists freedom of others. This is because, believe). But suppose schools decide much as in Locke’s argument instead to cover unhealthy food (Rickless, 2015), there is only an altogether with a blanket of some kind illusion of freedom. People, if we so that children are not cognisant of what exactly remains under the L’un des principes are to go by experimental studies at fréquemment invoqués least, are inclined to remain with the cloth. This is problematic because it pour expliquer la gran- default option even if they oppose could be said that the unhealthy food deur du libre-marché it. Being presented with two options is still there. It could be said that the est celui de la souve- does not mean that customers are freedom of the children to choose raineté du consom- predisposed to picking either using has been preserved. Yet in covering mateur : l’idée selon all their rational faculties. Cognitive the food the children are ignorant laquelle « le client bias(es) have a part to play. of the unhealthy food actually being à toujours raison ». there and, being ignorant, cannot Cependant, avec les Indeed, this points to a problem actually exercise their freedom to progrès de la tech- that is inherent within libertarian choose unhealthy food. Freedom nologie ainsi qu’une paternalism. Libertarian paternalists means the ability to choose good and meilleure compréhen- argue that libertarian paternalism the ability to choose evil. This points sion de la psychologie is distinct from other forms of to the issue raised by Locke with humaine, de tels prin- paternalism in that it does not cipes sont progressive- regards to the man in the closed room restrict the array of choices available ment remplacés par la (Rickless, 2015). It is difficult to see to people as, for instance, with notion selon laquelle how this is consistent with the claim hard paternalism, but that the array « les entreprises ont that libertarian paternalism preserves toujours raison. ». of choices is simply presented in choice. alternative ways for the good of those in question. But we have to ask Like the cafeteria example, much ourselves: ‘where exactly is the line the same can be said about contactless drawn?’ cards. If people are automatically enrolled onto contactless cards and Take, for instance, the traditional are not informed about the possibility example frequently cited in the of remaining with or reverting to literature of the cafeteria (Bovens, traditional “chip and pin”, then 2009). Schools know that, if they it could be said that the freedom place unhealthy food away from eye of customers has, indeed, been level in a cafeteria, this will reduce infringed. consumption of unhealthy food by

WHEN BANKS DO NOT ALWAYS KNOW BEST 44 What can public choice also prone to irrational decisions and theory teach us about suboptimal choices. the problems with Consider the issue of unintended paternalism? consequences. This concept describes a situation where a policy has Public choice theory is an consequences that are not otherwise important school of thought that intended, almost always negative. came to prominence in the 20th Imagine throwing a ball upwards with century, although its origins can be the intention to catch it as it falls back seen as far back as the 19th century, down, only for a strong gust of wind and perhaps even further back. Public to suddenly blow the ball away from choice theory analyses the decision- you as it falls back into your hands. making processes of politicians and Dans le contexte des Unintended consequences are a cartes sans contact, les governments. One of the crucial result of a complex world with many avantages liés à leur conclusions of public choice theory is variables, the effects of which cannot adoption accrue ne that politicians and the government be predicted from the outset. In the semblent pas suffi- are people too: they are susceptible case of encouraging contactless cards, samment décisifs pour to making bad decisions, engaging whilst some banks have said their use l’emporter sur les in unscrupulous behaviour and should be encouraged because they autres préoccupations so on, and so forth. This stands in are quick, convenient and secure éthiques soulevées par stark contrast to the belief usually (Salmon, 2017), what hasn’t been l’atteinte à la liberté. assumed, but never made explicit, in Nous espérons que noted is the potential downsides that cette contribution policy debates that the government could come with increased adoption sera pertinente pour is objective and unable to make of contactless cards. éclairer les banques suboptimal decisions4. et autres institutions Public choice theory teaches us Disadvantages of financières sur les that, in the same way that governments contactless cards enjeux éthiques qui and politicians are prone to error, découlent de l’inscrip- One such potential downside is tion automatique des so too banks and other financial the inability for people to live within personnes à la techno- institutions can make mistakes. A their means as a result of having a logie sans contact. paternalistic relationship conveys contactless card. Research (Poulter, the mental image of banks and other 2016) suggests that ownership of financial institutions “knowing a contactless card can encourage more” than the “little people” who overspending because it removes the are being nudged in this direction “psychological brake” that occurs and that direction. However, it is when someone has to get money out also completely plausible that banks of a purse and ask themselves: “Do and other financial institutions are I really need this?” The researchers also found that this over-spend effect 4 In the literature, public choice theory gave is particularly pronounced on those birth to the term “government failure”, a good who have low self-esteem (Poulter, counterpoint to frequently used “market failure”. 2016). This again points back to

CHANGING FRONTIERS OF ETHICS IN FINANCE 45 the issue of “manipulation” when those being interfered with are being it comes to exploiting cognitive interfered with for nonmonetary biases, raising ethical concerns about reasons. As one bank said, customers paternalism. Most people would are automatically enrolled onto not tolerate businesses exploiting contactless technology because the mentally disabled to sell their the bank believes that contactless items, and indeed, there have been payments are secure, convenient and a number of scandals in the lending quick (Poulter, 2016). If, indeed, industry already to this effect5; in a banks are issuing contactless cards similar way, it seems unethical to to exploit the cognitive bias of exploit the cognitive biases of others, remaining with the default option some of whom invariably will have then this merely highlights the issue low self-esteem (Poulter, 2016). that public choice theory raised Herein it is perhaps relevant to make with regards to politicians and an allusion to the argument of Kant governments: claims of interfering that such behaviour is unethical as in someone else’s freedom for their we are treating people not as ends apparent benefit are usually based on in themselves but as a mere means self-interest rather than altruism. to an end. As Wilkinson explains: It would not be so bad if banks “Nudging uses the clever tricks of stated plainly that they are issuing modern psychology and economics contactless cards to increase their to manipulate people. We don’t profit margins. However, when it like manipulation when it’s done is said that contactless cards are a to sell us things; we shouldn’t like function of nonmonetary concerns, manipulation when our governments like convenience and security, and do it to us.” In the context of this there is some degree of probability paper, we could change the word that this is not true, we are confronted “governments” to “banks” (Dworkin, with a lack of transparency6 when 2017). it comes to libertarian paternalism. Transparency is a fundamental value Paternalism potentially that many societies in the Western conflicts with honesty Of course, it could be argued 6 Transparency is particularly pertinent here. It that this is all “part of the plan”. might be believed that those doing the nudging Banks issue contactless cards with (in this case the banks) would find it more effective if they did not publicly communi- the knowledge that people are more cate their actual intention. However, Dworkin inclined to spend using one than (2017) notes that findings from psychology using a non-contactless card, which show that there is no significant difference in means they can increase their profits. outcomes between a nudge policy that does communicate its intention and one that does However, this undermines the notion not. Therefore, there is really nothing that of paternalism, which implies that stops a bank from being transparent about why exactly it is issuing contactless cards as a 5 See Poulter (2015) default option.

WHEN BANKS DO NOT ALWAYS KNOW BEST 46 world aspire to and libertarian comes to the issue of contactless paternalism seems to conflict with technology. In fact, this is nothing that (Dworkin, 2017). else than a conflict with the principle of transitivity8, and thus represents Other disadvantages irrational decision-making. This with contactless cards shows that even the decision-makers There are other downsides that can be irrational, just as implied with come with the increased adoption public choice theory and politicians of contactless cards. For example, and governments, and therefore also it has been noted that contactless raises the question of the legitimacy cards are bedevilled by a wide range of their authority in trying to nudge of cyber-security concerns, from people in certain directions. “skimming”, through the ability to A capabilities approach spend an unlimited amount in a foreign currency, to the card being to financial technology stolen and allowing the person with Exchange is vital to human the card to spend money without existence. Adam Smith remarked the need to enter a PIN number. If that humans are distinct from other a person has a very high preference species in that we live by exchange: for cyber-security, a preference “Nobody ever saw a dog make a that completely outweighs that of fair and deliberate exchange of one convenience, it seems unethical for bone for another with another dog. those doing the decision-making to Nobody ever saw one animal by its say that such a “choice architecture”7 gestures and natural cries signify to is wrong and that the customer must another, this is mine, that yours; I am prefer convenience to cyber-security. willing to give this for that”. He went Indeed, we can say here that it is on to add that, “But man has almost the decision-makers who are being irrational as opposed to those who 8 This says that if A is preferred to B and B choose to remain with non-contactless is preferred to C then A must be preferred to cards. This is because the decision- C. Any other arrangement is deemed irrational. The principle of transitivity is violated makers say in many contexts that here because banks and other financial insti- they value cyber-security and regard tutions constantly preach that security should cyber-security as the most pressing be prioritised over convenience. An example concern for banks and other financial of this is found in passwords, with banks advising customers not to choose convenient institutions, but then suddenly passwords like “abcd” or “1234” or one’s bir- discard this preference when it thday. Yet this same insistence of prioritising security over everything else is quickly forgot- 7 Choice architecture is the term commonly ten in favour of convenience when it comes to used in libertarian paternalist literature to des- contactless technology, reflecting a violation of cribe how choices are presented in order to the principle of transitivity and thus providing influence decisions – an example of irrational behaviour on the part eg sweets are removed from a child’s field of of banks and other financial institutions (the view. “choice architects”).

CHANGING FRONTIERS OF ETHICS IN FINANCE 47 constant occasion for the help of his developing country is that the person brethren, and it is in vain for him who is fasting in the developed to expect it from their benevolence country at least has the freedom – only” (Smith & Skinner, 1982). the “capability” – to nourish him or The capabilities approach emerged herself. The same cannot be said for from the ideas of economist Amartya someone in a developing country. Sen and political scientist Martha Nussbaum – primarily as a reaction How do we gauge to mainstream welfare economics progress in fintech? because it was underpinned by In a similar way, it is not an utilitarianism – but also in response example of progress if people are to the political theories of thinkers “forced” to use contactless cards, such as John Rawls, who argued even if statistics show increased that a society should be rationally convenience, reduced queues or arranged such that the least well-off better security. We should analyse benefit from any benefits reaped by the question of whether the growth in society as a whole (Robeyns, 2016). contactless cards is a good thing. First, It is relevant to mention Rawls we should ask whether people have here because Sen lauds his framework naturally chosen to use contactless but argues that it does not go far cards as a means of payment. Second, enough, Rawls’ framework ultimately we should ask whether those who boiled down to an assurance that the choose not to pay with contactless least well-off were guaranteed the cards can pay with other means. provision of material goods, whilst These are not trivial questions. As Sen believes that development should mentioned previously, the ability to be seen as much more. Sen argues, as exchange is fundamental to human does Nussbaum, that development existence. Forcing people to pay in should be seen as an expansion of certain ways has at times in history freedoms and the ability to live a life been accompanied by persecution. that one has reason to value. Furthermore, there are cybersecurity If fintech is to promote human concerns as well as concerns about flourishing, then it needs to put possible unintended consequences. freedom at its heart of self-evaluation. A capabilities approach to the Sen gave the example of a person issue of contactless cards ensures who is fasting. A person who is that people can continue to pay using fasting in a developed country can non-contactless means. It guarantees hardly be said to be malnourished, the freedom to live a life one sees at least when compared with fit to live. Upon closer inspection, people in developing countries. The it is also noteworthy to see how the difference between a person who is Rawlsian criterion is satisfied. Older fasting in a developed country and people, for example, are known to be a person who is malnourished in a reluctant to use contactless cards. By

WHEN BANKS DO NOT ALWAYS KNOW BEST 48 ensuring that there is always a viable Paternalism is relevant to ethics alternative to contactless technology, because it encompasses the issue or by refraining from using cognitive of liberty and freedom: interfering manipulation to surreptitiously with someone else’s choices is a encourage the uptake of contactless very controversial issue indeed and technology, banks and other financial makes those who suggest it liable to institutions can make sure that the accusations of “manipulation” and most vulnerable – such as the elderly “deceit”. It would not be true to say – are adequately catered for. that contactless cards represent the only instance of paternalism by banks Conclusion and other financial institutions. Our liberal society prides itself on However, it does serve as a useful diversity. A free market is a subset microcosm of paternalism in the of that diversity and it is seen as a banking and financial industry and mechanism through which people’s paternalism more generally speaking. preferences can be satisfied. One of The author is not so ambitious as the principles frequently touted as to try to deal with paternalism as an fundamental to the free market is overarching concept and to try to say that of consumer sovereignty: the whether all instances of paternalism idea that “the customer is always are acceptable or deplorable. But right”. However, with the advance in the context of contactless cards, of technology as well as a better the advantages gained from their understanding of human psychology, increased adoption do not seem that principle is gradually being compelling enough to override the replaced with the notion that: other ethical concerns raised by the “Businesses know best”. This has infringement of freedom. It is hoped led to an increased prevalence that this paper proves insightful to of a paternalistic mindset: rather banks and other financial institutions than consumers choosing what is regarding the ethical issues that may placed on the market, businesses arise from automatically enrolling are collectively determining what people into contactless technology. • consumers can get in the market. It is an inverted relationship, and that is also seen with the issue of contactless cards. Was any consultation held with customers and other stakeholders about whether contactless cards were wanted? Was any discussion held as to how to provide for those who choose not to opt for contactless cards?

CHANGING FRONTIERS OF ETHICS IN FINANCE 49 References Bovens, L. (2009). The Ethics and pay cards fuel debt crisis. [online] of Nudge. Retrieved from: https:// The Daily Mail. Retrieved from: philpapers.org/archive/BOVTEO-8. http://www.dailymail.co.uk/news/ pdf article-4023468/Guilt-free-tap-pay- Collinson, P. (2015). Contactless cards-fuel-debt-crisis.html payments: should banks force us to Poulter, S. (2017). Wonga use them? The Guardian. Retrieved relaunches with promises not to from: https://www.theguardian.com/ target vulnerable. [online] The money/2015/jan/17/contactless- Daily Mail. Retrieved from: http:// payments-banks-force-us www.dailymail.co.uk/news/ Dworkin, G. (2017). Paternalism. article-3087089/Wonga-change- Retrieved from: https://plato. heart-Payday-loan-firm-launches- stanford.edu/entries/paternalism/ promises-not-target-vulnerable-cap- charges.html Hayek, F. (1976). Choice in Currency: A way to stop inflation. Rickless, S. (2015). Locke On London: Institute of Economic Freedom. Retrieved from: https:// Affairs. plato.stanford.edu/entries/locke- freedom/ Immanuel Kant, (2016). [TV programme] Philosophical Overdose. Robeyns, I. (2016). The Kahneman, D. (2013). Thinking, Capability Approach. Retrieved from: fast and slow. London: Penguin. https://plato.stanford.edu/entries/ capability-approach/ Kant, I. (2008). Groundwork for the metaphysics of morals. New Salmon, J. (2017). Don’t force Haven & London: Yale University people to use tap and go cards, Press. banks are told by watchdog. [online] The Daily Mail. Retrieved from: Lewis, C. (1987). God in the dock. http://www.dailymail.co.uk/news/ Grand Rapids, Mich.: Eerdmans. article-4362678/Don-t-force-people- Philippe, J. (2007). Interior use-tap-cards-banks-told.html Freedom. New York: Scepter Smith, A. & Skinner, A. Publishers. (1982). The Wealth of Nations. New Poulter, S. (2016). ‘Guilt-free’ tap York: Penguin Classics.

WHEN BANKS DO NOT ALWAYS KNOW BEST 50 51

ehavioural Ethics and the BBNext Generation in Finance

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

First Prize

1 Ross Murdoch As a young professional working What is behavioural United Kingdom in finance, I believe it is important to ethics? Solicitor, try and be a positive force for chan- The Financial ge. We can challenge corruption. We Behavioural ethics is the exami- Conduct Authority*, can do things differently. However, nation of “individual behaviour that London this cannot be achieved unless we are is subject to or judged according to ge- enabled, unless we remain free from nerally accepted moral norms of beha- corruption. How can we become and viour” (Treviño, Weaver & Reynolds, remain ethical decision-makers? Be- 2006, p. 952). It considers how indi- havioural ethics is an innovative field viduals really make decisions when that can help answer that question. faced with ethical dilemmas. This This paper applies those concepts to requires us to do much more than a variety of examples, from LIBOR to consider individuals as rational ac- Madoff to Enron, in order to unders- tors (Tenbrunsel & Messick, 1999); tand the pressures faced by young it involves a close examination of professionals in finance and consider the full range of emotional and so- how we can use this knowledge to cial influences on moral behaviours enable more young people to beco- (Zhong, 2011). * The views expressed herein are those of me ambassadors for ethical decision- As long ago as the 18th century, the author and do not making. Adam Smith (1759/1981) stated that necessarily reflect those there are: “…some situations which of the Organization he is 1 For the purposes of this paper, young pro- affiliated to. fessionals will be defined as those aged 35 or bear so hard upon human nature, that younger. the greatest degree of self-government,

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 52 L’éthique compor- which can belong to so imperfect a 1739/1978, p.415). The third and tementale étudie le creature as man, is not able to stifle, al- final philosophical approach to dis- comportement d’un together, the voice of human weakness, tinguish behavioural ethics from is individu pour savoir or reduce the violence of the passions to deontological ethics, which judges s’il respecte les normes morales généralement that pitch of moderation, in which the whether or not an action is moral ba- admises. Elle examine impartial spectator can entirely enter sed on its adherence to rules (Kant, comment il prend des into them.” (p. 29). 1785/2013). Behavioural ethics, on décisions face aux However, for most of the 20th the other hand, seeks to understand dilemmes éthiques. century theories of economic analysis why individuals really make deci- Pour ce faire, l’éthique were dominated by the premise that sions to behave unethically by taking comportementale fait individuals are rational actors (Mor- plus que considérer les into account the social context of individus comme des gan, 1996), without considering that unethical action, i.e. it is not limited acteurs rationnels, elle individuals really make decisions ba- to considering the existence of moral prend en compte les sed on a multitude of emotional and traits, reason, or rules in order to de- valeurs émotionnelles situational factors. More recently, fi- termine whether behaviour has been et sociales qui influent nancial regulators around the world unethical. sur les comportements have taken a different approach by moraux. embracing behavioural economics Behavioural ethics and to help people make better financial L’économie et la generation in finance decisions. In a similar way, this pa- finance comporte- To understand how to cultivate per argues that behavioural ethics mentales sont utilisées strong ethical standards in the next par les régulateurs du can help people make better ethical monde entier pour decisions. generation of finance professionals it is vital to first understand how we aider les gens à prendre This relatively new field embraces de meilleures décisions might become corrupted. Initiatives some of the best ideas from a broad économiques. La thèse can then be developed to help young range of existing ones, including or- de ce texte consiste à professionals develop into ambassa- ganisational behaviour, behavioural montrer que l’éthique dors for ethical decision-making. comportementale economics, and moral and social peut aider les gens à psychology (Kish-Gephart, Harri- This paper is, accordingly, struc- prendre de meilleures son & Treviño, 2010). However, it tured to answer four key questions: décisions éthiques. Il is also important to distinguish be- (i) Are some individuals inhe- est important de distin- havioural ethics from three well-es- rently more unethical than others? guer l’éthique com- tablished philosophical approaches portementale d’autres (ii) Can the workplace environ- approches philoso- to ethics (Van Dijke, 2014). The first ment influence a person to behave phiques de l’éthique, is Aristotle’s virtue-based approach, unethically? mieux établies et which considers whether or not ac- reconnues, mais aussi tions have been motivated by certain (iii) How do individuals really plus limitées, notam- morally desirable traits. The second decide to make ethical or unethical ment l’éthique des ver- is the belief that the consequences decisions? tus, l’éthique du devoir of an action determine its moral (iv) What will help the next ge- ou l’éthique utilitariste value, “Reason is, and ought only to neration to become ambassadors for des conséquences. be the slave of the passions” (Hume, ethical decision-making?

CHANGING FRONTIERS OF ETHICS IN FINANCE 53 Are some individuals less we are often unsure of what the inherently more role involves on a day-to-day basis Les questions fonda- and it is only by performing the role mentales auxquelles unethical than others? and interacting with our team that ce papier tente de we discover what it really involves répondre sont les sui- Generally speaking, there is no vantes : (i) est-ce que standardised qualification that one (Ashforth, 2001). This leaves us pre- certains individus sont requires to work in finance. The data disposed to find positive qualities in naturellement moins showing what levels of ethical trai- the role and use them to shape our éthiques que d’autres ? ning young recruits in finance recei- identity (Fichman and Levinthal, (ii) l’environnement de ve prior to joining their firms is not 1991). However we remain members travail peut-il induire substantial. Ethics is taught at many of society as a whole. This can lead une personne à agir business schools. However not all to conflict between wider views of de façon contraire right and wrong, on the one hand, à l’éthique ? (iii) graduates will have attended busi- comment les décisions ness school and even if they did the and workplace behaviour, on the éthiques ou contraires curriculums which they studied will other. We deal with this by com- à l’éthique sont-elles vary. Furthermore, and even more partmentalising our work-life from réellement prises? importantly, we do not have a clear our identity in other social contexts. Et finalement (iv) idea of what the ethical baseline of This may explain why even so-called qu’est-ce qui aidera la young recruits is. What ethical va- “good people”, who are upstanding nouvelle génération à lues do they hold? Will that influen- members of the community, can en- devenir des ambassa- gage in corruption (Banfield, 1958). deurs d’une prise de ce what they do in the workplace or Interestingly, studies show that mo- décision éthique ? will they succumb to other pressures? Influences from childhood and ral reasoning is lower when indivi- adolescence are important (Haidt, duals respond to workplace ethical 2001), but it seems unlikely that dilemmas compared to those outside moral intuitions about ethical issues the workplace (Weber, 1990; Weber Nous n’avons pas that occur in complex organizations and Wasieleski, 2001). We are often d’idée claire de ce guided by personal standards of be- qu’est la référence are definitively shaped by experiences gained during early periods of haviour and regulate ethical conduct éthique des jeunes through “anticipatory self-sanctions” qui entrent dans les life (Treviño et al., 2006). As part of that help us avoid unethical beha- métiers de la finance. some recruitment processes ethics viour (Bandura, 1999). Those stan- Quelles étaient leurs will be assessed and new recruits dards may, over time, be shaped and valeurs éthiques avant may receive ethical training. Howe- morally compromised by uncons- de rejoindre le monde ver, again, this is not standardised or du travail ? Vont- cious thought processes generated by generally open to academic analysis. elles influencer leur the environment we find ourselves in comportement après We may partially define oursel- (Gino, Moore & Bazerman, 2008). l’engagement ? Les ves in terms of our role because we données chiffrées sur are attracted to the values and beliefs Bad apples? ces questions ne sont that the role is supposed to repre- Many have framed unethical be- pas substantielles, ce sent. The reputation of finance, the- haviours in finance to be the respon- qui complique leur refore, is important in shaping the sibility of “a few bad apples”. This réponse. Nous pou- attitude of its new recruits. Nonethe- focuses on individualistic traits to

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 54 vons nous définir par explain why people do bad things. notre rôle et être attirés The role of the However many now accept that it is workplace environment par ce qu’il représente. not only “bad people” who do bad Cependant, nous ne things. As Minouche Shafik of the Behavioural ethics recognises sommes pas sûrs de ce that the environment we are placed qu’il implique au quo- Bank of England recently commen- tidien jusqu’à ce que ted, “the initial argument that it is just in can heavily influence whether or nous commencions à the case of ‘a few bad apples’ is no lon- not we behave unethically. When a travailler. Cela nous le ger credible.”2 The reality is that both young person joins the world of fi- comprenons seulement “good” and “bad” people do “good” nance they are highly likely to have en jouant notre rôle, and “bad” things (Bazerman & Ten- joined an already established firm en interagissant avec brunsel, 2011). As explained above, with pre-existing routines and pro- notre équipe. Nous cesses. They are introduced to their sommes prédisposés à behavioural ethics is the study of identifier des qualités unethical behaviour within the wider supervisor, their team and told what positives associées à social prescriptions in which such they will be working on. How does ce rôle et avec cela behaviour occurs. Blaming a few bad this influence ethical behaviour? nous construisons apples is an example of a bias known There are two very important strands notre identité. Cette as fundamental attribution error, whe- of influence, namely routinization dernière peut parfois se re too much emphasis is placed on and socialisation by peers. heurter avec la vision individual characteristics to explain que la société porte sur Routinization le rôle. Pour assumer behaviour and the circumstances in cela, nous trouvons which that behaviour occurred are Many of our working lives con- l’échappatoire dans la largely ignored. The study of this tain an element of routine (some séparation stricte entre bias was the foundation of social more than others). Routine and the vie professionnelle et psychology, a field that preceded division of labour improve produc- privée. behavioural economics and, indeed, tivity, an idea that underpins capita- behavioural ethics. It makes clear lism (Smith, 1776/1976). However, that when we try to sort individuals over time routine can also blunt ethi- into groups of those that are more or cal decision-making. It is often said Beaucoup pensent que less likely to be unethical we make that our most difficult unethical act is les comportements mistakes. A far more accurate predic- the very first one (Ashforth & Anand, contraires à l’éthique tor of whether or not an individual 2003). Take, for example, one of en finance sont le fait is likely to be ethical or unethical the biggest financial scandals of re- de “quelques brebis cent history - LIBOR. This involved galeuses”. C’est un is to examine the context in which exemple d’erreur they make decisions. Accordingly, highly routinized misconduct. Every fondamentale d’attribu- this paper considers first the social day at 11am UK time LIBOR submit- tion car nous mettons contexts in which decision-making ters were required to input at what beaucoup trop l’accent occurs before examining individual rate their bank could borrow funds. sur les caractéristiques decision-making processes. However as a matter of routine many individuelles et igno- submitters inappropriately took into rons les circonstances 2 ‘Making markets fair and effective’, speech account trading positions. Often dans lesquelles le com- given by Minouche Shafik, Deputy Governor, those submitters were relatively ju- portement a lieu. Markets and Banking, at the London School of Economics, on 27 October 2014 nior employees (McConnell, 2013).

CHANGING FRONTIERS OF ETHICS IN FINANCE 55 When they took over as submitter, as indirect losses where the identity of with many other situations (Henisz the victim is unknown. Routinizing & Delios, 2001), they may have as- processes are particularly relevant to sumed that their predecessor’s beha- the young people facing the reality La routine peut éroder l’acuité éthique de la viour was based on rational reasons of what is expected of them in the prise de décision. Le and that following the precedent that workplace and provide a so-called scandale du LIBOR had been laid down would legiti- transition bridge to transform naïve est un exemple d’une mate their own behaviour. As those newcomers into corrupted veterans faute professionnelle unethical practices became part of an (Ashforth, 2001). Young LIBOR sub- hautement routi- institution’s way of doing things and mitters may have been motivated to nière. Chaque jour repeated over and over again they dismiss potentially corrupt practices à 11 heures UK, on as unremarkable and suspend their demandait à un certain become routinized and habitual. Kel- nombre d’employés man (1973) defined routinizing as disbelief by saying, “this is the way de banque désignés “transforming the action into routine, it’s done”. This is an example of ethi- d’indiquer à quel taux mechanical, highly programmed ope- cal fading, where our minds remove leur banque pouvait rations.” (p. 46). If unethical practi- the ethical content of a decision or it emprunter des fonds. ces are embedded they provide mo- fades from view; in this case owing Pris dans la routine, ce mentum and remove the perceived to its repeated, seemingly innocuous, qui étaient chargés de need to make a decision (Ashforth & nature. transmettre l’informa- Kreiner, 2002; Kelman, 1973; Staw, tion ont de façon inap- Peer pressure propriée tenue content 1980). Human nature dictates that de leur propre de mar- we often take the path of least resis- Pressures from peer groups may ché. Nombre d’entre tance. Habitual, familiar and taken- heavily influence unethical beha- eux était des juniors. for-granted practices may be enacted viours. For these purposes the word Ils ont probablement mindlessly and without conscious ‘peer’ is used to denote members of été poussés à ignorer thought (Ashforth & Fried, 1988; que ces pratiques both formal and informal groups. étaient potentielle- Brief, Buttram & Dukerich, 2001). Take the case of Bernard Madoff. ment corruptrices et Furthermore, it is worth noting that Over the course of thirty years, mettre l’ordre de côté LIBOR misconduct took place du- Madoff’s Ponzi scheme defrauded en croyant que c’était ring the financial crisis of 2008 –a investors on an industrial scale: ainsi que les choses se time of extreme stress and workload more than 15,000 individuals claim faisaient. Lorsque des for many finance professionals. We to have been defrauded and almost pratiques contraires à are most ethically compromised $65 billion has been wiped from l’éthique sont ancrés, when our minds are overloaded and elles peuvent créer une client accounts (although deducting dynamique qui occulte falling back on a routine in such a the gains which had been fabricated, le besoin d’une prise de situation may bring cognitive relief. the net loss to clients is estimated décision réfléchie. C’est LIBOR submitters may argue that if to be some $18 billion). Mr Madoff un exemple de la dissi- they played a role in a wider corrupt did not act alone. He was aided by a pation de l’éthique. act they did so without fully appre- large number of feeder funds that in- ciating that counterparties would vested in his products. Some clients suffer loss. It is well known that of those feeder funds were told about individuals often fail to recognise this investment (and attracted to it

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 56 owing to Mr Madoff’s reputation) Socialisation Les pairs peuvent and some were simply told that it être des membres was an exotic investment strategy. The people we work with shape a du groupe formel ou Either way, those intermediaries informel. Par exemple, large part of our working lives. The le schéma de Madoff running the feeder funds were paid process of socialisation can have a à la Ponzi a trompé handsomely for the investment by large influence over how we behave les investisseurs, car their funds, receiving a small per- in the workplace, although we often les fonds qui l’alimen- centage of the sums invested, plus underestimate the extent to which taient comportaient de as much as 20% of any profits made we will be influenced by a peer or fortes incitations. Ces from the investment. Year-on-year supervisor. We are most likely to incitations ont empê- Madoff consistently outperformed feel social pressures from those we ché les gestionnaires de fonds de réaliser que the markets, which meant that year- work most closely with (Ashfor- les bénéfices générés on-year those running the feeder th, 2001; Bazerman & Tenbrunsel, étaient trop importants funds got richer and richer. A num- 2011; O’Reilly & Chatman, 1996). pour être réels. C’est ber of analysts have demonstrated Informal groups may form (not ne- un exemple de ce que that the returns generated by Madoff cessarily within the same teams or l’on peut appeler la were impossible to achieve legitima- departments) that create pockets sensibilité éthique tely. Did the managers of those fee- within the organisation that hold bornée. Les gens n’ont der funds recognise that the returns plus le recul pour voir the same informal values. These ce qui est juste ou faux were too good to be true and that values are “felt” by members and, car ils sont distraits Madoff was running a Ponzi scheme, whilst unofficial, may represent a par d’autres facteurs and were they accordingly motivated firm’s true ethical norms (Bazerman situationnels. to turn a blind eye? Many people be- & Tenbrunsel, 2011). This may be lieve that if they were placed in such how we actually learn how to behave a situation they would behave ethi- in the workplace. It is these values cally, stop investing in the scheme, that may have the greatest sway over and report any wrongdoing that they how members of those, sometimes witnessed. Yet thousands invested loosely formed, groups will behave. and only a few appear to have rai- The people that we work with may Le processus de socia- sed concerns (which were ignored). model corrupt behaviour and, im- lisation avec ceux avec Why? This is an example of boun- portantly, their comfort with it. As qui nous travaillons ded ethicality, where individuals fail newcomers we are often encouraged peut avoir une grande to see the bigger picture of what is to learn from and seek to please tho- influence sur notre right or wrong because they are dis- comportement au lieu se more experienced colleagues or de travail. Nos collè- tracted by other situational factors. supervisors. If we have misgivings gues peuvent personni- Many individuals helped to perpe- about what we are being asked to fier un comportement tuate Madoff’s fraud. The managers do we may attribute this to our own corrompu tout en étant of the different feeder funds may not lack of experience (Lifton, 1961). parfaitement à l’aise have considered themselves to be Furthermore, we may receive posi- avec lui. En tant que peers, but that is what, in effect, they tive reinforcement when performing nouveaux arrivants, became - at least as far as Madoff’s the corrupt behaviours and so are nous pouvons être enterprise was concerned. discouraged from questioning them.

CHANGING FRONTIERS OF ETHICS IN FINANCE 57 encouragés à faire de In the example of the LIBOR submit- form in the future. Once this process même pour plaire à ces ter given above, traders were found has started it can be very difficult to collègues plus expéri- to have praised submitters and made stop: we often accept the rewards mentés. Le processus promises of champagne and free and seek to rationalise our behaviour de corruption peut être coffee. This may cause us to reason graduel, il concerne afterwards (Sherman, 1980). This is de petites actions qui that what we are being asked to do the case even when we become aware paraissent anodines. is routine, more experienced collea- that what we are doing is wrong, the On accepte ainsi les gues have no problems with it and so only alternative to continuing on rationalisations que my own misgivings must be an ove- is perhaps to “blow the whistle” or produit le groupe dans rreaction. This creates a social co- take the big step of leaving our job; lequel nous nous trou- coon in the workplace that we may accepting the associated psycholo- vons. C’est alors que struggle to look beyond (Brief et al., s’initie un processus gical and financial costs that such a 2001). This is a further example of d’alignement de notre course of action would bring (Dar- attitude sur celle des bounded ethicality, where we fail to ley, 1992). This is the point at which see the bigger picture of what is right collègues. Les direc- what may have been inadvertent be- or wrong because we are distracted teurs devraient être comes deliberate. des modèles, bien que by other situational factors. les études ont montré Those who manage young people que leur raisonnement Incremental change have an important job to play in moral est moins acéré acting as role models. However, re- que celui des jeunes This process of corruption may search has found that managers may employés. also be a gradual one where we are have lower moral reasoning scores asked to engage in small acts that than more junior employees (Pone- seem relatively harmless. As explai- mon, 1990, 1992). Similar findings ned above, Madoff’s fraud developed have been observed amongst phar- gradually over the course of thir- macists (Latif, 2000) and also in a ty years. That is why many did not more general management sample recognise the scam and it was only (Elm & Nichols, 1993). The expe- his confession (when losses during the financial crisis became too lar- rienced peer to whom an individual ge to conceal) that caused many indirectly reports will have possibly vestors to wake-up to the evidence the most significant bearing on a ju- that they should have recognised a nior employee’s behaviour, although long time ago. Similarly, we may be the more senior the individual the incrementally corrupted over time more widely felt their actions. From without recognising this until it is the perspective of the junior emplo- too late. What might appear to be yee, it is therefore important that very small acts require us to accept more experienced individuals at all the rationalising ideologies that our levels set a good example and that group provides and this starts a pro- they are held to account when they cess of attitude realignment, which do not. We do not always make the means that incrementally more and ethical decisions that we, or others, more corrupt acts are easier to per- expect us to make.

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 58 Nous ne prenons pas they do something seriously wrong. toujours les décisions Why do individuals make ethical or When misconduct slowly builds it éthiques que nous- may be harder to notice the change mêmes ou les autres, unethical decisions? than if the firm had committed a se- attendent de nous. En 2001, Enron a payé son Take the example of Enron, the rious transgression in the first year. auditeur Arthur Ander- energy firm who tried to conceal This may make the auditor more sen 52 millions USD billions of dollars of debt and even- likely to believe that the firm was au total (25 millions tually went bankrupt. Why did their simply following accepted business USD pour les missions auditors, Arthur Andersen, approve practices. When the time came for d’audit et 27 en frais financial statements that misled the Enron’s auditors to make a decision de conseils) ce qui en markets into believing the company they did not fulfil their professional a fait son deuxième responsibilities. They were accused plus grand client. Les was in a healthy condition? Audi- auditeurs d’Enron tors have a duty, which is enshri- by many of turning a blind eye to avaient donc une ned in law and codes of conduct, to Enron’s misconduct. Enron’s then forte motivation pour report on whether or not financial CEO, Kenneth Lay approved the conserver un client si statements are a fair and accurate firm’s accounts. He has subsequently lucratif et ignorer tous reflection of a company’s financial rationalised his behaviour by bla- les conflits d’intérêts. position. If an auditor is asked to ming the firm’s Chief Financial Offi- Il est possible que audit a company it is likely that an cer, Andrew Fastow. Mr Lay asserts leurs comportements that Mr Fastow misled him about contraires à l’éthique auditor would consider, in advance, se soient développés de that any audit they conduct will be the nature of the off-the-book part- manière incrémentale. above board and ethical. However, nerships that eventually led to the Ainsi, dans l’activité when it actually comes to the audit, bankruptcy of the firm, thus preser- d’audit, il est plausible history has shown that they do not ving his own self-image as an ethical que des pratiques dou- always behave in this way. In 2001, decision-maker. teuses se développent Enron paid its auditing firm, Arthur graduellement. La Self-awareness première année, il n’y Andersen, a total of $52m ($25m in a pas de problème, la auditing fees and $27m in consul- We often consider ourselves to deuxième ils peuvent ting fees), making them their second be more ethical than we actually faire des erreurs largest client. The auditors of Enron are. Research on how individuals techniques, mais rien had a strong motivation to retain make decisions has proposed that de grave, puis dans les this lucrative business and ignore there are two systems governing années qui suivent, ils any conflicts of interest. It is possible our decision-making capabilities: commettent des délits graves. Quand un com- that their unethical behaviour deve- intuition (fast thinking, or System portement délictueux loped incrementally. For example, in 1) and reasoning (slow thinking, or s’installe peu à peu, auditing it is plausible that a firm’s System 2) (Kahneman, 2011; Stano- il est plus difficile à questionable practices might deve- vich & West, 2000). Our intuition déceler que lorsqu’il lop over time – say in the first year makes quick judgments automatica- y a tout de suite, la there are no problems, in the second lly. Reasoning, on the other hand, is première année, trans- year they may have done something deliberate and requires much more gression. technically wrong but nothing se- effort. We find it hard to accurately rious, and then in the following year predict what ethical dilemmas we

CHANGING FRONTIERS OF ETHICS IN FINANCE 59 may be confronted with in the future Tenbrunsel (2011) explain that:“Our but believe that in any case we will memory is selective; specifically, we Les études sur la behave ethically. This is likely to be remember behaviours that support our prise de décision des based on our own sense of moral be- self-image and conveniently forget tho- individus ont conclu se that do not. We rationalize unethi- que deux systèmes liefs and principles formed through gouvernent nos capaci- reason (System 2). At this stage we cal behaviour, change our definition of tés de prise de décision may still recognise that an issue is an ethical behaviour, and, over time, be- : l’intuition (pensée ethical one. However when actually come desensitized to our own unethical rapide ou Système 1) et faced with an ethical dilemma we behaviour.” (p. 73). le raisonnement (pen- may base our decision on intuitive In other words, we can come up sée lente ou Systèmes thought processes (System 1) which with reasons as to why we under- 2). may have removed ethics from the took a certain course of action; our Lorsque nous sommes equation due to unconscious biases. System 2 takes back control and may effectivement confron- The factors of routine and peer pres- either recognise what has happened tés à un dilemme sure, referred to above, can combi- or construct a false explanation of éthique, il se peut que ne to produce an intuitive feeling of our behaviour. nous prenions notre cognitive ease that can lull our more décision sur la base du vigilant, ethical selves into corrupt Ambassadors for ethical processus de pensée acts. In other words, we often slee- decision-making intuitif (Système 1) qui peut exclure de pwalk into ethical failures without Whether or not a young person l’équation la dimension being aware. In the examples of Ma- behaves ethically is invariably bound éthique à cause de biais doff and Enron individuals failed up with the wider organisation they inconscients. to act ethically because they failed are part of. What is its ethical clima- to recognise that they were faced te? Have cultural change initiatives Malheureusement, trop not with a business decision, but an penetrated down to lower levels of souvent, notre Système ethical one. This is particularly im- 2 est paresseux et the organisation? However, beha- nous retombons dans portant to young people, who are vioural ethics initiatives can be de- le Système 1. Après la motivated to try and fit in. In these signed to help young people recog- décision, le Système circumstances, it is important that nise corrupt practices and become 2 peut reprendre le young people recognise ethical is- agents for bottom-up, as opposed to contrôle et donner les sues and then think them through the norm of top-down, change. We raisons pour lesquelles in a deliberate way. System 1 might can draw some important conclu- nous avons choisi sometimes alert us to an issue that sions in this respect from the analy- d’agir d’une certaine does not seem right and System 2 sis set out above. façon. Il peut soit reconnaître honnête- can then evaluate it. That would be Our ethical awareness should ment ce qui s’est passé, the ideal scenario and when the two be assessed when we join the finan- soit échafauder une systems are in disagreement that ce sector for the first time. In order explication fausse du would provide a vital check and ba- to answer the question of whether comportement. lance. Unfortunately, all too often some individuals really are more our System 2 is lazy and we fall back ethical than others it would be use- on System 1. When it comes to eva- ful if this data could be retained and luating our decisions Bazerman and opened up to academic analysis in

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 60 the future. Once our ethical aware- se this with their superiors - parti- Notre conscience ness is assessed, we should then be cular if they consider those persons éthique devrait être given training to provide a baseline to be complicit. In reality, that may éveillée lorsque nous awareness of ethical issues and plug be a career-limiting move. However, entrons dans les mé- any knowledge gaps. tiers de la finance pour it should not be - if anything those la première fois. Nous This training should also help us individuals should be encouraged devrions alors être identify the limits, fallibilities, and to become the leaders of the futu- formés à développer strengths of our decision-making re. Young people, therefore, must un socle de conscience process. In order to do so properly be provided with the opportunity éthique et combler les this training should test us against to seek guidance and advice from lacunes en matière de situations that we might encounter ethical and experienced individuals connaissances. Cette formation devrait nous in our role. If we are able to project who do not form part of their im- préparer aux situations ourselves into a future situation then mediate peer group. A mentoring susceptibles de surgir we can better anticipate and manage scheme for young employees would dans notre fonction. the motivations that are likely to be be one way of championing ethical Si nous pouvons nous the most powerful. Training should behaviour. However such a scheme projeter dans ces situa- also be designed to help debunk the would only be as good as the mentions futures et nous rationalisations that might be proffe- tors that take part. As argued above, préparer à assumer cer- red for unethical requests and provi- informal values imparted from peers taines attitudes, alors nous serons mieux à de a solid basis for ethical decision- have possibly the greatest influence même de contenir les making. It should cover the biases over how individuals behave within motivations quand that impact on an accurate analysis the workplace, e.g. more than stated elles seront très fortes. of our decisions, which means that corporate values or compliance poli- we can truly learn if asked to explo- cies. It is suggested that both young re why we acted in a certain way. people and their mentors should be Regular debriefings with a trusted trained to understand these informal colleague can help this process. It values. This is no easy task. It will might also be useful for us to dis- require the true sources of power cuss potential ethical issues that we within firms (normally those who Les jeunes devraient might face with that colleague and make the most money, but not ex- avoir la possibilité commit to a course of action in ad- clusively) to drill down and identify d’être guidés et conseil- vance (using System 2 thinking). these values. Doing so requires an lés par des personnes This might improve the likelihood open and honest discussion about fiables éthiquement of us thinking through and making what really motivates individual de- et expérimentées qui the right decision if and when such a ne font pas partie du cision-making. Through what rou- situation occurs. groupe proche de leurs tes are individuals seen to progress pairs. Un schéma de within an organisation’s hierarchy? mise en place de men- Managing What makes them forget ethical va- tors pour les jeunes unconscious biases lues, e.g. routine? What pressures do employés permettrait Even if one recognises that a they feel and why, e.g. peer pressure? de mettre le com- practice is unethical, it is incredibly What decisions does the firm incen- portement éthique à difficult for a junior employee to rai- tivise? As noted above, this requires

CHANGING FRONTIERS OF ETHICS IN FINANCE 61 l’honneur. Les jeunes the identification of pockets of power to apply principles to the situation, et leurs mentors that are not necessarily reflected on rather than allowing situational fac- devraient être formés an organisation chart. Identification tors to either blind us to the ethical pour comprendre que of these forces that silence our ethi- content of an issue or determine ce sont les valeurs decision-making via the path of least informelles de leur cal voice is the first step in making entreprise qui sont sure that we are able to make ethical resistance. It is accepted that, in rea- réellement à la base de decisions when the time comes. lity, young people will face pressures la prise de décision. from superiors to act in certain ways. Thinking through However every generation repre- ethical issues sents an opportunity for change, the current generation of young people It sounds obvious but when faced working in finance arguably more with ethical dilemmas it is important than most. Many young professio- that young people think through nals are likely to have been introdu- what to do in a deliberate and consi- ced to the finance industry around dered way. It would be nice to think On devrait apprendre the time of the financial crisis of that behaving ethically is something aux jeunes à identifier 2008, a crisis that may have shaped les questions poten- that is always recognised and comes the careers of many thus far and im- tiellement éthiques, intuitively, perhaps one day as a re- pacted on our ethical sensitivity. It pour pouvoir ensuite sult of cultural change and training. was a crisis that brought with it mass réfléchir à une façon However, witnessing the impact that redundancies, particularly in respect d’agir responsable et de recent ethical failures had on socie- of young people working in finance. manière approfondie et ty it is clear that such issues are far As the economy emerges from that complète. Ce processus too important to leave to fast thin- devrait se dérouler en crisis it is important to ensure that dehors de tout biais. king. We should be taught to iden- young people learn the right lessons Nous ne devrions tify ethical issues and consider what and recognise how to manage un- pas être contraints au to do in a deliberate and conscious conscious biases. Ethical failures can compromis dans notre way. Free from bias. Free from the have a severe impact on the rest of chemin de carrière influence of unethical peers. This society. We should not have to com- du jeune employé au paper advocates that when confron- promise our ideals or stop listening professionnel financier ted with ethical issues we should be to our conscience simply to make expérimenté trained to use reasoned and delibera- the journey from young to experien- te thinking. Thinking through how ced finance professionals. •

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 62 References Ashforth, B. E., & Fried, Y. Case. Retrieved from http://g24.org/ (1988). The mindlessness of organi- wp-content/uploads/2014/03/Corn- zational behaviors. Human Relations, ford-1.pdf 41, 305-329 Darley, J. M. (1992). Social orga- Ashforth, B. E. (2001). Role tran- nization for the production of evil. sitions in organizational life: an iden- Psychological Inquiry, 3,199-218 tity based perspective. Mahwah, NJ: Erlbaum Elm, D., & Nichols, M. L. (1993). An investigation of the moral reaso- Ashforth, B. E., & Kreiner, G. E. ning of managers. Journal of Business (2002). Normalizing emotion in or- Ethics, 12, 817-833 ganizations: Making the extraordinary seem ordinary. Human Resource Fichman, M., & Levinthal, D. A. Management Review, 12, 215-235 (1991). Honeymoons and the liability of adolescence: A new perspective Ashforth, B., & Anand, V. (2003). on duration dependence in social and The Normalization of Corruption in organizational relationships. Academy Organisations. Research in Organiza- of Management Review, 16, 442-468 tional Behavior, 25, 1–52 Gino, F., Moore, D.A. and Bazer- Banfield, E. C. (1958). The moral man, M.H. (2008). See No Evil: When basis of a backward society. New York, We Overlook Other People‘s Unethi- NY: Free Press cal Behavior. Retrieved from http:// hbswk.hbs.edu/item/5839.html Bandura, A. (1999). Moral disengagement in the perpetration of Haidt, J. (2001). The emotional inhumanities. Personality and Social dog and its rational tail: A social in- Psychology Review, 3, 193-209 tuitionist approach to moral judgment. Psychological Review, 108(4), Bazerman, M., & Tenbrunsel, A. 814-834 (2011). Blindspots: Why we fail to do what’s right and what to do about it. Henisz, W. J., & Delios, A. (2001). Princeton, NJ: Princeton University Uncertainty, imitation, and plant lo- Press cation: Japanese multinational corporations, 1990-1996. Administrative Brief, A. P., Buttram, R. T., & Science Quarterly, 46, 443-475 Dukerich, J. M. (2001). Collective corruption in the corporate world: Hume, D., (1978). A Treatise of Toward a process model In: M. E. Human Nature, (2nd ed.), Selby- Turner (Ed.), Groups at Work: Theory Bigge, L.A. and Niditch, P.H. (eds.), and Research (pp. 471-499). Mahwah, Oxford: Clarendon (Original work NJ: Erlbaum published in 1739) Cornford, A. (June 2004). Inter- Kahneman, D. (2011). Thinking, nationally Agreed Principles For Cor- fast and slow. New York, NY: Farrar, porate Governance And The Enron Straus and Giroux

CHANGING FRONTIERS OF ETHICS IN FINANCE 63 Kant, I., (2013). The Groundwork Ponemon, L. (1990). Ethical jud- for the Metaphysics of Morals, (2nd gments in accounting: A cognitive- ed.), Gregor, M. & Timmermann, J. developmental perspective. Critical (trans.), Cambridge: Cambridge Uni- Perspectives on Accounting, 1, 191-215 versity Press (Original work published in 1785) Ponemon, L. (1992). Ethical reasoning and selection-socialization Kelman, H. C. (1973). Violence in accounting. Accounting, Organiza- without moral restraint: Reflections tions, and Society, 17(3/4)239-258 on the dehumanization of victims and victimizers. Journal of Social Issues, Shafik, M. (2014), Speech titled 29(4), 25-61 ‘Making markets fair and effective’. Retrieved from http://www.banko- Kish-Gephart, J.J., Harrison, D. fengland.co.uk/publications/Docu- A., & Treviño, L. K. (2010). Bad ments/speeches/2014/speech771.pdf Apples, Bad Cases, and Bad Barrels: Meta-Analytic Evidence About Sour- Sherman, L. W. (1980). Three ces of Unethical Decisions at Work. models of organizational corruption Journal of Applied Psychology, 95(1), in agencies of social control. Social 1-31 Problems, 27, 478-491 Latif, D. A. (2000). Ethical cog- Smith, A., (1981), The Theory of nition and selection-socialization in Moral Sentiments, Raphael, D.D. & retail pharmacy. Journal of Business Macfie, A.L. (eds.), Oxford: Oxford Ethics, 25,343-357 University Press (Original work published in 1759) Lifton, J. (1961). Thought Reform Smith, A., (1976), An Inquiry into and the Psychology of Totalism: A Stu- the Nature and Causes of the Wealth dy of “Brainwashing” in China. New of Nations, Campbell, R.H., Skinner, York, NY: Norton A.S., & Todd, W.B. (eds.), Oxford: McConnell, P. (2013). Systemic Oxford University Press (Original operational risk: the LIBOR manipu- work published in 1776) lation scandal. Journal of Operational Stanovich, K. E., & West, R. F. Risk, 8(3), 59-99 (2000). Individual differences in rea- Morgan, M. (1996). The Cha- soning: Implications for the rationa- racter of “Rational Economic Man”. lity debate. Behavioral & Brain Scien- Retrieved from http://eprints.lse. ces, 23, 645-665 ac.uk/22412/1/34_96.pdf Staw, B. (1980). The consequences of turnover. Journal of Occupatio- O’Reilly, C. A., & Chatman, J. nal Behaviour. 1(4), 253–273 A. (1996). Culture as social control: Corporations, cults, and commitment Tenbrunsel, A. E., & Messick, D. In: Staw, B.M. & Cummings, L.L. M. (1999). Sanctioning systems, deci- (eds.), Research in Organizational Be- sion frames, and cooperation. Admi- havior (pp. 157-200). Greenwich, CT: nistrative Science Quarterly, 44, 684- JAI Press 707

BEHAVIOURAL ETHICS AND THE NEXT GENERATION IN FINANCE 64 Trevino, L. K., Weaver, G. R., Weber, J., & Wasieleski, D. & Reynolds, S., (2006). Behavioral (2001). Investigating influences on ethics in organizations: A review. managers’ moral reasoning. The im- Journal of Management, 32(6),951- pact of context, personal, and organi- 990 zational factors. Business and Society, 40(1): 79-111 Van Dijke, M.H. (2014). Unders- tanding immoral conduct in business Zhong, C.B. (2011). The ethical settings. A behavioural ethics approach. dangers of deliberative decision ma- Rotterdam: Erasmus Research Insti- king. Administrative Science Quar- tute of Management terly, 56, 1–25 Weber, J. (1990). Managers’ moral reasoning: Assessing their responses to three moral dilemmas. Human Re- lations, 43: 687-702

CHANGING FRONTIERS OF ETHICS IN FINANCE 65 EEthics at the New Frontiers of Finance

Ethics & Trust in Finance Global edition 2016-2017

Finalist

Martin Foo “Ethics change with technology.” should insurers be exempted from Autralia – Larry Niven, American science the most basic precepts of anti- Associate, Sovereign fiction writer discrimination policy? And, as & International private firms collect more and more In 2011, the Court of Justice of Public Finance data about our driving histories, the European Union (EU) ruled Ratings, S&P Global*, medical records, and personal lives, Melbourne that European insurers must, after a short transitional period, no longer what other protections might be use a person’s gender as a factor in needed to ensure equitable access to calculating insurance premiums insurance coverage? (Court of Justice of the European Deep beneath the North Atlantic Union, 2011). The ruling was Ocean lies the Hibernia Express, a roundly criticised for being likely 4,600km transatlantic cable system to raise the cost of insurance for that connects Europe with North female drivers and incentivise riskier America. Completed in 2015 at a driving behaviour (HM Treasury, cost of US$300 million, the system 2011), and even for trivialising the lowers the latency of communication very concept of human rights (Booth, between traders in London and New 2011). Equality between men and York by 2.6 milliseconds (Buchanan, * The views expressed women is a bedrock principle of 2015). The Hibernia Express is herein are those of just the latest addition to a global the author and do not the EU. Indeed, Articles 21 and 23 necessarily reflect those of the EU’s Charter of Fundamental superstructure of privately-owned of the Organization he is Rights require gender equality to fibre-optic cables, microwave and affiliated to. be ensured in all areas. Why, then, millimetre-wave relays, and laser-

ETHICS AT THE NEW FRONTIERS OF FINANCE 66 based networks that connect the partially fill the gap by investigating world’s most important financial some of the emerging ethical issues exchanges. Market participants in insurance and fintech. worldwide spent some US$1.5 The second weakness is that billion in 2013 on technology to past essays (e.g. Murdoch, 2015) increase trading speeds (Patterson, have tended to focus on high-profile Les assureurs ont 2014). But researchers remain deeply instances of wrongdoing, like Bernard pendant longtemps pu divided on the societal benefits Madoff’s infamous Ponzi scheme, utiliser le sexe comme of this technological arms race: that were clearly illegal. Insofar as clé pour calculer les while high-speed trading improves a nation’s laws broadly express the primes d’assurance liquidity, the speed advantage combined ethics of its citizens, it is différentiées. La Cour enjoyed by professional traders may de Justice de l’Union not hard for a dispassionate external Européenne a mainte- have irrevocably rigged the market observer to clearly recognise these nant déclaré que c’était against pension funds and ‘mum- actions as being unethical. More illégal. Au niveau and-dad’ investors. interesting, from my point of view, global, les opérateurs These two examples illustrate are examples of financial practices or de marché dépensent some of the many pressing ethical innovations that are legal but whose des milliards de dollars dilemmas that will confront the ethicality is presently ambiguous. en technologies pour gagner des avantages finance professionals of tomorrow. The third weakness is that minuscules en vitesse Past submissions to the Robin past essays (e.g. Godbold, 2015) sur leurs concurrents. Cosgrove Prize have explored how the propose illusorily simple heuristics, finance industry could be rendered like “putting the customer first”. more ethical through avenues like These may be suitable for decision- Quel est le bénéfice better instruction in behavioural makers working in customer-facing sociétal de cette « ethics and design thinking. While retail financial services, but provide course aux armements these ideas are meritorious, I argue little guidance for professionals in » technologique, et est-ce que cela rend le that they have three principal other segments of the industry. In marché injuste pour les weaknesses. addition, as I write in this essay, autres investisseurs ? putting the customer first does not Ces deux exemples Building on the always lead to desirable outcomes illustrent quelques- literature when viewed through the broader uns des nombreux The first is that past essays have prism of distributive justice. dilemmes éthiques been overwhelmingly concerned urgents auxquels The motivation for this essay seront confrontés les with the business of banking and comes from my time as an analyst professionnels de la securities trading. But finance is focusing on financial regulation at finance de demain. a diverse profession: millions of the Australian Treasury, and then as people work in asset management, a researcher at a leading think-tank. insurance, broking, venture capital, I quickly came to see how decisions financial technology (‘fintech’), and made by industry executives, other fields. Ethical impasses in regulators, and government these fields are often overlooked in ministers are rarely value-neutral. the literature. This essay attempts to When the Australian state of

CHANGING FRONTIERS OF ETHICS IN FINANCE 67 Queensland was hit by a series of penultimate section draws out some massive flooding events over the useful lessons for young finance summer of 2010-11, it was revealed professionals. The final section that a great many households were concludes the article. Les textes retenus par unknowingly uninsured because of les éditions précé- Insurance and dentes de ce prix, ont their opaque insurance contracts. trois principales fai- ‘Greedy’ insurance companies were discrimination blesses. Premièrement, quickly portrayed as the villains Insurance is vital to the smooth ils portent en grande (Lutton, 2011). Insurers fired back, functioning of modern economies. majorité sur le secteur arguing that poor government By mitigating the effects of bancaire et le com- policy had rendered large areas exogenous events over which we merce de titres, laissant of Queensland uninsurable. As a de côté d’autres seg- have no control – illnesses, accidents, ments d’une industrie public policy analyst, I was required natural disasters – insurance allows financière diversifiée. to reflect on the many competing people and businesses to recover Deuxièmement, ils claims to ‘fairness’ that this disaster from sudden misfortune. This risk ont tendance à se provoked: whether it is reasonable to mitigation is often a precondition for concentrer sur des ask an insurer to pay a claim where it other productive activities, such as actes qui sont illégaux. has no contractual obligation, at the buying a home or starting a business Il est plus intéres- expense of its shareholders; whether (Geneva Association, 2012). In sant d’examiner les it is equitable for the government pratiques financières addition, the price of insurance often ou les innovations to provide aid to disaster- serves as an important signaling qui sont légales, mais affected families, but not to those mechanism that can incentivise éthiquement ambi- suffering from non-disaster related ex ante risk-management behaviour. guës. Troisièmement, misfortunes; whether disclosure is Insurance companies are in the certains auteurs ont a sound basis on which to build a business of discrimination. Insurers conclu que les entre- framework of consumer financial aim to charge different premiums to prises pouvaient être protection. éthiques « en mettant different groups of people based on le client à la première This essay is about ethics in a observable variations in their risk place » – mais ceci world where the financial industry profiles. There are limits, however, est en conflit avec la is being buffeted by the great winds to the types of discrimination réalité. De plus, le fait of technological change. The next that society considers tolerable. de mettre le client à la section of this paper looks at the In the United States (US), for première place n’abou- insurance sector, and examines the example, federal legislation forbids tit pas toujours à des résultats satisfaisants ethics of discriminating between health insurance companies from lorsque l’entreprise a different consumers based on considering gender or ‘pre-existing de nombreuses parties their observed or unobserved risk conditions’ in the underwriting prenantes en concur- profiles. The following section process. However, fewer than half rence. investigates the costs and benefits of of the American states ban the use financial innovation, with a specific of racial factors in life, health, and focus on the growing uptake of disability insurance. Only 15 states cryptocurrencies and algorithmic ban the use of sexual orientation in decision-making systems. The underwriting health insurance, and

ETHICS AT THE NEW FRONTIERS OF FINANCE 68 only nine ban the use of gender in regular smokers are more likely to motor vehicle insurance (Avraham, die at a younger age, lifetime health Logue & Schwarcz, 2014). expenditure is actually greater for healthy people than it is for smokers L’industrie d’assurance Clearly, there is no consensus (van Baal et al., 2008). In addition, a fait de la segmenta- on which forms of discrimination tion / discrimination should be permissible. At first glance, charging smokers higher premiums son métier de base. the correct moral position might be might cause them to forego health Les assureurs visent to suggest that discrimination on the insurance altogether, thereby à facturer des primes basis of immutable factors outside of preventing them from accessing différentes selon le one’s control – gender, race, sexual insurer-funded smoking-cessation groupe de personnes orientation, and so on – ought to programs (Resnik, 2013). The costs en se basant sur des be outlawed. But this in itself raises and benefits of penalising unhealthy différences observables behaviour are more complex than de leurs profils de at least two new ethical questions. they seem. risque. Il y a toutefois First, is it then fair to charge people des limites aux types higher premiums for factors that When responding to the second de discrimination que are within their control? Second, question, it is tempting to conclude la société considère is it fair to charge an individual a that the only equitable approach comme acceptables. higher premium simply because the is to set premiums commensurate Les différents pays, ont particular demographic group to with a policyholder’s individual risk des niveaux de tolé- which they belong presents a greater characteristics, rather than proxy rance variables pour la risk on average? factors like their age, ethnicity, or discrimination basée other demographic grouping. But sur le sexe, la race, When is price l’orientation sexuelle, here, too, society faces troubling etc. Clairement, il discrimination fair quandaries. ‘Telematics’ – the fitting n’existe aucun consen- and equitable? of devices to motor vehicles in order sus sur quelles formes I argue that the first question to track real-time driving behaviour – de discrimination sont has no clear answer. Take smoking, is revolutionising the auto insurance justes. for example. A majority (59%) industry. Usage-based insurance of Americans say that insurers might allow safe drivers who would would be justified in setting higher otherwise be considered high-risk health insurance rates for smokers based on their demographic profile Une majorité de gens (Gallup, 2017). After all, smoking- (e.g. men under the age of 25) to pense que les fumeurs related illnesses cost the economy prove to insurers that they should devraient payer plus hundreds of billions of dollars a not be punished for the sins of others. pour l’assurance-ma- year in healthcare expenditure and Similarly, the ‘Internet of Things’ may ladie. Cependant les lost productivity. The theory goes one day provide property insurers coûts et bénéfices d’un that charging smokers more would with information about our homes tel changement de po- and offices, and wearable sensors litique sont incertains. encourage them to quit, improving could transmit real-time biometric Le fait de facturer aux their health and lightening the fumeurs des tarifs plus burden on the public healthcare data to health insurers, so that élevés peut les pousser system. Counterintuitively, however, insurers rely less on self-reported à renoncer complè- some studies show that because medical information. However, such

CHANGING FRONTIERS OF ETHICS IN FINANCE 69 tement à l’assurance- devices are necessarily intrusive those at high risk. In the UK, this maladie. De nouvelles and raise a host of issues around cross-subsidy, valued at £180 million avancées dans la « télé- data privacy and security (Schumer, per year, is now unwinding (Cullen, matique » et l’idée des 2014). 2015). Greater granularity of data primes basées sur le is resulting in a greater dispersion comportement effectif, Insurance data and of premiums, creating winners and pourraient permettre public policy aux assureurs de diffé- losers. The key issue, of course, is rencier plus facilement How much data is too much? This whether it is equitable for those les individus sur la question has been given renewed who live in flood-prone areas to be base de leurs carac- impetus by technological advances subsidised by other policyholders (or téristiques de risques in areas like genetic testing. There by the taxpayer where government réels, plutôt que 1 have already been cases of individuals insurance schemes exist) . While d’après leurs seuls pro- some householders might be able fils démographiques. Il being denied life, disability, or travel to mitigate risks by erecting flood reste encore à savoir, insurance due to their genetic test cependant, si de telles results. Anxiety about potential defenses or relocating, others simply technologies valent le discrimination by insurers deters may not have the financial means, prix de l’intrusion dans people at high risk of cancer from or may have purchased a property la vie privée. taking up genetic testing, with without full knowledge of its flood potentially damaging consequences risk. The trade-off between economic for their health (Keogh et al., 2009). efficiency and social justice is a The industry’s response has varied vexing one. from country to country. In the Developed nations have instituted United Kingdom (UK), insurers a wide variety of models for the Les données peuvent have voluntarily committed to allow regulation of insurance. These range être une épée à double customers not to disclose adverse from completely deregulated systems tranchant. genetic test results. The US, Sweden, to those exhibiting partial or full Les tests génétiques Germany, France, and Canada have solidarity (i.e. the prohibition of peuvent aider les all enacted laws prohibiting genetic using certain types of information individus à com- discrimination. in underwriting) or mutuality prendre leurs risques (Liddell, 2002). Until recently, the médicaux, mais les In a similar way, advances in flood assureurs peuvent uti- modelling and satellite technology are flood insurance regime in the UK liser les résultats pour a double-edged sword. They threaten was largely market-based, while in identifier les gens avec to simultaneously make property France the principle of solidarity for des gènes à risque. insurance markets ‘fairer’ and to natural disasters is written into the Certains pays ont render large swathes of flood-prone French constitution itself (O’Neill choisi de promulguer areas uninsurable (or prohibitively & O’Neill, 2012). When it comes des lois pour empê- expensive to insure). In the past, to health insurance, some countries cher la discrimination génétique. knowledge of flood risk was relatively De même, la tari- unsophisticated, and the consequence 1 In the US, the benefits of the National Flood fication du risque was that insurers applied a degree Insurance Program (NFIP) appear to accrue d’inondation a été peu of collectivisation – where those at largely to wealthy households concentrated sophistiquée, mais pro- low risk informally cross-subsidised in a few highly-exposed states (Holladay & Schwartz, 2010).

ETHICS AT THE NEW FRONTIERS OF FINANCE 70 gresse avec la modéli- arbitrarily treat genetic information Tanzania, Afghanistan, and India. sation des inondations as different to more observable forms In developed nations, peer-to- et la technologie of medical information, such as a peer (P2P) lenders and insurers satellite aide mainte- person’s cholesterol level, so that are disintermediating traditional nant les assureurs à underwriters can consider one type markets. Cryptocurrencies – new mieux évaluer le coût du risque. Ces données of data but not the other. Even within forms of digital currency based on plus détaillées abou- countries, there are often significant ‘distributed ledger’ (blockchain) tissent inévitablement variations in laws between regions. technology – promise to do away with à une dispersion plus The World Economic Forum (2015) high-cost incumbents altogether. But grande des primes, et has noted that the greatest impact of many of these innovations are taking crée des gagnants et technological disruption in finance hold so rapidly that there has been des perdants. Certains is likely to be felt in the insurance little public scrutiny of their effects pays autorisent le mar- sector. The ethics of insurance are on society. ché à évaluer le risque unlikely to be settled soon. d’inondation. D’autres Take cryptocurrencies, for préfèrent un modèle de The frontiers of example. By facilitating the safe solidarité ou de mutua- financial technology transfer of value or ownership lité pour les désastres between parties without the need for naturels. Financial innovation has been middlemen or trusted intermediaries integral to the development of (i.e. banks, credit card companies, modern life. During the Song Dynasty payment companies etc.), they in China, the invention of paper solve an important societal problem money provided a way to efficiently (Blundell-Wignall, 2014). Distributed transport value across great distances. ledgers are resistant to tampering and Beaucoup d’inno- The growth of finance in Europe in inherently difficult to hack. There is vations financières the late 1600s was essential for the typically no central authority charged se développent si Industrial Revolution. Government with creating units of cryptocurrency rapidement qu’il y a eu bond markets have helped to finance or verifying transactions. Because peu de débat public sur wars from medieval Europe, to the cryptocurrency transactions are leurs effets sociétaux. American Revolution and beyond cheaper and quicker than traditional Par exemple, les cryp- (Goetzmann & Rouwenhorst, 2007). payment methods, they could help to-monnaies résolvent un important problème Today, financial services remain to lower costs for small businesses en facilitant un trans- surprisingly expensive – in fact, the and alleviate poverty by facilitating fert sûr de valeur ou de unit cost of financial intermediation instantaneous, inexpensive propriété entre les par- in the US has not fallen for the past remittances or micropayments (Brito ties sans avoir besoin 130 years. This helps to explain & Castillo, 2013). Researchers are d’intermédiaires. Elles the emergence of new entrants now investigating the use of the pourraient baisser les (Philippon, 2016). Large and underlying blockchain technology coûts pour de petites for managing healthcare records, entreprises et les unwieldy financial institutions are land title registries, supply chains, aid transferts de fonds. primed for modernisation. Mobile- Cependant, comme les money systems like M-Pesa have delivery, and even electronic voting. utilisateurs ne sont pas brought financial inclusion to the A crucial feature of soumis à une vérifi- ‘bottom of the pyramid’ in Kenya, cryptocurrencies like Bitcoin is their

CHANGING FRONTIERS OF ETHICS IN FINANCE 71 cation d’identité, les provision of pseudonymity: while The blockchain’s distributed trust crypto-monnaies ont transactions are visible, the ‘public structure is what facilitates smart été associées au crime keys’ associated with transactions contracts between unknown and et au terrorisme. Les are not tied to real-world identities. untrusted counterparties. crypto-monnaies de nouvelle génération No personal information is required Algorithms in finance to create an account on the Bitcoin permettent de faire des More broadly, consider the « contrats intelligents platform. Bitcoins have consequently employment of algorithms in » directement exécu- been used to purchase illicit goods finance. There is good evidence tables. Ceux-ci peuvent online, most notoriously through the that algorithmic trading – the use faciliter une gamme ‘Silk Road’ electronic black market. of computers to automate certain plus large de crimes Supporters of Islamic State of Iraq comme le kidnapping trading decisions – improves and Syria (ISIS) and other terrorist ou l’assassinat. market liquidity and efficient price organisations are actively promoting discovery (Hendershott, Jones & the use of Bitcoin to mitigate the Menkveld, 2011). Recent years risks associated with traditional have seen the emergence of a new funds transfer methods (Irwin & form of algorithmic trading: high- Milad, 2016). Next-generation frequency trading. The US Securities Tout indique que le cryptocurrencies like Ethereum commerce algorith- and Exchange Commission (2010) mique améliore la offer even richer functionality. notes that the speed of financial liquidité du marché et They support ‘smart contracts’, self- markets trading has increased to 2 la recherche du prix enforcing computerised contracts the point that the fastest traders efficient. that could enable a wider range now measure their latencies in Cependant, les of new crimes, like kidnapping microseconds. Computers are ordinateurs peuvent or assassination. A person with able to process vast amounts traiter des quantités malicious intent could theoretically énormes d’informa- of information at superhuman tions à grande vitesse, set up a smart contract to pay for a speed, potentially putting ordinary désavantageant ainsi criminal act to be committed and investors at a disadvantage. In potentiellement les walk away, allowing the contract addition, high-frequency trading investisseurs ordi- to self-execute once it determines firms go to great lengths to be faster naires. De plus, les that the crime has been carried than their competitors – by co- sociétés de trading à out (Juels, Kosba & Shi, 2016). locating their computer servers with haute fréquence sont those of exchanges, buying access connues pour payer 2 The critical distinction between smart des infrastructures contracts and other forms of electronic agree- to expensive telecommunications chères ou un accès ment is enforcement. The computers in the infrastructure (like the subsea prioritaire aux données blockchain network ensure performance of cables mentioned in this paper’s the contract, rather than any government afin d’élargir leur avan- introduction), and even paying for authority. Sometimes a smart contract may tage informationnel sur need to refer to facts in the world – such as early receipt of market-moving data d’autres investisseurs. when a contract pays out if a stock exceeds (Mullins et al., 2013) – seemingly a certain price on a certain date. In this case, doing away with any pretense of the ability to read an external data feed and a level playing field. The social verify contractual performance must be coded into the smart contract from the outset. See: welfare benefits of this high-priced Werbach & Cornell, 2017. technological arms race are dubious.

ETHICS AT THE NEW FRONTIERS OF FINANCE 72 Can algorithms make executive jobs to women than to human decision- men (Walport, 2017). Similarly, making fairer? underwriting algorithms that factor in where a potential borrower attended When an algorithm gets things college may tend to exacerbate wrong, who is responsible? Credit- socioeconomic stratification, and Les algorithmes de scoring algorithms are already used those that use measures of residential notation en matière by lenders to determine which stability to predict creditworthiness de crédit sont déjà customers should receive a credit may unfairly discriminate against utilisés par les prêteurs card or mortgage. In many cases, members of the military (Crosman, pour déterminer quels these systems can help to correct 2017). clients devraient inevitable biases in human decision- recevoir une carte de In insurance underwriting, some making. Most of today’s automated crédit ou une hypo- types of data may correlate with or credit decisions rely on ‘traditional’ thèque. Souvent, le act as a partial proxy for race (e.g. data inputs, such as disclosure of a fait de déléguer ces where a consumer lives, or what type décisions à un ordina- prospective borrower’s income and teur peut permettre de assets. Yet the use of such data means of food he/she purchases). Using corriger les biais dans that certain minority groups – like such data for underwriting may be la prise de décision the recently widowed or divorced, or statistically valid but run contrary to humaine. Toute- new immigrants – are often invisible anti-discrimination laws (Actuaries fois, les algorithmes to the mainstream credit system. Institute, 2016). But because most d’apprentissage-ma- algorithms are jealously-guarded chine contiennent des They may be forced to resort to high- commercial secrets, the lack of biais humains pré- cost products that do not help them existants. Comme ces to build a credit history (Bureau of transparency – as well as the lack algorithmes sont des Consumer Financial Protection, of avenues for review and redress – secrets commerciaux, 2017). makes counteracting bias difficult. il existe peu de moyens Advocates of novel inventions pour remédier aux Here, innovative companies sometimes argue that while a biais. offer a promising path to financial Nous devons commen- inclusion. Fintech lenders have technology itself may be morally cer à penser comment emerged that assess credit by mining neutral, policies must still be ces technologies all sorts of alternative consumer designed to limit the harm they can sont appliquées pour data, from mobile phone usage do (Extance, 2015). In a democratic s’assurer qu’elles ne and social media footprints to Web society, it is chilling to think that renforcent pas les algorithms that purport to offer préjugés existants ou search and e-commerce histories. But ne facilitent pas la machine-learning algorithms could objectivity might simply be holding a violation des lois. unwittingly internalise pre-existing harsh mirror to the flaws that we, as biases – as is the case in advertising, humans, like to overlook. We need where it has been discovered that a to start thinking about how these search on Google for the term ‘CEO’ technologies are applied if we are returns images almost exclusively to ensure that they do not reinforce of white men, and delivers far fewer existing prejudices or enable the advertisements for high-paying breaking of laws.

CHANGING FRONTIERS OF ETHICS IN FINANCE 73 Engage with legitimate with a changing industry. Instead, public concerns companies must develop protocols to extensively test new products Les futurs dirigeants So what lessons can be surmised and services to minimise the risk of doivent être préparés for tomorrow’s leaders of the à partager les préoc- unintended consequences. Human financial industry? I offer a handful cupations légitimes du executives must ultimately be held public sur la vie privée, here. accountable for decisions made with la responsabilité, Future leaders must be prepared the aid of computerised systems. As l’inégalité. En même to engage with legitimate public a recent White House report noted, temps, ce n’est pas à la worries over privacy, accountability, companies should consider providing régulation d’empêcher and inequality. The financial industry individuals and communities with des manquements the means to access and correct éthiques. has often used its money and political power to hijack the regulatory reform data, and promulgate industry best debate, and financiers and regulators practices for the fair and ethical use have lived and worked in the same of ‘big data’ techniques (Executive Le secteur privé devrait echo chamber (Foroohar, 2017). Office of the President, 2016). être prêt à prendre The success of financial innovations Finance industry leaders will l’initiative en dévelop- is often measured by short-term need to become well-versed in pant des protocoles qui efficiency criteria such as lower minimisent le risque de mobile and computer technology. conséquences impré- transaction costs and expansion As Bill Gates, the then-Chairman of vues, et en fournissant of corporate profits. These criteria Microsoft, quipped in 1994, banking aux communautés les may be used to retrospectively is necessary but banks are not. moyens d’accéder et de legitimate an innovation, while The next big providers of financial rectifier les données. negative externalities are glossed services may well be technology Les prochains grands over (O’Brien, 2017). As Rodrik firms like Facebook, Google, and fournisseurs de (2017) argues, the mistake of many Apple. Financial leaders at these services financiers economists and policy technocrats pourraient bien être firms will face a new set of ethical des entreprises de has been their unwillingness to issues, not the least of which is the technologies comme confront serious normative fairness question of how vast troves of social Facebook, Google, et considerations that do not fit neatly data might be ‘mined’ to expand Apple. Les sociétés with theories of efficiency. Just as access to finance without violating feront face à un nouvel the public has grown increasingly society’s standards of privacy. In ensemble de questions concerned about the impact of addition, technology may widen the éthiques, par exemple technology-driven disruption on comment utiliser les informational gap between providers jobs, so too will public debate données présentes sur and customers. For instance, health les réseaux sociaux de be necessary as new financial insurers might soon know more façon à promouvoir technologies come to the fore. about a consumer’s health than l’accès à la finance, At the same time, it cannot fall to that consumer. Even where the sans violer la vie regulation to contain ethical failures. law is successful in creating what privée. The bureaucratic process is, by its appears to be a level playing field, nature, cumbersome and regulators markets in reality tend to be defined will inevitably struggle to keep up by asymmetric information. Ethics

ETHICS AT THE NEW FRONTIERS OF FINANCE 74 should reject the old caveat emptor to limit climate change to two as a regulatory fallback and ethical degrees Celsius. Here, two groups providers must devise new ways of of influential investors reached helping consumers to understand diametrically different conclusions Il est possible pour des personnes soucieuses their rights and obligations. on how to tackle the same moral challenge: climate change. d’éthique de parvenir Concluding remarks à des conclusions Finally, it must be recognised that très différentes sur It should be remembered that conventional cost-benefit analyses of le même problème. it is possible for ethical people to new products and services may no Par exemple, certains come to wildly varying conclusions longer be adequate insofar as they investisseurs ont choisi de faire face au on the same issue. For instance, in miss important stakeholders and changement climatique 2015, Norway’s parliament voted neglect broader distributional effects. en se désengageant des to require its government pension For instance, a utilitarian analysis actifs liés aux combus- fund – the largest sovereign wealth of incorporating more granular tibles fossiles; d’autres fund in the world – to divest from data into insurance underwriting ont choisi l’activisme companies involved in the coal processes might suggest that more actionnarial pour exi- industry, following the lead of other data is always better. But concerns ger un changement de prominent institutional investors about equity cannot be pushed to the l’intérieur des entre- background. The implicit system of prises. Il faut recon- including AXA and the Church naître que les analyses of England (Schwartz, 2015). cross-subsidies in many insurance conventionnelles Proponents of fossil fuel divestment markets is not simply a pricing coûts–bénéfices sont often frame their position in stark inefficiency – it is also a contributor inadéquates si elles moral terms: a “moral obligation”, to social cohesion. Important oublient d’importantes as Valerie Rockefeller Wayne, the social policy questions can rarely parties prenantes ou chair of Rockefeller Brothers Fund, be reduced to a set of numbers. négligent des effets puts it (Goldenberg, 2015). But Technology should not be invoked distributionnels plus to provide supposedly objective larges. La technologie opponents of divestment activism, ne devrait pas être like climate researcher David solutions to problems that are really invoquée pour fournir Oxtoby, view divestment actions about societal values. This may be des solutions soi-disant as little more than symbolic “feel- an uncomfortable proposition for objectives à des pro- good measures that have no effect on an industry built on ever-greater blèmes qui concernent actual greenhouse-gas production” quantification. vraiment des valeurs (Oxtoby, 2014). In 2017, three of the At its core, the financial sector sociétales. En conclusion, la finance world’s largest investment managers is a place where people with ideas demeure essentielle, et – BlackRock, Vanguard, and State can meet people with money, where de nouvelles technolo- Street Global Advisers – took an buyers can meet sellers, where gies peuvent aider à en entirely different approach. They individuals can borrow against their démocratiser l’accès. supported a shareholder resolution future income to meet present needs, demanding that ExxonMobil, the and where people bearing risks can world’s largest publicly-traded oil meet others willing to take on some and gas company, report on the or all of those risks (Peirce, 2014). impact of global measures designed Finance remains essential. But our

CHANGING FRONTIERS OF ETHICS IN FINANCE 75 sclerotic industry is in desperate Like most things in life, ethics Il est important que les need of an overhaul, with new aren’t static. What is most important jeunes professionnels business models to loosen the grip of is that young finance professionals aient la créativité et la incumbents and restore trust in the latitude de réfléchir have the creativity and latitude to eyes of consumers. New technologies sérieusement aux pro- think deeply about ethical issues as blèmes éthiques quand may help to democratise access to ils apparaissent. financial services and improve the they emerge. It falls to our generation functioning of modern economies. to make this happen. •

References Ajdukiewicz, K. (1960). O Brito, J. & Castillo, A. (2013). sprawiedliwosci. A lecture delivered Bitcoin: a primer for policymakers. in Lviv in 1939. (Reprint in: Jezyk i Policy: A Journal of Public Policy and poznanie, Vol. I, Warszawa) Ideas, 29(4), 3-12. Actuaries Institute (2016). The Buchanan, M. (2015). Physics Impact of Big Data on the Future of in finance: trading at the speed of Insurance. Retrieved from https:// light. Nature, 518, 161-163. www.actuaries.asn.au/Library/ Opinion/2016/BIGDATAGPWEB.pdf Bureau of Consumer Financial Protection (2017). Request for Avraham, R., Logue, K.D. information regarding use of & Schwarcz, D. (2014). alternative data and modeling Understanding insurance techniques in the credit process. antidiscrimination laws. Southern Federal Register, 82(33), 11,183- California Law Review, 87, 195-274. 11,191. Blundell-Wignall, A. (2014). Court of Justice of the European The Bitcoin question: currency Union (2011). Association Belge versus trust-less transfer technology. des Consommateurs Test-Achats OECD Working Papers on Finance, ASBL and Others v Conseil Insurance and Private Pensions, 37, des Ministres, Case C-236/09, 3-21. Judgment of the Court (Grand Booth, S. (2011). The insurance Chamber). Retrieved from http:// ruling trivialises human rights. curia.europa.eu/juris/liste. The Guardian, 1 March. Retrieved jsf?language=en&num=C-236/09 from https://www.theguardian. Crosman, P. (2017). Is it OK com/commentisfree/2011/mar/01/ for lending algorithms to favor ivy insurance-human-rights-premiums- league schools? American Banker, 9 europe March. Retrieved from https://www.

ETHICS AT THE NEW FRONTIERS OF FINANCE 76 americanbanker.com/news/is-it-ok- org/research-topics/social-and- for-lending-algorithms-to-favor-ivy- economic-value-insurance league-schools Godbold, A. (2015). Making Cullen, M. (2015). Think piece innovation in finance ethical. 8: sharing risk or smoothing bad Finance & The Common Good/Bien luck – what is insurance really all Commun, 140-154. about? In: A brave new world: the Goetzmann, W. & changing landscape for insurance Rouwenhorst, K.G. (2007). The and long term savings. London: history of financial innovation. Association of British Insurers. In: Carbon finance: environmental Executive Office of the market solutions to climate change, President (2016). Big Data: 19-43. New Haven: Yale University. A Report on Algorithmic Goldenberg, S. (2015). Systems, Opportunity, and Rockefeller Brothers Fund: it is our Civil Rights. Retrieved from moral duty to divest from fossil https://obamawhitehouse. fuels. The Guardian, 27 March. archives.gov/sites/default/files/ Retrieved from https://www. microsites/ostp/2016_0504_data_ theguardian.com/environment/2015/ discrimination.pdf mar/27/rockefeller-fund-chairman- Extance, A. (2015). The future moral-duty-divest-fossil-fuels of cryptocurrencies: Bitcoin and Hendershott, T., Jones, C.M. beyond. Nature, 526, 21-23. & Menkveld, A.J. (2011). Does Foroohar, R. (2017). Echoes of Algorithmic Trading Improve Wall Street in Silicon Valley’s grip on Liquidity?. The Journal of money and power. Financial Times, Finance, 66(1), 1‑33. 3 July. Retrieved from https://www. HM Treasury (2011). UK ft.com/content/3d5425ac-5dbf- Response to the 1 March European 11e7-b553-e2df1b0c3220 Court of Justice Ruling that Gallup (2017). Americans Back Insurance Benefits and Premiums Higher Insurance Rates for Smokers, after 21 December 2012 should be Not Obese. Retrieved from http:// Gender-Neutral. Retrieved from news.gallup.com/poll/214244/ https://www.gov.uk/government/ americans-back-higher-insurance- uploads/system/uploads/ rates-smokers-not-obese.aspx attachment_data/file/81229/condoc_ insurance_benefits_and_premiums. Geneva Association pdf (International Association for the Study of Insurance Economics) Holladay, J.S. & Schwartz, J.A. (2012). The Social and Economic (2010). Flooding the market: the Value of Insurance. Retrieved from distributional consequences of the https://www.genevaassociation. NFIP. Institute for Policy Integrity.

CHANGING FRONTIERS OF ETHICS IN FINANCE 77 Retrieved from http://policyintegrity. Data. The Wall Street Journal, 12 org/publications/detail/flooding-the- June. Retrieved from https://www. market wsj.com/articles/SB1000142412788 Irwin, A.S.M. & Milad, 7324682204578515963191421602 G. (2016). The use of crypto- Murdoch, R. (2015). currencies in funding violent jihad. Behavioural ethics and the next Journal of Money Laundering Control, generation in finance.Finance & 19(4), 407‑425. The Common Good/Bien Commun, Juels, A., Kosba, A. & Shi, 19-32. E. (2016). The Ring of Gyges: O’Brien, J. (2017). A question Investigating the Future of of trust: post-truth paradigms Criminal Smart Contracts. and the challenge to financial Retrieved from https://eprint.iacr. regulation. Retrieved from https:// org/2016/358/20160408:015115 australiancentre.com.au/publication/ Keogh, L.A., van Vliet, C.M., a-question-of-trust/ Studdert, D.M., Maskiell, J.A., O’Neill, J. & O’Neill, M. (2012). Macrae, F.A., St John, D.J., Gaff, Social Justice and the Future of C.L., Young, M.A., Southey, M.C., Flood Insurance. Retrieved from Giles, G.G., Rosenthal, D.A., https://www.jrf.org.uk/sites/default/ Hopper, J.L. & Jenkins, M.A. files/jrf/migrated/files/vulnerable- (2009). Is Uptake of genetic testing households-flood-insurance- for colorectal cancer influenced summary.pdf by knowledge of insurance implications? Medical Journal of Oxtoby, D. (2014). Divestiture Australia, 191(5), 255-258. is nothing but a distraction. The Liddell, K. (2002). Just genetic Chronicle of Higher Education, discrimination? The ethics of 15 September. Retrieved from Australian law reform proposals. http://www.chronicle.com/ University of New South Wales Law article/Divestiture-Is-Nothing- Journal, 25(1), 160-184. but-a/148789 Lutton, E. (2011). Public fury Patterson, S. (2014). High- over flood insurers.The Sydney speed stock traders turn to laser Morning Herald, 8 May. Retrieved beams. The Wall Street Journal, 11 from http://www.smh.com.au/ February. Retrieved from https:// environment/weather/public-fury- www.wsj.com/articles/highspeed- over-flood-insurers-20110507- stock-traders-turn-to-laser- 1edkl.html beams-1392175358 Mullins, B., Rothfeld, M., Peirce, H. (2014). Finance and McGinty, T. & Strasburg, J. (2013). innovation. The American Interest, Traders Pay for an Early Peek at Key 10(1).

ETHICS AT THE NEW FRONTIERS OF FINANCE 78 Philippon, T. (2016). The Schwartz, J. (2015). Norway FinTech opportunity. National will divest from coal in push against Bureau of Economic Research. climate change. The New York Times, Retrieved from http://www.nber.org/ 5 June. Retrieved from https://www. papers/w22476 nytimes.com/2015/06/06/science/ norway-in-push-against-climate- Resnik, D.B. (2013). Charging change-will-divest-from-coal.html Smokers Higher Health Insurance Rates: Is It Ethical? The Hastings Securities and Exchange Center: Bioethics Forum Essay. Commission (2010). Concept Retrieved from http://www. release on equity market structure; thehastingscenter.org/charging- proposed rule, 17 CFR Part 242. smokers-higher-health-insurance- Federal Register, 75(13), 3594-3614. rates-is-it-ethical van Baal, P.H.M., Polder, J.J., Rodrik, D. (2017). The Rights de Wit, G.A., Hoogenveen, R.T., and Wrongs of Economics. Harvard Feenstra, T.L., Boshuizen, H.C., Kennedy School PolicyCast. Retrieved Engelfriet, P.M. & Brouwer, W.B.F. (2008). from https://hkspolicycast.org/the- Lifetime medical costs of obesity: prevention no cure for rights-and-wrongs-of-economics- increasing health expenditure. PLoS 4fbc1f062335 Medicine, 5(2), 242-249. Schumer, C. (2014). Schumer Walport, M. (2017). Rise of the Reveals: Without their Knowledge, machines: are algorithms sprawling Fitbit Bracelets & Smartphone Apps out of control? Wired, 1 April. are Tracking Users Movements Retrieved from http://www.wired. and Health Data that could be Sold co.uk/article/technology-regulation- to Third Parties; Calls for FTC algorithm-control to Require Mandatory Opt-Out Opportunity Before Any Personal Werbach, K.D. & Cornell, N. Data can be Sold. Retrieved from (2017). Contracts ex machina. Duke https://www.schumer.senate.gov/ Law Journal, 67 (forthcoming). newsroom/press-releases/schumer- World Economic Forum (2015). reveals-without-their-knowledge- The Future of Financial Services: fitbit-bracelets-and-smartphone- How Disruptive Innovations are apps-are-tracking-users-movements- Reshaping the Way Financial and-health-data-that-could-be- Services are Structured, Provisioned sold-to-third-parties-calls-for-ftc- and Consumed. Retrieved from to-require-mandatory-opt-out- http://www3.weforum.org/docs/ opportunity-before-any-personal- WEF_The_future__of_financial_ data-can-be-sold services.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 79 FFinancial Services as a “Common” Good

Ethics & Trust in Finance Global edition 2016-2017

Finalist

Camille Meyer Financial services are essential The concept of the commons is France to the growth of economic activity increasingly debated in the academic Post-doctoral resear- in both developed and developing literature examining social finance cher at the University economies. However, multiple (Hudon & Meyer, 2016; Meyer of Victoria*, Canada economic, social and environmental & Hudon, 2017; Paranque, 2016; Member of the Centre for European Research in crises have recently called the Périlleux & Nyssens, 2017; Servet, Microfinance, Univer- functions of financial services into 2013, 2015). The commons refers sité libre de Bruxelles, question in the public mind (Melé et to collective ways of organizing Belgium al., 2017) and financial intermediaries economic activities according to are sometimes considered greedy and shared values and ethical principles untrustworthy (Carucci, 2017). To (Bollier & Helfrich, 2014). This promote ethics in finance, a number of concept is closely tied to the notion citizens and practitioners have started of the common good, and these two to redirect funds into activities that aim words share the same etymological to generate social and environmental roots in the Latin word communis, benefits (Nicholls & Pharoah, 2008). meaning “common” and “which In this article, we investigate how the belongs to several or all”. The concept growing sector of social finance can of ‘commons’ can shed new light on * The views expressed promote ethics and trust in finance. finance in that it understands financial herein are those of To this end, we explore whether organizations as communities of the author and do not necessarily reflect those social finance can be considered as a people who share similar beliefs and of the Organization he is common good and promote personal purposes. It can also be instructive affiliated to. and collective wealth. through its openness to new forms

FINANCIAL SERVICES AS A COMMON GOOD 80 of governance, which are more The rise participatory and inclusive. of social finance La notion de communs To investigate the extent to which se réfère à des façons social finance can be understood as Social finance is an emerging collectives d’organiser commons, we use three academic phenomenon of interest to investors, les activités écono- traditions and research trends in policy-makers, social entrepreneurs miques d’après des and citizens (Benedikter, 2011; valeurs partagées et des the economics and management principes éthiques. Ce literature: 1) institutional economics Lehner, 2016). Social finance refers concept est étroitement (e.g. Ostrom, 1990, 2010), 2) to the deployment of financial lié à la notion du bien nonprofit and organization studies resources for primarily social and commun, le terme (e.g. Bushouse et al., 2016; Lohmann, environmental returns. It is a broad commun provient du and heterogeneous field that covers 2016) and 3) business ethics (e.g. mot latin communis, a wide range of instruments and Akrivou & Sison, 2016; Argandoña, qui signifie « commun practices, such as socially responsible 1998; Melé, 2009, 2012). Each of » et « qui appartient à investment (Louche et al., 2012), plusieurs ou à tous ». these traditions has investigated social banking (Cornée & Szafarz, Par conséquent, cette commons from a particular approach, 2014), microfinance (Armendáriz notion peut apporter whether focusing on the shared un nouvel éclairage sur & Labie, 2011; Hudon & Sandberg, resources, the management and la finance en considé- 2013), and complementary rant les organisations governance mechanisms, or ethics currencies (Seyfang & Longhurst, financières comme and responsibility. Our investigation 2013). des communautés de of finance as commons is based The demand for social finance is personnes partageant on multiple examples of social increasing worldwide. In the United des croyances et des finance services, namely responsible States, the Forum for Sustainable buts semblables. investment, stakeholders’ banks, Dans cet article, nous and Responsible Investment community microfinance, and examinerons si la identified that the sector had $8.72 complementary currencies. finance sociale peut trillion professionally managed in être considérée comme This article proceeds as follows. assets in 2016 – which represents un bien commun pour First, we present some characteristics a 33 percent increase since 2014 promouvoir la richesse of social finance. Second, we develop (US SIF, 2016). This growing trend personnelle et collective. Nous utiliserons three approaches to and theoretical is also seen in Europe. Eurosif, the trois traditions acadé- perspectives of the commons, in association for European Sustainable miques et tendances particular with regard to studies in and Responsible Investment, de recherche dans la institutional economics, nonprofit identified about 21 trillion euros littérature en économie and organization, and business ethics in responsible investment assets et en gestion : 1) l’éco- literature. Third, we investigate under management in 13 European nomie institutionnelle, the extent to which social finance countries in 2015 (Eurosif, 2016: 2) les études sur les 56). In Europe, such assets grew by organisations à but non can be considered as commons and lucratif, et l’éthique des promote the common good. Fourth, 25% from 2013 to 2015 indicating an affaires. we summarize our findings and increasing market for social finance. establish how social finance can More broadly, this sector raises promote ethics and trust in finance. questions about the nature of financial

CHANGING FRONTIERS OF ETHICS IN FINANCE 81 services in modern societies. As one more embedded into local highlighted by Nicholls and Pharoah realities and responsive to needs that (2008) social finance “is about more are not met by purely commercial than just the flow of money into actors. These grassroots experiments social or environmental projects. It often rely on collective decision- is an ethos about the way money is making to decide which activities to used […]. So, social investment can finance, while promoting new social La finance sociale be seen as the discourse around such ties and sociability among users and se réfère au déploie- flows that is developing in concrete investors (Cornée & Szafarz, 2014; ment de ressources terms in the new institutions of Hudon & Meyer, 2016). financières pour des supply, intermediation and demand” All the above arguments show bénéfices principa- (Nicholls & Pharoah, 2008: 11). that social finance is a promising lement sociaux et environnementaux. Hence, social finance is part of a and expanding phenomenon. In a Il s’agit d’un champ broader philosophical debate about context of financial crisis (Sun et large et hétérogène qui the role of money in our economies al., 2011), it represents something couvre un large éven- and the ethos it conveys. From new in society: an individual and tail d’instruments et this perspective, it echoes the long collective aspiration to change the de pratiques, tels que ethical and theological traditions of role of finance in the collective l’investissement socia- condemning greed, speculation and interest. lement responsable, usury (e.g. Aquinas, 1981; Aristotle, la banque sociale, la micro finance, et les 1925). In this philosophical tradition, The commons and the monnaies complé- the pursuit of wealth accumulation as Common Good mentaires. De plus, an end and not a means is considered In the encyclical Laudato Si’- On ce secteur soulève des as leading us astray from virtue and care for our common home, Pope questions sur la nature the social nature of humans. des services finan- Francis (Francis, 2015) highlights ciers dans les sociétés As that suggests, social finance the interdependence between modernes. La finance conveys certain ethical perspectives ecology, society and the economy. sociale représente toward finance and its relationship Considering poverty, social quelque chose de nou- with society. Social finance acts inequalities and environmental veau dans la société : as a driver for economic change, degradation – from climate change, une aspiration indi- particularly when developed by to the overexploitation of fishing viduelle et collective grassroots actors involved in “new resources and loss of biodiversity pour changer le rôle de social economic movements” la finance en faveur de – Pope Francis calls for a deep l’intérêt collectif. (Gendron et al., 2009). Several change in the economic system and bottom-up initiatives are spreading the adoption of a responsible long- worldwide to (re)take control of term perspective. From this point of the financial and banking system in view, individuals and organizations order to promote economic stability, are responsible for their actions community development and and inactions with regard to the financial inclusion (Lietaer et al., environment and social degradation. 2012). These social actors often aim The preservation of “our common to build another financial system, home” therefore requires an economy

FINANCIAL SERVICES AS A COMMON GOOD 82 that is more inclusive and caring, in terms of degree, from high to low. both of human beings and nature. These characteristics incentivized To this end, economic actors should commons scholars to focus on Le pape François follow ethical principles targeting natural CPRs (Ostrom, 1990, 2010), appelle à changer both collective and individual good profondément le such as fisheries, groundwater and système économique et (Frémeaux & Michelson, 2017; irrigation systems, communal land à adopter une pers- Melé, 2009). and the climate. Because of their pective responsable The concept of commons characteristics of subtractability de long terme. À cet is sufficient to establish the and non-excludability, CPRs could égard, les individus interdependence between society presumably be overexploited, as et les organisations and the economy. Indeed, commons individuals would tend to maximize sont responsables de their own appropriation of the leur action et inaction are increasingly developed by civil en ce qui concerne la society to resolve socio-economic resource. This is the so-called “tragedy dégradation environne- problems through collective of the commons” (Hardin, 1968), mentale et sociétale. organizing (Bollier & Helfrich, where users of a shared resource are La préservation de « 2014). Social movements use the guided by their own interest and notre maison com- term ‘commons’ to qualify new unable to cooperate. mune » nécessite une organizations with the objective However, the pioneering work économie qui soit plus of promoting both personal and of Elinor Ostrom revealed that the inclusive et qui prenne community interest (Dardot & soin en même temps tragedy of the commons is avoidable. des êtres humains et Laval, 2014). The academic literature Ostrom’s seminal work Governing de la nature. Dans proposes various interpretations the Commons (Ostrom, 1990) shows cette ligne, les acteurs and definitions of the commons. many examples of CPRs that were économiques devraient In this section, we present three collectively managed by communities, suivre des principes main theoretical approaches to the without requiring public intervention éthiques dans le but commons in the economics and or privatization of resources. d’atteindre le bien management literature. collectif et individuel. Communities can self-organize and develop adequate institutional Le concept de com- Commons as accessi- muns convient pour arrangements to ensure the sustainable établir l’interdépen- ble and shared resources use of CPRs for long-term periods. dance entre la société The understanding of commons These institutions rely on strong et l’économie. En effet, was confined for many years to social ties and cooperation among les communs sont de users. Users self-govern and monitor plus en plus fréquem- common goods, or common-pool ment développés par la resources (CPRs). In institutional their behavior to avoid overexploiting société civile pour ré- economics, CPRs are resources the resources. Ostrom’s work shows soudre des problèmes that are subtractable through use that shared resources can be preserved socio-économiques à (consumption by one user decreases and remain accessible if users set up travers une organisa- the amount of the resource available effective institutions. This analysis tion collective. for others) and non-excludable of collective governance has been (excluding someone from having used for multiple settings (Lohmann, access to the resource is difficult and 2016), including community finance costly). These two characteristics vary (Hudon & Meyer, 2016).

CHANGING FRONTIERS OF ETHICS IN FINANCE 83 La compréhension de Collective action in contexts as users decide how to ces biens a été confinée share and manage these resources durant de nombreuses commons for common objectives. These années aux ressources Building on Ostrom’s theory commons therefore both rely on, communes. L’ouvrage précurseur d’Ostrom of the commons, several nonprofit and strengthen, social relationships « Governing the and organizational scholars have at local scale, whilst fostering a Commons » (Ostrom, analyzed how non-natural commons shared social identity enabling users 1990) donne de nom- could be established (Bushouse et al., to cooperate and act collectively breux exemples de 2016; Coriat, 2015). Therefore, the (Bollier & Helfrich, 2014). ressources communes understanding of commons evolved qui étaient collective- from an “essentialist approach” The common good of ment gérées par des (Périlleux & Nyssens, 2017), communautés, sans communities intervention publique defining commons by their intrinsic and society ni privatisation des res- nature and the characteristics of sources. Les commu- CPRs, to a “constructivist approach”, Commons are developed by, and nautés peuvent s’auto based on the idea that commons provide support to, communities. organiser et développer are socially constructed through Commons organizations, like other des arrangements ins- practices and cognition (Dardot & organizations, are “communit[ies] titutionnels adéquats Laval, 2014). of persons” (Melé, 2012) in which afin d’assurer une people meet to achieve common utilisation durable du Hence, commons can potentially ressources communes emerge from resources that are objectives (Gomez & Jones, 2000). pour des périodes de shared and collectively managed. However, commons organizations long terme. Ces insti- This is known as ‘commoning’ usually go beyond the sole interest tutions reposent sur de (Meyer & Hudon, 2017). of their members and also engage in forts liens sociaux et Commoning is a widespread practice the interest of society (Nyssens & la coopération parmi in self-managed organizations, and Petrella, 2015). les utilisateurs : les utilisateurs auto-di- in projects where users co-produce Hence, commons organizations rigent et contrôlent rights and duties linked to a shared follow the common good principle leur comportement resource (Coriat, 2015). Examples with the objective of contributing pour ne pas surex- of commoning include transition to the collective interest (O’Brien, ploiter les ressources. towns, collaborative consumption of 2009; Sison & Fontrodona, 2012). Ostrom montre que les food, and complementary currencies The common good principle is ressources partagées (Bollier & Helfrich, 2014; Meyer & particularly present in the social peuvent être préservées Hudon, 2017). et demeurent acces- teaching tradition of the Catholic sibles si les utilisateurs From this we can conclude that church (e.g. Conférence des Evêques mettent en place des commons are created through the de France, 2014), which aims to institutions efficaces. voluntary association of people foster social justice, responsibility Cette analyse de sharing common purposes and and fraternity in modern societies. In gouvernance collective values (Lohmann, 2016). Based on this contect, the common good is the peut être utilisée dans the principle of self-management and philosophical principle that “entails de multiples contextes, autonomy (Bushouse et al., 2016), cooperation to promote conditions y compris la finance. commons are embedded in territorial that enhance the opportunity for

FINANCIAL SERVICES AS A COMMON GOOD 84 the human flourishing of all people philosophical approach, which within a community” (Melé, 2009: holds respect for human dignity 227). It refers to the inherent and individual rights sacred (Melé, tendency of human beings to 2012). It assumes that societies associate, collaborate and socialize in should provide conditions that foster order to achieve common objectives humans’ flourishing through the Plusieurs chercheurs (Aristotle, 1925). achievement of their personal goals. et experts de la société The common good principle Individual flourishing is crucial civile ont analysé comment des biens is also attached to the personalist for collective well-being since the communs non naturels Table 1: Definition and characteristics of the different concepts linked to the pouvaient être établis. commons Ainsi, ils peuvent potentiellement pro- Concept and Definition and Characteristics venir de ressources Terminology qui sont partagées et gérées collectivement We define common goods as the resources characterized by : ceci s’appelle le « intrinsic dimensions of subtractability of use and non-exclu- faire en commun ». Il dability of access. As such, these goods are synonymous with s’agit d’une pratique Common common-pool resources, or traditional commons. Exam- largement répandue goods ples of common goods are environmental resources that are dans les organisations open-access and deplete with consumption. This approach to autogérées, et dans les common goods is used mainly in institutional economics and projets où les utili- environmental science. sateurs coproduisent des droits et des Commons can be considered as shared resources that are co- obligations liés à une llectively managed by a group of users who design and im- ressource partagée. Les plement the rules for their provision, allocation, withdrawal, biens communs sont control and monitoring. Commons are therefore not defined créés à travers l’asso- by the internal characteristics of their resources but by co- Commons ciation volontaire de llective organization that institutionalizes them as commons. personnes partageant des buts et des valeurs Examples of commons are digital and informational com- communs. Ils reposent mons, or urban commons. This concept of commons is in- donc sur et renforcent creasingly present in nonprofit studies, organization theory, les relations sociales au and computer science niveau local, tout en The common good is a philosophical principle guiding indi- favorisant une identité vidual and collective action to contribute to the wellbeing of sociale partagée qui society. Taking into account the collective dimensions of in- permet aux utilisateurs dividuals in societies, there are multiple meanings, since the de coopérer et d’agir Common common good will depend on collective-choice and virtue collectivement. Good behavior. According to this idea, individual and collective action should not be undertaken if it destroys others’ wellbeing. This concept is mainly present in business ethics, philosophy and theology.

CHANGING FRONTIERS OF ETHICS IN FINANCE 85 fulfilment of society both results of individuals do not have access to from and contributes to individual financial services, these services are welfare (Frémeaux & Michelson, not easily accessible and exclusion Les organisations 2017). is prevalent (Demirgüç–Kunt et al., de biens communs 2015). suivent le principe du For the sake of clarity, Table 1 bien commun avec presents a summary of these three Nonetheless, several microfinance l’objectif de contribuer meanings of the commons and their organizations aim to promote à l’intérêt collectif. respective scholarly disciplines. financial inclusion. In these cases, Le principe du bien access is facilitated and contributes commun est particuliè- Social finance and the to less “excludability” of these rement présent dans la resources. For example, in their tradition de l’enseigne- commons analysis of a community bank in ment social de l’Eglise In this section, we investigate catholique qui vise Brazil, Hudon and Meyer (2016) the extent to which social finance à favoriser la justice show that collective and participatory sociale, la responsabi- can be considered as commons, governance can make financial lité et la fraternité dans however these are understood. Our services more “commons-like” and les sociétés modernes. analytical framework relies on the accessible. The authors argue that Le bien commun est three approaches of the commons organizational form and corporate considéré comme le described in the above section: 1) governance affect the nature of principe philosophique commons as accessible resources, 2) the financial services provided. In qui « entraîne la coo- commons organized collectively, and pération afin de favori- this case, microfinance community 3) commons promoting the common ser des conditions pour banks include multiple community augmenter le bien-être good. stakeholders in strategic decision- humain de toutes les making. These stakeholders have personnes à l’intérieur Finance as private or the tendency to use the microfinance d’une communauté common goods? organization to promote local » (Melé, 2009: 227). development and financial inclusion. On se réfère à la Commons were historically disposition des êtres attached to natural common- Therefore, they tend to promote humains de pouvoir pool resources meeting the two inclusive financial programs, ask for s’associer, collaborer characteristics of subtractability and limited – if any – collateral and to lend et socialiser afin de non-excludability (Ostrom, 1990). to community members registered réaliser des objectifs However, finance can instinctively with the credit bureau. communs. Le bien be considered as a private good as Other types of social finance commun suppose que les sociétés devraient it is easy to prevent people from services can be driven by economic fournir des conditions having access to financial services inclusion aims. This is, for example, qui favorisent l’épa- and the amount of money used the case with complementary nouissement humain à by one person is not available for currencies (Lietaer et al., 2012). travers l’accomplisse- other users. By way of illustration, These monetary systems are ment de leurs objectifs credit is a substractable good, in developed by local nonprofits and personnels. the sense that the consumption of business networks with the objective credit diminishes the total amount of promoting supplementary available for others. Also, as billions means of exchange to businesses,

FINANCIAL SERVICES AS A COMMON GOOD 86 organizations, and people who Stakeholder are traditionally excluded from official monetary systems (Seyfang participation in La gouvernance & Longhurst, 2013). There is a financial organizations collective et participative peut rendre les broad diversity in these systems. Both community banks and services financiers plus Some are used in barter markets, complementary currencies rely on similaires aux biens whereas others are shaped as local the participation of multiple local communs et acces- currencies to promote consumption stakeholders – such as customers, sibles. Par exemple, les on a local scale. Well-known staff members, community leaders banques communau- examples of complementary and representatives of local taires de micro finance au Brésil incluent dans currencies are time banks, which nonprofits and government – in la prise de décision are used to exchange services their governance and management. stratégique de mul- and goods in neighborhoods. For As Ostrom (1990) explained, the tiples parties prenantes example, people can exchange one efficient management of natural communautaires. Ces hour of piano or language lesson commons relies on the establishment parties prenantes ont for bike repairing or gardening. of rules that are collectively defined, tendance à utiliser produced and respected. In a similar l’organisation de micro These currencies are usually based vein, financial commons could finance pour promou- on reciprocity with the objective of voir le développement building social ties and promoting emerge from collective action. local et l’inclusion social inclusion (Servet, 2013, Financial commons could refer financière. Des mon- 2015). They also convey a strong to the resources that are shared naies complémentaires symbolic power as they value and regulated by institutional peuvent aussi être territories and local identity (Blanc arrangement co-established by centrées sur le but de stakeholders (Nyssens & Petrella, & Fare, 2016). l’inclusion économique 2015). des organisations et les A substantial number of these Based on this approach, gens qui sont tradition- currencies emerged and were used organizations promoting stakeholder nellement exclus des during financial and economic systèmes monétaires participation in strategy and crises. In these cases, citizens officiels. Ces monnaies operational management are doivent aussi permettre started to use these currencies to potentially commons organizations. de promouvoir une access goods and services they Co-governance of resources is nouvelle sociabilité could not acquire with official particularly present in grassroots dans le commerce et currencies. Several inclusion les échanges sociaux. social finance organizations, mechanisms are implemented in such as community banks and these monetary systems, such as complementary currencies, but also free access to credit and no demands in more established organizations, Les organisations qui for previous acquisition of capital such as stakeholder banks. promeuvent la parti- or the provision of collateral. These Stakeholder banks, also known as cipation des parties currencies also have the objective social banks (Cornée & Szafarz, prenantes dans la to promote a new sociability in 2014), are financial institutions gestion stratégique et trade and social exchange (Meyer & promoting both social and financial opérationnelle mettent Hudon, 2017). objectives. They are distinct from

CHANGING FRONTIERS OF ETHICS IN FINANCE 87 en place potentielle- traditional commercial banks in sets of values. The authors argue that ment une logique de the sense that they aim to promote a common social identity engenders biens communs. value not only to shareholders but “reciprocity” among lenders and La co-gouvernance des also to other stakeholders, such as borrowers: funders accept the ressources est parti- employees, clients and communities. culièrement présente “financial sacrifice” of lending below dans les organisations Stakeholder participation can market rate whilst borrowers show a de finance sociale take different forms. For example, lower probability to default (Cornée locale, telles que les cooperative banks are owned and & Szafarz, 2014). These results bring banques communau- controlled by members on the to the forefront the difficulty of having taires et les monnaies basis of ‘one member, one vote’ and both social and financial returns, complémentaires, mais community banks have community since social and environmental également dans les benefits are often at the expense of organisations mieux representation on their boards of établies telles que les directors. Nonetheless, participation financial considerations (Nicholls banques coopératives. is not systematic and not easy to & Pharoah, 2008). It might be this Les banques sociale organize. Many social banks do not cost that reflects the individual sont des institutions have a participatory governance commitment to the collectivity: it is financières qui pro- structure and sometimes larger a personal financial sacrifice for the meuvent des objec- cooperatives do not use the ‘one development of other members of tifs à la fois sociaux member, one vote’ feature even if the community. et financiers. Elles se distinguent des they have it. banques commerciales However, studies investigating Promoting traditionnelles car elles stakeholder participation have veulent promouvoir de shown that the organizational the Common Good la valeur pas seulement structure of these banks favors Beyond financial inclusion and pour les actionnaires, a stronger social orientation: stakeholders’ participation, social mais aussi pour toutes community and social banks have les autres parties finance has features of commons prenantes, telles que a greater tendency to promote when it promotes the common good. les employés, les financial inclusion by dealing with We base our understanding of the clients et les commu- customers who are underserved by common good on the social teaching nautés. La structure commercial banks. By doing this, of the Catholic church: the common organisationnelle de they have a positive impact on local good is founded on both societal ces banques favorise economic development. According and individual development and une orientation sociale to Almandoz (2014), motivated fulfilment (e.g. Argandoña, 1998; plus forte : les banques owners and deposit holders in US communautaires et Conférence des Evêques de France, sociales ont une plus community banks aim to focus first 2014; Frémeaux & Michelson, 2017). grande propension à on community needs and have a Social finance, and particularly promouvoir l’inclusion smaller tendency to prioritize profits. responsible investment, can promote financière et elles ont Likewise, Cornée, Kalmi and the common good when using un impact positif sur le Szafarz (2016) showed that social screening mechanisms to direct développement écono- banks’ depositors and investors finance towards ethical activities for mique local. share a common social identity with individual and collective interests borrowers as they adhere to similar (Louche et al., 2012). Responsible

FINANCIAL SERVICES AS A COMMON GOOD 88 investors typically acquire of ethics and values in investment companies’ shares based on ethical decisions and the reputation risk that factors such as environmental, social, fossil fuels represent for companies and governance considerations. (Carrington, 2015). Negative screening consists of Divestment from greenhouse La finance sociale, et avoiding and excluding investment gas emitting activities is an en particulier l’inves- in companies that are engaged important and necessary step for tissement responsable, in activities considered not in containing and mitigating climate peut promouvoir le conformity with investors’ values. change. It certainly contributes to bien commun en uti- Activities in pornography, alcohol promoting ethics in finance and lisant des mécanismes and weapons are typically screened de sélection afin de provides concrete examples of what diriger la finance vers negatively. In contrast, positive responsible financial actors can des activités éthiques. screening consists in investing do to preserve the environment. It Les investisseurs res- in enterprises that have strong is also worth mentioning that the ponsables acquièrent corporate social responsibility and preservation of the environment généralement des positive social impacts. Generally, should not be restricted to work actions d’entreprises both positive and negative screenings on climate but also embrace forest, basées sur des facteurs help promote the fulfilment of éthiques prenants en seas, and biodiversity preservation – human beings, and further social to name but a few (Francis, 2015). considération l’envi- development and/or ecological ronnemental, le social Hence, the responsibility of investors et la gouvernance. preservation. is broad and can also apply to a vast La sélection négative array of natural resources. consiste à éviter et à Environmental exclure l’investisse- preservation Promoting human ment dans des entreprises qui mènent des Banks and investment funds dignity and decent work have an important role to play activités qui ne sont Promoting the common good pas conformes aux in preserving and protecting is inseparable from the promotion valeurs des investis- the environment. Recently, they of individual and personal good seurs (pornographie, have been urged by several social (Frémeaux & Michelson, 2017). l’alcool et les arme). Au movements to massively divest from According to Catholic social contraire, la sélection fossil energies to contain climate positive consiste à teaching, human dignity is one of change. An increasing number of investir dans des entre- the key ethical elements involved in prises ayant une forte financial actors have agreed that it is their historical responsibility to personal good. As work has a central responsabilité sociale role in our lives, human dignity et des impacts sociaux promote the decarbonization of the positifs. economy and have started to divest is increasingly shaped through from fossil fuels (e.g. Mooney, 2017; working conditions and decent work Morgan Stanley, 2016). To illustrate: (Conférence des Evêques de France, the insurance company Axa decided 2014). to remove around €500m of coal According to the International investments from its portfolio Labor Organization (ILO) decent (Harvey, 2015), based on the role work “involves opportunities for

CHANGING FRONTIERS OF ETHICS IN FINANCE 89 work that is productive and delivers investors could refer to auditors and a fair income, security in the the multiple forums and networks Récemment, les workplace and social protection for promoting ethics and responsibility banques et les fonds families, better prospects for personal in finance. Such networks provide d’investissement development and social integration, expertise for institutional investors ont été pressés par plusieurs mouvements freedom for people to express their to incorporate environmental, sociaux de se désenga- concerns, organize and participate in social and governance factors into ger massivement des the decisions that affect their lives and their investment and ownership énergies fossiles afin de equality of opportunity and treatment decisions. They are present in the freiner le changement for all women and men”1. USA (US Forum for Sustainable and climatique. Un nombre However, decent work is a major Responsible Investment), Europe croissant d’acteurs challenge in global supply chains. (Eurosif, Principles for Responsible financiers ont reconnu Investment), Australia and New leur responsabilité his- This is particularly the case in the Zealand (Responsible Investment torique en promouvant textile industry. The Rana Plaza la décarburation de tragedy showed that the working Association Australasia), France l’économie et ont com- conditions in the textile industry (Forum pour l’Investissement mencé à se retirer des remain dangerous in developing Responsable), and the United combustibles fossiles. countries (Jopson et al., 2014). In Kingdom (UK Sustainable Investment Le désengagement des 2013, a textile factory working for and Finance Association), to name activités émettrices de international clothing companies but a few. gaz à effet de serre est – the Rana Plaza – collapsed and un pas important et né- Building an inclusive cessaire afin de freiner killed more than 1,100 workers. This et d’atténuer le change- tragedy revealed the parlous working and responsible ment climatique. Cela conditions of the Bangladeshi financial system contribue certainement workers and fostered a debate about à promouvoir l’éthique the responsibility of multinational Financial resources, such as en finance et fournit corporations outsourcing to suppliers credit or currencies, are often des exemples concrets who do not respect decent work considered as private goods. de ce que les acteurs (Croft, 2016). However, our investigation shows financiers responsables that some organizational mechanisms peuvent faire pour To prevent similar disasters, increase access to these resources, préserver l’environne- financial actors could promote decent making them more inclusive and ment. La préservation work by financing companies who commons-like. This is particularly de l’environnement ne show responsibility in their supply the case of grassroots microfinance devrait pas être réduite chain management. Banks and au climat mais devrait organizations, such as community investment funds could invest in banks, and complementary aussi inclure la forêt, companies promoting decent work les mers, la préserva- currencies. Therefore, based on tion de la biodiversité, and having a code of conduct. Since solidarity and inclusivity principles, pour n’en citer que this would increase the due diligence social finance can promote access to quelques-uns. costs of financial intermediaries, financial services – a crucial aspect of social integration and a key factor in 1 Retrieved from http://www.ilo.org/global/ topics/decent-work/lang--en/index.htm on 23 economic development and poverty June 2017. alleviation (Hudon, 2009). As argued

FINANCIAL SERVICES AS A COMMON GOOD 90 by Nobel Peace Prize Laureate the promotion of human rights and Muhammad Yunus, access to finance dignity, correspond to the historical offers those traditionally excluded responsibility investors have towards the means to develop new economic societies and communities. La promotion du bien opportunities and, therefore, is commun est insépa- rable de la promotion instrumental in human fulfilment Financial commons du bien individuel et (Yunus, 1999). for ethics and trust in personnel. Comme Corporate governance and finance le travail occupe un institutional design are important rôle central, la dignité in conditioning the provision of The recent crises have damaged humaine est de plus these resources. Social finance the general perception of the financial en plus façonnée à organizations, such as stakeholder and banking sectors. Increasingly, travers les condi- society denounces the greed and tions de travail. Un banks, use several participatory mechanisms enabling clients, speculation associated with these travail décent est un sectors and the risk they represent to défi majeur dans les employees and other stakeholders to chaînes d’approvision- participate in strategic management. economic stability (Carucci, 2017). nement globales. C’est The inclusion of stakeholders in To contain public opinion defiance, particulièrement le cas decision-making not only favors there is a need to promote ethics and dans l’industrie textile collective action in finance but also trust in finance. où les conditions de has a positive impact on the social In this article, we have adopted travail demeurent dan- orientation of finance. Stakeholder the lens of the commons to explore gereuses dans les pays how social finance can contribute en développement. banks promote a sense of reciprocity Les acteurs financiers and social identity among financial to restoring both public trust and pourraient promouvoir clients (Cornée & Szafarz, 2014; ethics in finance. The commons refer un travail décent en Paranque, 2016). This can be a to conventions and interrelations in finançant des compa- strong factor in generating trust in socio-economic activities. They are gnies responsables de banking activities, even though it has not only ruled by market mechanisms, leur gestion de chaîne a financial cost for investors. but also include reciprocity and gift d’approvisionnement. Finally, with a particular focus on characteristics among financial users Comme cela augmen- (Servet, 2013). This favors a new terait le coût de la « responsible investing, we discovered form of sociability among users, as due diligence » des that social finance can also contribute intermédiaires finan- to the advancement of the common well as transforming the relationships ciers, les investisseurs good. More precisely, we explored between collectives and individuals on pourraient se référer two possibilities for finance to have one hand and finance on the other. For aux auditeurs et à de positive impacts on climate change example, complementary currencies multiples forums et mitigation:divesting from oil and coal foster new forms of exchange and réseaux de promotion industries and improving working trade while simultaneously building éthique et de responsa- social ties among exchangers and bilité en finance. conditions in developing countries by investing in companies that stakeholder banks bring a common promote responsible supply chain social identity and a sense of belonging management. Ethical considerations to financial intermediation (Périlleux on environmental preservation, and & Nyssens, 2017).

CHANGING FRONTIERS OF ETHICS IN FINANCE 91 Commons require cooperation concern for the common good. and rely on coordination between Therefore, the commons propose actors. Greater participation of users to understand what is shared and in governance allows both depositors common in human communities. and borrowers to determine their Considering social finance as common concerns and decide on commons therefore advances a actions to achieve their interests new project of society in which the (Hudon & Meyer, 2016). Hence, the collective interest predominates construction of participatory spaces and is considered as essential for in banking institutions can redefine individual fulfillment. Hence, the financial resources according to focusing on the interdependence the needs expressed by users and and interconnectedness among their representatives. While financial investors and society can potentially services are the subject of international generate a renewed perception of deregulation, community redefinition responsibility in the financial sector of finance in participatory spaces for human dignity, social justice and allows it to be embedded in the social, environmental preservation. cultural and political structures of each territory. Acknowledgements To conclude, considering finance I thank Marek Hudon, Marc Labie, as commons enables to reflect on Ariane Szafarz, Patrick Reichert, and the relationship between finance Majid Lemqaddem for their comments and society. The commons approach on earlier versions. I also acknowledge conceives of economic and financial the financial support of F.R.S.-FNRS activities as essentially human to conduct this research. • activities, embedded into social relationships, values and ethical

References Akrivou, K., & Sison, A. J. G. Aquinas, T. (1981). Summa (Eds.). (2016). The Challenges of theologiae (trans. Fathers of the English capitalism for virtue ethics and the Dominican Province). London: Burns common good: interdisciplinary Oates and Washbourne. perspectives. Cheltenham: Edward Argandoña, A. (1998). The Elgar Publishing. stakeholder theory and the common Almandoz, J. (2014). Founding good. Journal of Business Ethics, 17(9- teams as carriers of competing logics 10), 1093-1102. when institutional forces predict Aristotle (1925). The Nicomachean banks’ risk exposure. Administrative ethics (D. Ross, Trans.). Oxford: Science Quarterly, 59(3), 442-473. Oxford University Press.

FINANCIAL SERVICES AS A COMMON GOOD 92 Arjaliès, D. L. (2010). A social Conférence des Evêques de France movement perspective on finance: (2014). Notre bien commun: connaître la how socially responsible investment pensée sociale de l’Eglise pour la mettre mattered. Journal of Business Ethics, en pratique. Ivry-sur-Seine : Editions de 92(1), 57-78. l’Atelier. Armendáriz, B, & Labie, M. (2011). Coriat, B. (Dir.) (2015). Le retour The handbook of microfinance. London/ des communs. La crise de l’idéologie Singapore: World Scientific Publishing. propriétaire. Paris: Les Liens qui Benedikter, R. (2011). Social Libèrent. banking and social finance. New York: Cornée, S., Kalmi, P., & Szafarz, A. Springer. (2016). Selectivity and transparency in Blanc, J., & Fare, M. (2016). social banking: evidence from europe. Turning values concrete: the role and Journal of Economic Issues, 50(2), 494- ways of business selection in local 502. currency schemes. Review of Social Cornée, S., & Szafarz, A. (2014). Economy, 74(3), 298-319. Vive la différence: social banks and Bollier, D., & Helfrich, S. (Eds.). reciprocity in the credit market. Journal (2014). The wealth of the commons: a of Business Ethics, 125(3), 361-380. world beyond market and state. Amherst, Croft, J. (2016). ‘FTSE 100 slow to MA: Levellers Press. report on fight against modern slavery’, Bushouse, B. K., Never, B., & Financial Times, 15 October 2016. Christensen, R. K. (2016). Elinor Retrieved from https://www.ft.com/ Ostrom’s contribution to nonprofit content/f8be6906-914b-11e6-8df8- and voluntary action studies. Nonprofit d3778b55a923. and Voluntary Sector Quarterly, 45(4S), Dardot, P., & Laval, C. (2014). 7S-26S. Commun: essai sur la révolution au XXIe Carrington, D. (2015). ‘Axa IM Siècle. Paris: La Découverte. warns that companies linked to fossil Demirgüç–Kunt, A., Klapper, L., fuels risk their reputations’. The & Singer, D. (2015). The global findex Guardian, 15 January 2015. Retrieved database 2014: measuring financial from https://www.theguardian.com/ inclusion around the world. World Bank environment/2015/jan/15/axa-warns- Policy Research Working Paper #7255. companies-linked-fossil-fuel-risk- Washington: World Bank. reputations. Eurosif (2016). European SRI Study Carucci, R. (2017). ‘How to restore 2016. Brussels: Eurosif. Retrieved from trust in an industry notorious for http://www.eurosif.org/wp-content/ greed’, Forbes, 10 April 2017. Retrieved uploads/2016/11/SRI-study-2016-LR-. from https://www.forbes.com/sites/ pdf. roncarucci/2017/04/10/how-to- Francis (2015). Laudato Si’ - restore-trust-in-an-industry-notorious- On Care For Our Common Home. for-greed/#63eb8fe8454c. Encyclical-Letter. Retrieved from

CHANGING FRONTIERS OF ETHICS IN FINANCE 93 http://w2.vatican.va/content/francesco/ Retrieved from https://www.ft.com/ en/encyclicals/documents/papa- content/be1a194a-c9ab-11e3-89f8- francesco_20150524_enciclica- 00144feabdc0 laudato-si.html. Lehner, O. M. (Ed.). (2016). Frémeaux, S., & Michelson, G. Routledge handbook of social and (2017). The common good of the sustainable finance. London: Routledge. firm and humanistic management: Lietaer, B. A., Arnsperger, C., conscious capitalism and economy of Goerner, S., & Brunnhuber, S. (2012) communion. Journal of Business Ethics, Money and sustainability: the missing 145(4), 701-709. link. Report from the Club of Rome. Gendron, C., Bisaillon, V., & Rance, Devon: Triarchy Press. A. I. O. (2009). The institutionalization Lohmann, R. A. (2016). The of fair trade: more than just a degraded Ostroms’ commons revisited. Nonprofit form of social action. Journal of Business and Voluntary Sector Quarterly, 45(4S), Ethics, 86(1S), 63-79. 27S-42S. Gomez, P.-Y., & Jones, B. (2000). Louche, C., Arenas, D., & van Crossroads – conventions: an Cranenburgh, K. C. (2012). From interpretation of deep structure in preaching to investing: attitudes organizations. Organization Science, of religious organisations towards 11(6), 696–708. responsible investment. Journal of Hardin, G. (1968). The tragedy Business Ethics, 110(3), 301-320. of the commons. Science, 162(3859), Melé, D. (2009). Integrating 1243-1248. personalism into virtue-based business Harvey, F. (2015). ‘Axa to divest ethics: the personalist and the common from high-risk coal funds due to threat good principles. Journal of Business of climate change’, The Guardian, 22 Ethics, 88(1), 227-244. May 2015. Retrieved from https://www. Melé, D. (2012). The firm as a theguardian.com/environment/2015/ “community of persons”: a pillar of may/22/axa-divest-high-risk-coal- humanistic business ethos. Journal of funds-due-threat-climate-change. Business Ethics, 106(1), 89-101. Hudon, M. (2009). Should access Melé, D., Rosanas, J. M., & to credit be a right?. Journal of Business Fontrodona, J. (2017). Ethics in finance Ethics, 84(1), 17-28. and accounting: editorial introduction. Hudon, M., & Sandberg, J. (2013). Journal of Business Ethics, 140(4), 609- The ethical crisis in microfinance: 613. issues, findings, and implications. Meyer, C., & Hudon, M. (2017). Business Ethics Quarterly, 23(4), 561- Alternative organizations in finance: 589. commoning in complementary Jopson, B., Allchin, J. & Kazmin, A. currencies. Organization, 24(5), 629- (2014). ‘Rana Plaza collapse: one year 647. on’, Financial Times, 22 April 2014.

FINANCIAL SERVICES AS A COMMON GOOD 94 Mooney, A. (2017). ‘Growing Périlleux, A., & Nyssens, M. (2017). number of pension funds divest from Understanding cooperative finance as fossil fuels’, Financial Times, 28 April a new commons. Annals of Public and 2017. Retrieved from https://www. Cooperative Economics, 88(2), 155-177. ft.com/content/fe88b788-29ad-11e7- Servet, J. M. (2013). Monnaie: 9ec8-168383da43b7?mhq5j=e3 quand la dette occulte le partage. Revue Morgan Stanley (2016). Climate Française de Socio-Economie, 12(2), change and fossil fuel aware investing: 125-147. risks, opportunities and a roadmap for Servet, J. M. (2015). La finance et la investors. New York: Morgan Stanley. monnaie comme un «commun». Paris : Retrieved from http://www.ussif.org/ Institut Veblen pour les Réformes climatereinvestment Economiques. Nicholls, A., & Pharoah, C. (2008). Seyfang, G., & Longhurst, N. The landscape of social investment: a (2013). Growing green money? holistic topology of opportunities and Mapping community currencies for challenges. Oxford: Skoll Centre for sustainable development. Ecological Social Entrepreneurship. Economics, 86, 65-77. Nyssens, M., & Petrella, F. Sison, A. & Fontrodona, J. (2012). (2015). ESS et ressources communes: The common good of the firm in the vers la reconnaissance d’une diversité Aristotelian-Thomistic tradition. institutionnelle. Revue Française de Business Ethics Quarterly, 22(2), 211- Socio-Économie, 15(1), 117-134. 246. O’Brien, T. (2009). Reconsidering Sun, W., Louche, C., & Pérez, the common good in a business R. (Eds.). (2011). Finance and context. Journal of Business Ethics, sustainability: towards a new paradigm? 85(1), 25-37. A post-crisis agenda. Bingley: Emerald Ostrom, E. (1990). Governing the Group Publishing. commons: the evolution of institutions US SIF (2016). Report on US for collective action. Cambridge: Sustainable, Responsible and Impact Cambridge University Press. Investing Trends 2016. Washington, Ostrom, E. (2010). Beyond DC: US Social Investment Forum. markets and states: polycentric Retrieved from http://www.ussif.org/ governance of complex economic content.asp?contentid=82 systems. American Economic Review, Yunus, M. (1999). Banker to the 100(3), 641-672. poor: microlending and the battle against Paranque, B. (2016). La finance world poverty. New York: Public Affairs. comme commun : un idéal-type pour des emancipations. Revue de la Régulation. Capitalisme, Institutions, Pouvoirs. Retrieved from https:// regulation.revues.org/12031.

CHANGING FRONTIERS OF ETHICS IN FINANCE 95 OObjectivity - a Pipe Dream ?

Ethics & Trust in Finance Global edition 2016-2017

Finalist

Mariusz Maziarz On Price Indices The estimates obtained in these three ways are likely to differ more Poland and Objectivity Ph.D. candidate, than the average value of their Wroclaw University of What will the rate of inflation ex-post error. Moreover, even an Economics*, be next year? That question can be answer to the question about the Wroclaw answered in several ways. A skeptic inflation rate that was measured who adheres to the Pyrrhonic in the previous year is ambiguous. conviction that it is impossible It can be given by indicating the to make predictions will look at value of the Consumer Price Index last year’s inflation figures, which, (CPI) or Producer Price Index assuming random changes in this (PPI) published by the US Bureau macroeconomic indicator, would be of Labor Statistics. Or one might the best estimate. An econometrician use the value of the GDP deflator will apply his mathematical knowledge whose estimates are delivered by the and modeling ability to analyze how Bureau of Economic Analysis. Then, inflation has been trending over the for the sake of simplicity, one might past years and whether it has been compare the cost of the same basket correlated with other variables. A of shopping bought today and a year * The views expressed herein are those of the (theoretical) economist will build ago. Finally, the value of each of the author and do not neces- a mathematical model determining inflation indicators mentioned above sarily reflect those of the the essential relationship between can be calculated with the Paasche Organization he is affiliated the endogenous inflation rate and and Laspeyres indices, which will to. exogeous determinants. also influence the estimate. As that

DO THE RIGHT THING: INCENTIVISE ETHICS 96 shows, any answer to a question to knowledge induction is was concerning an economic fact convincingly argued by Taleb (2010, depends on the methods applied to p. 40), when described the thoughts Quel sera le taux getting that answer. d’inflation l’année of a doomed turkey that took what prochaine ? La réponse We can find demands for it had seen of life so far as proof that dépend de la méthode objectivity in many ethical codes it would live forever. Until, that is, de calcul. Les éva- of conduct in financial services. In Thanksgiving came along.) luations obtenues de différentes façons sont those from national and international In this essay, I advance a thesis susceptibles de différer bank associations, from supervisory that fulfilling such demands for plus que la valeur authorities, and from professional objectivity is impossible. Objectivity moyenne de leur erreur organizations. For instance, Polish is out of the question not because a posteriori. Même une banks have voluntarily agreed to of the malice or greed of the people réponse à la question be bound by the Code of Banking working in the financial sector but du taux d’inflation de Ethics, which provides that disputes l’année précédente est because an objective or – in other ambiguë, on peut la with clients are resolved “in an words – true viewpoint either does donner en indiquant la objective way” (ZBP 2013, p. 5). not exist or is epistemologically Similarly, the Code of Ethics and valeur de l’Indice des inaccessible. prix à la consommation Standards of Professional Conduct (le CCPP) ou l’Indice published by the CFA Institute It is clear that most of the des prix à la production (2014) obliges financial analysts issues dealt with by the employees (PPI). Ou, au contraire, to “deal fairly and objectively of the financial sector are not utiliser la valeur du matters for philosophical debate. facteur de déflation with all clients” (paragraph III.B) du PIB. La valeur de and also “to achieve and maintain For instance, there is an objective chacun des indicateurs independence and objectivity answer to a client’s question about d’inflation susmention- in their professional activities” the commission in a relevant table nés peut être calculée (I.B). Objectivity is mentioned as of fees and commissions. Similarly, avec les indices de principle 2 by the Code of Ethics and there is one mathematical formula Paasche et Laspeyres Professional Responsibility set up by for calculating the profit on a deposit qui influenceront aussi the Certified Financial Planner Board l’estimation. given its value, maturity, and the of Standards (2016). Being objective interest rate. However, as I intend is also mentioned in the codes of to highlight in this introductory conduct of many banks and financial section, situations in which an Nous pouvons trouver institutions (cf., for instance, objective answer cannot be reached les exigences d’objec- JPMorgan Chase&Co. 2016). occur more often in financial services tivité dans plusieurs codes de conduite Now, though induction is an than is commonly believed. Below, en matière éthique uncertain source of knowledge, I briefly review the philosophical établis tant par des I will take the liberty of claiming sources of the idea of objectivity and associations de banque that objectivity is, if only implicitly, the accessibility of truth and go on internationales que demanded by all ethical codes of to analyze several case studies that nationales, des auto- rités de surveillance conduct established by financial seem to contradict such a viewpoint. institutions. (How uncertain a route Finally, I offer a few solutions.

CHANGING FRONTIERS OF ETHICS IN FINANCE 97 et des organisations by the practically-oriented sophists professionnelles. Par A Few Words on Philosophy that earned popularity. That is why exemple, le Code science is now seen as an activity d’Ethique et de Normes In ancient Greece, beside the aimed at discovering truth. de Conduite Profes- mainstream philosophers we sionnelle publié par This truth is understood as an l’Institut CFA (2014) recognize today, there were also objective description of reality, oblige les analystes sophists, who – as Sophie’s teacher rather than as something that offers financiers à «traiter aptly observed in the fictionalized models to help deal with the world. de manière équitable introduction to the history of The objective of eternal truth was et objective tous les philosophy, Sophie’s World – established by one of the Socrates’ clients» (paragraphe rejected a huge part of philosophical students, Plato, who believed that III.B) et aussi à deliberations (particularly «atteindre et conser- truth, or – in other words – what ver l’indépendance et metaphysics), because “although science produces, should describe l’objectivité dans leurs answers to philosophical questions eternal ideas rather than a changeable activités profession- may exist, man cannot know the everyday experience. Plato (2000, p. nelles» (I.B). truth about the riddles of nature 220) believed that our experience is Dans cet essai, j’avance and of universe” (Gaarder, 1994, mere illusion, similar to the shades la thèse que satisfaire p. 60). One of the sophists making of reality, of ideas on a wall of the les exigences d’objecti- a living out of teaching Athenians, cave seen by the people held inside. vité est impossible. La raison est qu’un point Protagoras, rightly observed that, for de vue objectif ou – en human beings, “man is the measure Mirroring reality d’autres termes – vrai, of all things.” However, it was not the However, Plato optimistically soit n’existe pas, soit philosophical viewpoint supported assumed that, through rational est épistémologique- Graph1: Plato’s Allegory of the cave. inquiries, we can understand the ment inaccessible. reality which, located in front of the entrance to the cave, casts the shade. Indeed, understanding reality, or, in Les sophistes ont rejeté other words, explaining it, is the main une grande partie des goal of the most popular paradigm débats philosophiques of the philosophy of economics – (particulièrement méta- scientific realism. This trend emerged physiques), parce que in the mid-20th century in an attempt «bien que les réponses to respond to the severe difficulties aux questions philosophiques puissent faced by the Vienna Circle positivists. exister, on ne peut It was also a response to the success pas connaître la vérité Source: Saenredam J., Plato’s Allegory of the physical sciences. Even though sur les énigmes de la of the cave, http://www.britishmuseum. calling economics a successful science nature et de l’univers». org/research/collection_online/collec- is a risky and questionable thesis, Protagoras a observé tion_object_details/collection_image_ the methodologists of this particular avec justesse que gallery.aspx?partid=1&assetid=2611 discipline seem to be those most «l’homme est la mesure 45001&objectid=1490634, (CC BY- supportive of the idea of scientific de toutes choses ». NC-SA 4.0). Access: 1 March 2016. realism.

DO THE RIGHT THING: INCENTIVISE ETHICS 98 According to this approach, which and ontological indeterminism1 is gets its strongest underpinning from negligible for the purposes of further the work done on the philosophy argument. Even though scientific of economics by Uskali Mäki realism is the most popular approach (2011), an analytic philosopher among philosophers of economics, La science est mainte- from Helsinki, the primary aim of thinkers interested in other, usually nant considérée comme a scientist is to explain analyzed more successful sciences, do not une activité destinée phenomena. The truth or rightness support this viewpoint (Tegmark, à découvrir la vérité of theories and models is defined 1998). comprise en consé- with reference to “essesimilitude”, quence, c’est-à-dire Heterodox approaches comme une descrip- a term coined by Ilkka Niiniluoto tion objective de la (2002), a Finnish philosopher of There are a few alternative réalité au lieu d’offrir science, who attempted to describe philosophical approaches to the des modèles pour aider a model depicting the key (or issue of the truth. Milton Friedman à affronter le monde. essential) aspects of the economic (1953) who developed monetarist Cet objectif de vérité reality. Moreover, scientific realists macroeconomics, supported éternelle a été établi believe that theories and models are instrumentalism. Deidre McCloskey par l’un des élèves de (1983) supported the rhetoric of Socrate, Platon, qui (in general) right in their depiction croyait que la vérité, of unobservable entities. Hence, their economics. Ludwik Fleck (1979) ou – en d’autres termes ontological status is the same as that advocated sociologically grounded – ce que la science proof the reality experienced every day. constructivism. According to duit, devait décrire des In other words, those entities (e.g. the most widely supported idées éternelles plutôt utility functions, GDP and profit- interpretation of the essay, The qu’une expérience quo- 2 maximizing companies) exist. methodology of positive economics, tidienne variable. the creator of monetarism defined If you accept scientific realism the truth in an instrumentalist way: you also accept that objectivity those theories and sentences are can be required of the personnel true that make fruitful predictions of financial institutions through their codes of conduct. According 1 The epistemic indifference is an outcome to this viewpoint, there is only one of our limited knowledge of the mechanisms Selon le réalisme scien- governing the reality or the initial conditions. tifique, l’objectif pre- appropriate description of reality For instance, a roulette game is random for mier d’un scientifique or a solution to a problem that we us even though it is governed by the perfectly est d’expliquer les phé- attempt to deal with. deterministic laws of physics. On the contrary, nomènes analysés. Les the ontological determinism constitutes real scientifiques réalistes That does not hold in two randomness which could not be dismissed even if we possessed all the information. As if croient que les théories cases: (1) if we do not have full knowledge of the facts (even though God played dice. et les modèles sont 2 However, it should be highlighted that it is (en général) exacts. it might possible to gain it, at least one of the most cited and interpreted articles En d’autres termes, les in theory) and (2) if the economic or focused on the methodology of economics, entités invisibles (par financial reality that we are facing is which results from Friedman’s unclear style exemple, les fonctions of writing and (supposedly) an attempt to inherently indeterministic. In fact, utilitaires, le PIB (pro- appeal to economists holding various points the difference between the epistemic of view.

CHANGING FRONTIERS OF ETHICS IN FINANCE 99 duit intérieur brut) et possible (Friedman, 1953). Similar of a unified theory of economics is, les entreprises maximi- to a physicist who applies the laws according to Fleck (1979), a strong sant le profit) existent. of thermodynamics to analyze the argument in favor of the utilitarian Accepter le réalisme process of coffee cooling down, but definition of truth. scientifique entraîne quantum mechanics to describe the l’acceptation d’un point Shedding the light of anti- de vue inscrit dans la movements of caffeine particles in realist philosophies (either the demande d’objectivité his cup, an economist should choose instrumentalist one supported by exigée de la part du among a handful of models depending Milton Friedman or the constructivist personnel des institu- on their utility. However, according one coined by Deidre McCloskey tions financières dans to the instrumentalist methodology, and Ludwik Fleck) on the problem leur code de conduite. none of the models is true. They are of truth shows that being objective Selon ce point de vue, just useful in particular situations. is impossible because there is no il y a seulement une Or, to put it differently, models are description appropriée one, fixed truth. Instead, there are true as long as they are useful. de la réalité. only various theories, methods, and The professor of history of models that deal with the world of economics from Chicago criticized finance in a more or less successful the realist approach and, instead, manner. Therefore, I can only repeat advised that we choose those theories McCloskey (1998),“[t]he best you that are an outcome of a discourse can do, then, is to recommend what among economists. This is because is good for science now, and leave the Contrairement au comparing a theory with God’s future to the gods,” (p 186) because réalisme scientifique, Friedman (1953) a mind (the poetical postulation of “man is the measure,” as Protagoras supporté l’instrumen- the correspondence theory of truth) wrote, “of the things that are, that talisme selon lequel ces is virtually impossible (McCloskey, they are, and of the things that are théories et affirmations 1998). Ludwik Fleck (1979), an not, that they are not” (Reale and qui rendent possible early 20th- century microbiologist (by Catan 1990, p. 157). Below, I provide des prédictions fruc- profession) and philosopher of science several examples from contemporary tueuses, sont vraies/ (for a hobby) analyzed the historical economics, which are faced by people réelles. De façon simi- development of microbiology and working in the financial sector. laire à un physicien qui discovered that the descriptions of applique les lois de la Your Truth and Mine thermodynamique pour the same phenomenon differed over analyser le processus time and depended on previously One of the conclusions drawn de refroidissement du created definitions and methods of by Ludwik Fleck (1979) shows that café et la mécanique measurement. His constructivist results depend on or, to put it more quantique pour décrire point of view, according to which accurately, are the outcome of, les mouvements des theories depend on ways of thinking conventional definitions and selected particules de caféine (thought styles), can be exemplified methods. This viewpoint can be best dans sa tasse, un by the thought experiment that I économiste devrait exemplified by comparing the results outlined in the opening section of the choisir parmi quelques of marketing research conducted by modèles en fonction article. The dependence of theoretical Coca-Cola and Pepsi Co. Kanner de leur intérêt. Aucun descriptions on the research methods (1981), in his article for the New York des modèles n’est vrai/ employed, together with the absence Magazine, indicated that the two old

DO THE RIGHT THING: INCENTIVISE ETHICS 100 réel. Ils sont seule- competitors had published results, They arithmetically averaged the ment utiles dans des according to which, consumers pace of economic growth for each situations particulières. who had been asked to point to of four buckets of country/year Le fait de projeter la their preferred cola drink tended to observations organised by the level lumière des philoso- choose the product manufactured by phies anti réalistes sur of debt to GDP ratio (less than 30%; le problème de la vérité the sponsor of the marketing survey. 30-60%; 60-90%; over 90%). The montre qu’il est impos- Most of us, educated in the spirit of Harvard economists concluded that sible d’être objectif car the realist philosophy, will defend economic growth is much slower il n’y a pas une seule objectivity and the corresponding when the ratio exceeds 90%. Their vérité immuable. definition of truth by indicating that conclusion immediately attracted these contradictory results must have attention, being quoted by Paul Ryan, been obtained fraudulently and with the author of the Republican budget, a view to boosting sales and profit. and mentioned by several of most It cannot be otherwise. Researchers influential politicians worldwide, struggling for truth and objectivity including Angela Merkel, Wolfgang D’après Fleck (1979), do not produce contradictory Schäuble, Oli Rehn, and Manuel les résultats sont le findings. But, is this really the case? Barroso. Growth in a Time of Debt fruit de définitions was referred to by Paul Krugman conventionnelles et Contradictory results (2013) as “surely the most influential de méthodes choisies. in econometrics economic analysis of recent years”. Par exemple, Kanner (1981) a indiqué que In economics, there are many Three years later, at the peak of les deux vieux concur- cases that seem to undermine such popularity of Reinhart and Rogoff’s rents avaient publié des a sanguine view of truth. One of (2010) paper, Thomas Herndon, a résultats selon lesquels the most vocal and famous cases Ph.D. candidate at the University les consommateurs à of the ‘emerging contrary result’ of Massachusetts, was asked to qui l’on avait demandé phenomenon3 is the Reinhart-Rogoff d’indiquer leur boisson replicate their analysis. After many controversy. Given that the most préférée au coca ont failed attempts, and having received tendance à choisir le quoted publications are usually the original spreadsheet of data from produit fabriqué par the least read ones, I will briefly Reinhart and Rogoff, Herndon and le sponsor de l’étude review the two contradictory articles his research mentors Michael Ash de marketing. De tels and have a closer look at their and Robert Pollin (2014) published résultats empiriques ne methodologies. an article that pinned down three sont pas une excep- Five years ago, Carmen Reinhart errors made in the original study: (1) tion, mais une règle. Selon les estimations and Kenneth Rogoff (2010) a non-standard averaging scheme; grossières de Goldfarb published an article that made a lot (2) a failure to include several (1997), approxima- of waves in which they analyzed post-war observations; and (3) a tivement un article their own database covering public miscoded Excel formula that caused économique sur dix est debt and the economic growth of 44 the exclusion of five countries at the en contradiction avec countries and spanning 200 years. start of the alphabet. According to les autres. Un des cas Herndon, Ash, and Pollin (2014), the les plus virulents et 3 According to Robert Goldfarb’s (1997) adjusted findings give altered results: célèbres du phénomène rough estimates, approximately one in ten articles on economics contradicts the others. public debt does not harm economic

CHANGING FRONTIERS OF ETHICS IN FINANCE 101 du « résultat contra- development in a non-linear way. controversy, the controversy is the dictoire émergeant » In spite of commonly held outcome of differing methodological est la controverse de beliefs, a precise analysis of the two preferences, rather than of a miscoded Reinhart-Rogoff. Rein- Excel formula. (Maziarz 2017). hart-Rogoff (2010) et methodologies and other cliometric Herndon Ash et Pollin studies of the issue (cliometrics If one only reads the popular press, (2014) ont donné des being an analysis of economic history one might develop the mistaken belief réponses opposées à la using quantitative methods), show that the Reinhart-Rogoff controversy question de savoir si that only one of the three challenged is an extraordinary case. It certainly des mesures d’austérité garnered considerable attention, but étaient nécessaires. errors (the miscoded Excel formula) there are many econometric disputes6 La controverse est le is actually an error. On the contrary, résultat de préférences the other two deficiencies identified similar to the one discussed previously méthodologiques by Herndon, Ash, and Pollin (2014), where – as Ludwik Fleck wrote différentes plutôt que i.e. the averaging method4 and the almost a century ago – the findings de formules Excel data exclusion5, should be seen as are determined by a conventionally mal codées. (Maziarz methodological decisions rather than chosen research method. 2017). errors. Considering the negligible Reinhart and Rogoff (2010) and influence of the spreadsheet error (up Herndon Ash and Pollin (2014) to 0.3 pp) compared with the impact reached different conclusions on the of the two methodological decisions question of whether austerity measures (up to 1.7 pp in the case of choosing are needed. Alberto Alesina and Silvia the averaging scheme), a dispute Ardagna (2009) from the National Un autre exemple Bureau of Economic Research and montrant qu’il n’y a on which of the two conclusions is Jaime Guajardo, Daniel Leigh and pas de connaissance justified should be dismissed. Though objective en économie I will refrain from choosing a winner Andrea Pescatori (2010) employed est la recherche selon la in the “Growth in a Time of Debt” at the International Monetary Fund cliométrie sur l’hypo- analyzed how government spending thèse de contraction 4 Reinhart and Rogoff (2010) employed a cuts influence the economy in the fiscale expansionniste. weighted averaging scheme calculated in two steps. First, they averaged the pace of econo- short term and also had divergent Alberto Alesina et mic growth for each country in every of the findings. However, in this case, the Silvia Ardagna (2009 four baskets. Second, they calculated four discussion appropriately focused on et Jaime Guajardo, average paces of economic growth for every methodological issues instead of on Daniel Leigh et Andrea basket (i.e. averaged over countries regardless Pescatori (2010) ont of a number of country/year observations). In picking on mistakes and a purposeful analysé comment contrast, Herndon Ash and Pollin (2014) ap- fudging and flubbing aimed at les coupes dans les plied an unweighted averaging scheme, arith- arriving at the expected result. Their dépenses publiques metically averaging the pace of economic development observed in each of the four baskets. main aim was to attempt to determine influencent l’écono- Both methods are justified to a similar degree whether, as the English proverb says, mie à court terme. Les (for a more detailed analysis, see my recent the roof should be fixed while the deux groupes d’écono- article (Maziarz 2017). mètres américains ont 5 Similarly, excluding the post-war period in 6 To be honest, I believe that theoretical eco- essayé de démontrer a few countries was attributed to the lack of nomics is even more contradictory than the si, comme le proverbe an appropriate estimation of the GDP of Spain empirical branch, but it is not my field and anglais le dit, le toit and the existence of two divergent estimates hence I limit myself to discussing cases from for New Zealand. econometrics and finance.

DO THE RIGHT THING: INCENTIVISE ETHICS 102 devrait être réparé sun is shining, or, in contrast, the it and argue that fiscal contractions pendant que le soleil roofers should wait till the end of the cause a short-term recession because brille, ou, au contraire, recession. of reduced demand. An important si les réparateurs conclusion for this essay is that both devraient attendre The basic issue in such a research methods are widely accepted among jusqu’à la fin de la project is to grasp the timing of the récession. Comme dans spending cuts made by governments. the cliometric fraternity. le cas de la controverse In many cases, the changes in de Reinhart-Rogoff, public debt levels can be attributed An objective medical les constatations sont to other factors, such as a volatile treatment? divergentes, mais la macroeconomic situation, which has Cases such as the expansionary discussion s’est concen- an impact on tax income. Alesina trée de façon adéquate fiscal contraction hypothesis, in sur les problèmes and Ardagna (2009) identified years which econometricians arrive at méthodologiques au in which tax reforms took place contradictory results because of a lieu de s’en prendre based on an analysis of changes preference for alternative methods, aux erreurs. in the cyclically-adjusted primary are not uncommon. Such problems balance. A team at the IMF employed also surface in the analyses of a divergent methodology, which scientists working in different was based on analyzing government fields. For instance, in early 1999, papers (e.g. official documents, the Kenyan government decided to Le phénomène de reports from financial institutions finance administering antiparasitic parvenir à des résultats and international organizations, drugs to school-age children. Miguel contradictoires est-il etc.). The two methods pinpointed and Kremer (2004) investigated this spécifique à l’écono- different years as the time of fiscal initiative. The two econometricians mie? reforms (to be exact, they concurred from Berkley and Harvard, specializing Au début des années only 30% of time), even though the in development economics indicated 1999, le gouvernement question of the timing of spending that, apart from helping to control kenyan décida de finan- cuts seems to be easy to address as a cer l’administration de the epidemic of parasites, the médicaments antipa- historical fact. program reduced anaemia, improved rasitaires aux enfants On the one hand, of course, the child nutrition and cut school en âge scolaire. Miguel results are to some degree similar. absenteeism (by one-third). Their et Kremer (2004) ont Namely, both studies demonstrate results, published by Econometrica, analysé cette initiative. that fiscal reforms involving spending become very influential and made the Les deux économètres cuts and not raising taxes are better World Health Organization advise spécialisés dans l’éco- dosingthe whole population with the nomie du dévelop- for economic development. On the antiparasitic drugs every six months, pement ont indiqué other hand, they produce conflicting qu’en plus de réduire answers to the question whether fiscal without prior screening tests. l’épidémie parasitaire, contractions have a positive influence Eleven years after the original le programme a limité on economic growth in the short term. research, Aiken et al. (2015) l’anémie, a amélioré la Alesina and Ardagna (2009) support attempted to replicate it. Their results nutrition infantile et the ‘expansionary’ fiscal contraction were published in the International a réduit l’absentéisme hypothesis. In contrast, Guajardo, Journal of Epidemiology. The scolaire (d’un tiers). Leigh, and Pescatori (2010) oppose researchers from the London School

CHANGING FRONTIERS OF ETHICS IN FINANCE 103 of Hygiene and Tropical Medicine unethical in the light of the above employed an alternative method arguments? In other words, is the of model estimation and slightly creditor – at the time of conducting redefined the test groups (control and the analysis (which, according to treated) because, in their opinion, the ethical codes of conduct, should Leurs résultats ont eu the trial was not strictly randomized. be objective) – able to predict that une grande influence Aiken et al. (2015), contrary to a mortgage denominated in Swiss au point que l’Organi- the econometricians who first francs is likely to become he less sation Mondiale de la analyzed the issue, concluded that optimal product, i.e. more expensive Santé a recommandé de the treatment under consideration than the one denominated in the donner des médica- was not efficient. Namely, they domestic currency? A few years ago, ments antiparasitaires did not find statistically significant tous les six mois à when the Swiss franc was cheaper toute la population differences between the two groups (and devaluating) and the interest sans tests de dépistage with regard to anaemic children and rates were much lower, taking out préalables. Des années school absenteeism. These three a foreign currency mortgage was après la recherche cases show that, as Ludwik Fleck more efficient. At that point, it was originale, Aiken et observed in the case of medical considered a better choice even if al. (2015) ont essayé research, the findings depend heavily moderate and unfavorable exchange de la reproduire. Les on the methods employed. Thus, rate changes were to occur. As in chercheurs n’ont pas constructing the truth – instead trouvé que la différence the case of calculating how public en ce qui concerne les of discovering it – seems to be the debt might affect economic growth, enfants anémiques et main aim of the researchers. If that what advice should be given to l’absentéisme entre is the case, and if employees in the someone applying for a mortgage les deux groupes était financial sector find themselves depends on the assumptions used. statistiquement signifi- in situations similar to those dealt In this case, calculating the risks cative. with by academics, the demands of for various foreign exchange rate objectivity cannot be met. distributions may change the advice given to a property buyer The struggle for applying for a mortgage. Of course, objectivity in the from today’s perspective, it is easy financial sector to reproach financial advisors for Les décisions et In the last few years, Polish underestimating the risk of changes la connaissance bankers have been reproached for in foreign exchange rates. However, dépendent de supposi- a few years ago, say in 2008, when tions et des méthodes offering foreign currency mortgages. d’évaluation aussi dans Because of unfavourable way in which the Swiss franc was constantly la finance. Au cours currency exchange rates fluctuated, devaluating, almost no one could des dernières années, the value of such loan often exceeded predict how much this currency on a reproché aux ban- the actual value of the property. In would appreciate in the next few quiers polonais d’offrir addition, some of them are likely to years. Behavioral psychologists des hypothèques en turn into bad debt in the near future. coined the term outcome bias to monnaies étrangères. À So, can advising customers to take describe the human tendency to cause de la fluctuation foreign currency mortgages be called condemn decisions that lead to a bad

DO THE RIGHT THING: INCENTIVISE ETHICS 104 (défavorable) des taux outcome without actually considering companies declared bankruptcy and de change, la valeur what those decisions were and why others were nationalized. However, d’un tel prêt a souvent they were made. . even if we assume that there is an dépassé la valeur réelle objective risk of default that can be de la propriété. Dans ce However, there are many other problems where there is no single, assigned to a company X, which has cas, le fait de calculer 7 les risques pour des objective solution. When applying for just applied for a loan, insolvency distributions de taux a mortgage, in addition to choosing is impossible to foresee and any de change variés peut a currency, borrowers ask their guesses or estimates made by the modifier le conseil financial advisors whether a fixed or credit risk analysts vary hugely. donné à un acheteur variable interest rate is more efficient, However, sometimes, as was the case de propriété sollici- better, or – simply – cheaper. This just before the last financial crisis tant une hypothèque. question also cannot be answered in erupted, though the ratings published Bien sûr, en se basant by rating agencies did not vary much aujourd’hui, il est an objective way. Advisors do not at all, the consistency did not indicate facile de reprocher au have the knowledge to do so. That conseiller financier is, advice given to a loan applicant their accuracy. d’avoir sous-estimé le depends on estimated future The problem of objectively risque de fluctuation interest rates over the repayment estimating credit risk can be seen des taux de change. period and the risk appetite of the when looking at the differences in financial advisor’s customer. Even estimated future gains and the profit economists who think such things actually earned by companies. For can be modelled would admit that instance, Barber et al. (2001), in their the forecasts depend strongly on the work, [Can] investors profit from the methods used and – as is the case prophets?, simulated the strategy of Le problème a aussi when predicting future inflation rates, buying (or short selling) stock with été expérimenté par the forecasts differ more than their ex- best and worst recommendations plusieurs institutions post error will. There is no one, true produced by security analysts financières américaines answer to such questions. Therefore, applying fundamental analysis. qui ont échoué à éva- the demands of objectivity cannot be According to their calculations, when luer le risque. met by a financial advisor because, in transaction costs are incorporated, Si nous supposons some cases, objective knowledge is buying undervalued stock and selling qu’il y a un risque objectif de défaut d’une out of reach – as demonstrated by the overvalued stock generates profit entreprise X, qui vient cases discussed above. that does not significantly differ from de demander un prêt, Similarly, from the point of zero. Many researchers analyzed il est impossible d’anti- view of a financial institution, different time periods, markets or the ciper le fait de devenir obtaining objective information is details of trading strategy, and their insolvable et n’importe also impossible. For instance, in conclusions are comparable. quelles suppositions ou estimations faites par order to make a profit, financial The strategy of finding overvalued les analystes de risque institutions should estimate credit and undervalued stocks failed de crédit sont haute- risk appropriately. Mistakes and ment différenciées. On negligence in this area resulted in 7 This would imply that our world is perfectly peut comprendre le the major crisis of 2007/2008 when deterministic and none of us, even the CEO problème de l’évalua- several major financial services managing company X, has a free will (Lawson, 1997, p. 29).

CHANGING FRONTIERS OF ETHICS IN FINANCE 105 tion objective de risque because financial analysts, referred to it is, based on my experience, much de crédit quand on voit by Barber et al. (2001) as “prophets,” more complicated than foreseeing les différences entre failed to predict the future profit the income of a single company. Of l’estimation des gains levels. Considering the efficient course, the risk aversion of a customer futurs et le bénéfice market hypothesis and the fact that seeking a piece of financial advice effectivement réalisé par les sociétés. Par smaller markets are less likely to be can be measured and professional exemple, Barber et al. efficient, it might be better to look help appropriately adjusted. (2001) ont indiqué at an analysis based on the Polish However, such a measurement, qu’en achetant un stock Warsaw Stock Exchange instead based on a psychological test, will sous-évalué et en en of the New York Stock Exchange. not be objective either. Just think vendant un surévalué Kowalke (2015), contrary to Barber of acquiescence bias (e.g. Friborg et génère un bénéfice qui et al. (2001), did not analyze whether al., 2006). According to this, people ne diffère pas significa- it is possible to profit from listening are more likely to agree with the tivement de zéro. to the fundamental analysts but questions asked in questionnaires compared their predictions (strictly rather than oppose them. Therefore, speaking, the net profit and earnings an unethical financial advisor who before interest and taxes (EBIT)) makes a living out of commissions with the actual data published by from selling financial products could companies. The Polish economist set up a test in a way that reduces found the accuracy of financial their customers’ risk aversion in D’un côté, selon les analysts’ forecasts was “considerably order to sell, for instance, shares codes de conduites low”. instead of bank deposits and make existant, les gens qui a higher commission. But, even travaillent dans le sec- However, being objective is teur financier devraient impossible not only in estimating without finding fault with employees être objectifs et donner risk or the likelihood of insolvency. in the financial sector (and that is des informations vraies Financial advisors are often confronted not my intention in this essay), it is à leurs clients. De with a question of how to invest the impossible to say which of the scores l’autre, de nombreuses customer’s money. On the one hand, aimed at measuring risk aversion études de cas analysées there are more profitable (and more based on a handful of options is montrent qu’il y a bien risky) options, such as stock markets objective. des situations aux- and investment funds. On the other, quelles sont confrontés How to Make the Pipe les chercheurs écono- banks offer a safe haven approach to miques, les employés deposits. Of course, the majority of Dream Come True? de banque et les insti- economists point out that the stock On one hand, according to tutions financières où market is more profitable in the long existing codes of conduct, people les exigences d’objecti- run. However, how long is the long working in the financial sector vité sont impossibles à run? And, as Keynes (1971) wrote should be objective and provide respecter. in A Tract on Monetary Reform,“in La raison n’est pas true information to their customers. the long run we are all dead.” In the l’avidité. Au contraire, On the other hand, several analyzed même lorsqu’on tra- short term, say five or ten years, stock case studies show that there are vaille de bonne foi, être market profits will depend on the many situations faced by research objectif est impos- macroeconomic situation. To predict economists and the personnel of

DO THE RIGHT THING: INCENTIVISE ETHICS 106 sible car les résultats banks and financial institutions more interesting from an ethical des estimations, les where the demands of objectivity point of view. modèles développés et are impossible to meet. The reason The above considerations lead les indices financiers is not greed or malice on the part of de prédiction ainsi que to the conclusion that the demand the financial sector. On the contrary, les mesures de risque of being objective or providing dépendent fortement even if they worked in good faith, true information is, in many cases, de suppositions et de being objective is impossible because impossible to fulfill and this is méthodes convention- the results of estimations, models and attributed to an epistemic problem. nelles et, assez fré- predicted financial indices, as well as Can we make the pipe dream come quemment, arbitraires. of risk measures, depend heavily on true? And, if yes, how? In order to conventional and, not infrequently, answer these questions, we should arbitrary assumptions and methods. have a closer look at what the Consider, for example, each of demands of objectivity are aimed the following choices: the weighted at. Is it “the love of wisdom” (i.e. averaging scheme preferred by literal translation of the Greek term Puisque le fait de choi- Herndon, Ash and Pollin (2014) or A life without objectivity φιλοσοφία sir une des alternatives the unweighted one employed by – philosophia)? Or, in contrast, were ne peut pas avoir lieu Reinhart and Rogoff (2010); one those who penned ethical codes of d’une façon rationnelle of the methods of indicating when conduct – supervisors, bank and (sachant que des argu- governments cut their expenditures financial institution executives or ments tels que «c’est ce based on assessing credit risk, or professional associations – driven by que la plupart des gens font»), il n’y a pas une quantifying the inflation rate with the desire to safeguard customers’ seule vérité objective. Il the Paasche or Laspeyres formula. interests? Paraphrasing Richard y a seulement des mo- Both are supported by a number of Rorty’s (2009) book title, the truth dèles et des hypothèses arguments and these methodological cannot be mirrored because, as qui sont construits. Les choices create alternative truths. Ludwik Fleck argued, it depends on exigences d’objectivité Since choosing one of the alternatives the methods applied. Hence, various ou le fait de donner cannot be conducted in a rational way analysts, using alternative methods, une information vraie (assuming that arguments such as arrive at different and sometimes sont, dans bien des cas, “this is what most people do” or “it is contrary “truths.” However, I should impossibles à remplir et il faut l’attribuer à une conventionally right” do not convince highlight that the microbiologist used raison épistémique. us), there is no single, objective truth. this word in a way similar to that Est-il possible d’assu- There are only models and hypotheses done by Milton Friedman (1953) to rer les intérêts des that are constructed. Of course, in refer to the high utilitarian value of clients des institutions everyday practice, the employees of a model compared to verisimilitude financières sans établir the financial sector mostly deal with understood in the realist way. des normes éthiques the situations of a lower epistemic qui sont impossibles à complexity. I certainly do not argue A life without objectivity respecter ? that there is no objective answer Since the viewpoint of people to the question: “what is the euro/ interested in ethics in finance, dollar exchange rate now?”, but the despite their philosophical erudition, situations described above are much is closer to the one presented by

CHANGING FRONTIERS OF ETHICS IN FINANCE 107 the instrumentalist economist/ Adam Smith (2005) in The Theory of philosopher or the constructivist Moral Sentiments or, on the contrary, microbiologist/philosophers rather profit-focused homo economicus as than the realist philosophers (only), described in The Wealth of Nations the second of the above two reasons for (Smith, 2003). Since the latter demanding objectivity is more likely. possibility cannot be eliminated (not À la place des exigences Is it possible to ensure the interests to say that it is more likely based on d’objectivité, les codes of customers of financial institutions common sense), a better solution for de conduite éthique without setting ethical standards that the problem described in the essay is devraient inclure are impossible to meet? Instead of to reform institutions in such a way l’exigence d’agir dans demanding objectivity, ethical codes that the interests of bank clerks and l’intérêt des clients. of conduct should include a demand financial advisors are aligned with Cependant il y a deux for acting according to the customers’ those of their customers. défis à cette approche. interest. However, there are two Tout d’abord, même Financial sector personnel should si les banques et les challenges to this approach. not be required to be objective, institutions financières First, even though banks and but should be incentivised in such fournissent des services financial institutions deliver useful a way that their earnings depend utiles, leurs intérêts services, their interests are sometimes on customers’ profit (in the case of sont parfois en oppo- at odds with those of the customer. financial advice) or on the efficiency sition avec ceux des Apart from the obvious conflicts of their decisions (when, for instance, clients. Ensuite, nous (e.g. banks want their commission estimating creditworthiness). Once ne savons toujours pas si les gens sont des in- to be higher, customers want to see implemented, this approach would dividus guidés par des them lower), there are also a few most likely resolve the problem of principes moraux ou epistemically interesting cases. For the impossible-to-meet demands des homo oeconomicus example, a bank analyst is likely to of objectivity and the provision of centrés sur le profit. Au estimate company’s creditworthiness ‘true’ information. This approach lieu d’exiger l’objecti- in a conservative way in order to would also omit the question of vité, les employés du reduce the risk to the bank. The whether ethical standards shape secteur financier de- company’s management, in contrast, human behavior. Reforming the vraient être rémunérés in planning to build a new factory, remuneration system in the financial de façon à ce que leurs revenus dépendent du will prefer estimates that reduce the sector and removing the demand of bénéfice des clients ou interest rate they have to pay on objectivity from ethical codes would de l’efficacité de leurs borrowings. help favor those analytical methods décisions. Second, it is a pity that the and models that would be conducive question of whether codes of conduct to arriving at such results that would should be followed remains open. be most beneficial for both financial Even though a lot of water has passed institutions and their customers. under the bridge, we still do not And these results, according to know if people are individuals driven the terminology coined by Milton by the moral principles described by Friedman and Ludwik Fleck, will be true. •

DO THE RIGHT THING: INCENTIVISE ETHICS 108 References Abolafia, M. (2001). Making mar- Gaarder, J. (1994). Sophie’s World, kets: Opportunism and restraint on Paulette Møller (trans.). New York: Wall Street. Cambridge, MA: Harvard Berkley Books. University Press Goldfarb, R. (1997). Now you see Barber, B. et al. (2001). Can it, now you don’t: emerging contrary investors profit from the prophets? results in economics. Journal of Security analyst recommendations Economic Methodology, 4(2), 221- and stock returns. The Journal of 244. Finance, 56(6), 531-563. Herndon, Th., Ash, M. & Pollin, Certified Financial Planner Board R. (2014). Does high public debt of Standards (2016). Code of Ethics consistently stifle economic growth? and Professional Responsibility. A critique of reinhart and rogoff. Retrieved from: http://www.cfp.net/ Cambridge Journal of Economics, 38 for-cfp-professionals/professional- (2), 257-279. standards-enforcement/standards-of- professional-conduct/code-of-ethics- JPMorgan Chase&Co. (2016) professional-responsibility. Code of Conduct – It Begins with Me. Retrieved from: https://www. CFA Institute (2014). Code of jpmorganchase.com/corporate/ Ethics and Standards of Professional About-JPMC/document/code-of- Conduct. Retrieved from: http://www. conduct.pdf. cfapubs.org/toc/ccb/2014/2014/6. Kanner, B. (1981). Coke vs. Pepsi: Fleck, L. (1979). Genesis and the battle of the bubbles. New York Development of a Scientific Fact. Magazine, 14(39), 5.10.1981, 21. Chicago: The University of Chicago Press. Keynes, J. (1971). A tract on monetary reform. In: The Collected Friborg, O., Martinussen, M. & Writings of John Maynard Keynes, Rosenvinge, J. (2006). Likert based vs. New York: Palgrave McMacmillan. semantic differential-based scorings of positive psychological constructs: Krugman, P. (2013), The Excel a psychometric comparison of depression., The New York Times,18 two versions of a scale measuring April. Retrieved from: http://www. resilience. Personality and Individual nytimes.com/2013/04/19/opinion/ Differences, 40(5), 873-884. krugman-the-excel-depression. html?_r=1. Friedman, M. (1953). The methodology of positive economics. Lawson, T. (1997). Economics and In: M. Friedman, Essays in Positive reality. London: Routledge. Economics. Chicago: University of Mäki, U. (2011). Scientific Chicago Press, 3-43. realism as a challenge to economics

CHANGING FRONTIERS OF ETHICS IN FINANCE 109 (and vice versa). Journal of Economic Reinhart, C. and Rogoff, K. Methodology, 18(01), 1-12. (2010). Growth in a time of debt. American Economic Review, 100 (2), Maziarz, M. (2017). The Reinhart- 573-578. Rogoff controversy as an instance of the ‘emerging contrary result’ Rorty, R. (2009). Philosophy phenomenon. Journal of Economic and the mirror of nature, Princeton: Methodology, 24(3), 213-225. Princeton University Press. McCloskey, D. (1983). The Smith, A. (2003). The wealth of Rhetoric of Economics. Journal of nations. Oxford: Oxford University Economic Literature, 21(2), 481-517. Press. McCloskey, D. (1998). The Smith, A. (2005), The theory Rhetoric of Economics, Madison: The of moral sentiment. San Francisco: University of Wisconsin Press. MetaLibri. Miguel E., Kremer, M. (2004). Tegmark, M. (1998). The Worms: identifying impacts interpretation of quantum on education and health in the mechanics: many worlds or many presence of treatment externalities. words?. Progress of Physics, 46 (6-8), Econometrica, 72 (1), 159-217. 855-862. Niiniluoto, I. (2002). Truthlikeness and economic Zaremba, A. and Konieczka P. theories. In: Fact and Fiction in (2014). Skuteczność rekomendacji maklerskich na polskim rynku Economics: Models, Realism and akcji. Zeszyty Naukowe Uniwersytetu Social Construction, Mäki U. (ed.). Szczeci skiego, 803, pp. 573-581. Cambridge: Cambridge University ń Press, 82-105. ZBP (2013). Kodeks Etyki Plato (2000). The Republic, Ferrari Bankowej (The Polish Bank G., Griffith T. (eds.). Cambridge: Assosiaton Code of Conduct), Cambridge University Press. Związek Banków Polskich. Retrieved from: zbp.pl/public/repozytorium/ Reale, G. and Catan, J. (2003). A dla_bankow/prawo/komisja_etyki_ history of ancient philosophy I: from bankowej/KEB_final_WZ.pdf the origins to Socrates, Albany: SUNY Press.

DO THE RIGHT THING: INCENTIVISE ETHICS 110 111

s Moral Hazard Always IIImmoral?

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Finalist

Emilia The fundamental wonder that today’s academic, busi- Klepczarek questions about the ness or political discussion increasin- Poland gly addresses the methods of com- PhD student, moral hazard bating this main antagonist of the University of Lodz*, “Moral conduct is the oil of the global downturn; which, as a kind of Poland social machinery. It reduces the in- modern Pandora’s box, has paved the evitable frictions and pushes the way for shady practices and defective social life ahead , without spoiling mechanisms to penetrate the global the social machine,” said Witwicki financial market. (1957), the 20th century Polish phi- It seems, however, that in the losopher. Half a century later, the heat of a discussion on how to deal course of social life was severely dis- with moral hazard, certain funda- rupted by the global financial crisis, mental questions are overlooked the causes of which have been pri- which should be taken as a starting marily attributed to so-called moral point for any further debate. What hazard, or “a temptation to abuse” does moral hazard actually mean? * The views expressed in Polish literature discussing the Whom does it concern? Does the go- herein are those of crisis.. The concept, apparently de- vernment have a moral obligation to the author and do not necessarily reflect those monstrating associations with the extend aid to banking institutions? of the Organization she is abuse in the banking sector, carries Or does the bank have a moral obli- affiliated to. strongly negative connotations, and gation to avoid risk so that no gover- any action linked to moral hazard is nment help will be needed? And fi- seen as unquestionably immoral. No nally, can moral hazard be eradicated

IS MORAL HAZARD ALWAYS IMMORAL? 112 and is it really immoral? This essay begging, and corrupts the entire wor- will attempt to answer these ques- king class by offering an easy reward tions. for cheating.” It seems that moral hazard is of a dual nature: the first as- La crise financière peut Who are the moral être abordée en tant sociated with excessive risk and the que perturbation ou gamblers? second manifested in embezzlement rupture du bon fonc- The concept of moral hazard ori- and fraud. The latter is unquestiona- tionnement de la ma- ginates in the insurance sector, even bly unethical; the former will be eva- chine sociale. Comme if more recently the term is usua- luated below. d’habitude dans de However, moral gamblers are not telles situations, l’opi- lly employed to refer to fraudulent nion publique pointe practices in financial institutions. only the parties to insurance agree- son index vers les It describes the tendency of an in- ments. In the United States the 1920s coupables. sured party to assume greater risks saw a discussion about the introduc- than a non-insured party owing to tion of deposit insurance, thereby the apparent security that possessing moving the debate about moral ha- insurance carries with it.. Along with zard into the banking sector. In such the exponential growth of insurance a case , the temptation of abuse sur- Bien que l’aléa moral faces with reference both to the go- soit utilisé aujourd’hui companies in the late 19th and the vernment support for banks, taking pour désigner des early 20th century, the use of the comportements term became increasingly widespread the form of deposit insurance, and frauduleux des ins- and its underlying problem more and to the institution of the central bank titutions financières, more important (Dembe & Boden, as the lender of last resort. A moral cette notion prend son 2000). Behavioural change resulting gambler can thus be a bank pursuing origine dans le monde from the insured being protected by an excessively risky activity which is de l’assurance. Elle an insurance policy was frequently secured by guarantees from its pa- décrit la tentation, rent organisation and possible public voire l’inclinaison des an issue in relation to automotive, aid. However, it also seems necessary assurés à prendre des property and social insurance and risques plus élevés que highlighted a significant increase in to distinguish between negligence or les non-assurés. the carelessness with which people carelessness concerning certain secu- Il est important de entered into insurance agreements. rity standards, , and advocating in- distinguer clairement As early as in 1913, Isaac Max Rubi- tentional fraudulent practices inten- entre la “tentation de now (1913), known as the father of ded to mislead market participants prise de risques” et la the American social insurance sys- in general or, more specifically, the tentation de “simuler” other party involved in the agree- afin de frauder ainsi tem, drew a distinction between “the ment. Given that the second scenario l’assurance. A partir de temptation of risk” and “the tempta- cette distinction, nous tion of simulation”. “In the opinion (intentional fraud) is clearly unethi- pouvons analyser les of many,” wrote Rubinow, “the most cal, let us concentrate on evaluating aspects éthiques de destructive is a conviction that social the first (negligence or carelessness). l’aléa moral. security not only increases risk, but To start with, it is worth consi- significantly encourages the simula- dering the very purpose of having an tion of accidents, illness or lack of insurance system. Is it not designed employment, lets alone professional precisely so that the insured party

CHANGING FRONTIERS OF ETHICS IN FINANCE 113 takes greater risks? If we imagine, for economic growth. After all, banking Le système d’assu- example, that motor insurance were operations are invariably risky. The rance est nécessaire no longer compulsory, we would ex- asymmetry of information along the au développement des pect a massive increase in the cost of bank-customer line and a number of activités impliquant la vehicle use and a reduction in vehicle external factors make uncertainty an prise de risque. Sans assurances, les possibi- owners’ peace of mind. inherent attribute of financial mar- lités de crédit offertes kets. Furthermore, securing even part par les institutions Were Columbus of the potential losses catalyses fur- financières seraient and Armstrong the ther operations in these markets and bien moins étendues moral gamblers? expedites their growth and develop- qu’aujourd’hui. Cer- ment. Repair and maintenance expendi- tains philosophes vont But again, we need to make a dis- ture, difficulties in enforcing claims même jusqu’à dire que tinction between risky activities and ni Christophe Colomb and, finally, the likelihood of very fraud or embezzlement. Some people ni Neil Armstrong ne conservative driving generating ex- do not consider breaking a traffic seraient partis dans tra congestion would lead to a visible rule immoral; the same with skiing l’inconnu à la décou- decline in the number of vehicles on headlong down a very steep slope verte si leurs familles the road. Insurance solves such pro- or purchasing shares in a joint ven- n’avaient pas été assu- blems, at least in part, and insurance rées au cas où leurs ture project. By contrast, begging for companies assume that drivers are missions tourneraient compensation after a fake accident, careless and calculate their premiums mal. or pursuing creative accounting prac- accordingly. The same applies to tices to lower risk indicators would other types of insurance, for example, no doubt be seen as immoral. It goes travel or holiday insurance. Perhaps without saying that the former set of some people would give up hiking, actions is somehow embedded in in- scuba diving or skiing without if they surance market scenarios, while the did not have the psychological buffer latter flouts any generally accepted of accident insurance in place. Some Les récents sauve- moral principles. philosophers even surmise that Co- tages des banques ne découlent pas de leur lumbus would not have discovered One hazard two faces droit illusoire à être America and Armstrong would not Bearing that in mind, can over- préservées de la faillite, have set foot on the Moon if their fa- exposure to risk without the intent of mais de droits fonda- milies had not been granted financial cheating or concealment of informa- mentaux des citoyens support, thus taking their share of tion be justified, and can we consider au bien-être et à la the risk had the mission failed (Hale, this kind of moral hazard ethical ? To prospérité. Le soutien à 2009). la liquidité des banques answer this question, some differen- est donc justifié du However, while the relations- ces must be taken into account bet- point de vue éthique hip between moral hazard and great ween a standard insurance agreement seulement si cette discoveries is questionable, it seems and agreements concluded in the obligation est dérivée more than likely that the lack of secu- banking sector, which, comprising of du droit des citoyens à rity and insurance in financial institu- institutions representative of social une vie décente. tions would considerably restrict the trust, is governed by certain specific En conséquence, la availability of credit, thus arresting rules.

IS MORAL HAZARD ALWAYS IMMORAL? 114 justification de la First, an “ordinary” agreement only stems from the citizens’ right to recapitalisation du with the insurer is a voluntary busi- an acceptable standard of living. It fo- secteur bancaire ne ness contract; on the other hand, the llows, therefore, that if in any given signifie en rien que les relationship between banks and their circumstances there exists a method individus qui sont à public “administrator” is in a sense a of asserting this right which is more l’origine de cet état de fait ne devraient pas social agreement that meets all the re- morally acceptable, this method être mis à contribution. quirements arising from the assump- should be adhered to . En dernière analyse, tions made by Hobbes and the canoni- However, if saving people rather il s’agit de protéger cal theory. If, therefore, we agree that than banks is a moral duty, there les citoyens, non pas this agreement protects the wider is certainly no moral duty to save les banques ou leur community interests, any violation of bankers who have acted in a way dirigeants. the contract must necessarily be con- which threatens social prosperity. sidered immoral. But here again, the Any justification of recapitalisation question is raised: Do we know what of the banking sector does not mean the deal is ? that the individuals who are to blame Despite appearances, this question for the existing state of affairs should is far from simple to answer. Let us not take responsibility. Mind you, we focus first on the commitments which protect citizens not banks, let alone the government makes in this agree- bank executives. Il semble impossible ment, and on any moral obligation it de trancher de façon A more complicated dilemma pre- might have to save the banking sec- ultime si certaines sents itself concerning the moral obli- actions sont bonnes tor from collapse. The answer can be gation of banks to operate in a man- ou justes et droites. found in Article 25 of the Universal ner that rules out the need to apply D’autant plus que dans Declaration of Human Rights: “Ever- for government aid. The content of certaines circons- yone has the right to a standard of li- the social agreement in this case is tances, elles pourraient ving adequate for the health and well- imprecise . The boundary level of risk apparaître comme being of himself and of his family.” preventing liquidity issues cannot be absolument justes, Based on this fundamental right, the established. It could also be possible alors que dans d’autres government should be assuming a elles seraient inappro- to gain a public consensus of opinion moral obligation to protect its citizens priées. over what is an acceptable level of risk Il est difficile de from crisis that might significantly for banks to take. Any organisations traiter les questions de decrease their standard of living. which have crossed this boundary moralité de manière Consequently, rescue packages or would be labelled immoral. However, non équivoque pour programmes are not implemented as obtaining a general social consensus une simple et bonne part of the banks’ fundamental right on this issue is not possible. In addi- raison : il n’y a pas de to be protected against failure, but as tion, information asymmetry and the définition générale part of the citizens’ fundamental right number of variables which have an et universellement to well-being and prosperity. Several admise de la moralité. impact on a banks operational risk important conclusions can be drawn La question de savoir is so vast that it is not possible to acce qu’est la morale at this point: supporting the liquidity curately assess an operation’s level est susceptible de of banks is ethically justifiable, yet the of uncertainty. More than that, the nombreuses réponses obligation to provide such support low level of risk translates into high

CHANGING FRONTIERS OF ETHICS IN FINANCE 115 basées tantôt sur la interest loans, while, evidently, the thanks to such government institu- religion, tantôt sur le public expects the supply of capital tions as Freddie Mac and Fannie Mae droit, ou encore sur at the lowest price. A high volume of assuming almost the entire risk of re- les émotions ou sur les loans, especially which stimulate ca- payment of the most vulnerable loans normes sociales. Ces pital expenditure, is highly desirable in bank portfolios. Let us ask the same réponses sont abordées dans le texte et elles in the economy. How, in this case, is Americans whether it is acceptable to serviront de base pour the social agreement formulated and be one of the 7 million people evicted traiter la question de la should excessive risk coupled with from their homes. Is it good to be os- (im)moralité de l’aléa almost free mortgage loans be consi- tracised and have pockets lined with moral. dered a violation of this agreement? junk shares of your own bank? And Answering this question would be to finally, it is acceptable to initiate res- state the obvious... cue programmes paid by newly prin- ted or taxpayers’ money? Therefore, What is “moral”? should we conclude that this hazard Questions of morality are usually is good or bad? Serait moral ce qui difficult to address in an unequivocal “Moral is that which is righteous.” est acceptable pour manner. The reason for that is fairly Here again we approach the same di- la majorité ? Pour simple: there is no single and genera- lemma: who should determine what paraphraser G. Frege lly applicable definition of morality. is righteous? In the long dispute “être moral est diffé- “What is ‘moral’?” Numerous answers about moral relativism, the Cartesian rent d’être considéré understanding of certainty as an attri- comme moral par une can be given to this question, based autre personne, par on religion, law, emotions, or social bute of knowledge is often dispara- beaucoup d’autres rules. Below I will share the answers ged. If, like the absolutists, we refer to voire même par tous. that I hear most frequently and will ethics as a science of morality which En aucun cas, la attempt to refer them to our explo- provides justifications based on a cri- question de moralité ration of the (im)morality of moral tical scientific methodology, we are ne devrait être réduite hazard. forced to reject the standards of those à cet aspect”. Il n’en “Moral is that which is good.” cultures which lack any considerable demeure pas moins scientific legacy or which treat scien- que nous ne savons Nevertheless, we must ask, good for ce differently. Consequently, the pro- toujours pas ce qui whom? And what if today’s good pro- est considéré comme ves a disaster tomorrow? Looking blem arises of whether we are able to moral par la majorité. back to 2006, we could ask millions propose such a set of rules or methods Etre moral, c’est suivre of Americans whether buying a proof their determination that will hold des principes comme perty at a 100% mortgage and a very true universally and will protect the le rappelle I. Kant avec low interest rate is acceptable. We legitimate interest and welfare of son impératif catégo- could ask bank executives whether everyone. If we answer in the affir- rique. paying themselves high bonuses for mative, further problems ensue. How Etre moral, c’est être can we objectively lay down such inspiré par de bonnes profit while being reluctant to take rules? Who is qualified to verify that intentions. Fondamen- any consequences for possible losses talement, l’aléa moral is acceptable. We could ask US con- impartiality? And, finally, once veri- se réfère uniquement gressmen whether it is acceptable fied, how can we make sure that the aux comportements to earn the support of poorer voters assessment is correct? After all, there

IS MORAL HAZARD ALWAYS IMMORAL? 116 intentionnels. Dans are people for whom the develop- bly interpreted public expectations cette acception de ment of financial markets, even at the as permitting or even encouraging moralité, les banques cost of issuing high risk derivatives, high risks. The information about qui n’ont pas manipulé constitutes the only correct view of this public acceptance may have leurs états financiers the evolution of the financial system. et n’ont pas délibé- been obtained from political and so- rément diminué les Still, there are those who continue to cial institutions, in a sense legitimi- indicateurs de risques regard government assistance to fi- zing the desired level of risk as so- devraient être considé- nancial institutions as a legal reward cially permissible. Therefore, banks rées comme ayant agi for thoughtlessness or an anti-market can be said to have acted within the moralement. support for losers. I have already out- framework of existing standards and lined some well-grounded arguments their activity did not violate the so- that contradict both of these theses. cial agreement (Claassen, 2015). Yet, the supporters of either of them “Moral is following principles.” should not be denied accurate jud- At this point, it is impossible to ig- Est moral ce qui vaut la gement. Considering the above, we nore Immanuel Kant and his duty peine d’être répété. Or, should see eye to eye with Jesse Prinz imperative. He says that a moral act si l’on pouvait savoir who rejects reasoning as a method of is committed out of duty while an- de manière ultime si ce seeking moral values (Prinz, 2011). ything which is done out of desire is qui vaut d’être répété Of course, he does not challenge the either neutral or reprehensible. Let est juste, il serait plus significance of reasoning in develo- us ponder in what way a bank’s obli- facile de discuter de ping moral principles, yet he claims gation can be considered superior . moralité. Sans cela, that it ultimately and always refers to tout dépend de l’inter- Besides meeting legal requirements, emotions. prétation. the most important obligation is to Est moral ce qui est Some other definitions act diligently, which stems from the conforme à la justice of morality standards of corporate governance. … L’exigence de base It is commonly defined as being vigi- ici est de savoir quelle “Moral is that which is accepted lant to detect any potentially impor- est le principe de jus- by the majority.” To paraphrase Gott- tice : le traitement égal, lob Frege, “being moral is something tant issues. Although it is impossible ou le “à chacun selon other than being considered moral to objectively verify how vigilant ses besoins”. Dans le either by one person or by many, or someone is, an intuitive assessment secteur bancaire, quel even by all, and in no case should it leads to the conclusion that this sens faut-il donner à la be reduced to this alone” (quoted af- obligation was not duly satisfied by justice face au refus du banks. gouvernement d’aider ter: Niebrój, 2012). However, even if Lehman Brothers alors we reject this argument, at this point “Moral means guided by good in- qu’il recapitalisait we should return to our discussion tentions.” Surprising as it may seem, d’autres banques à of the content of the social agree- people often judge intentions and not court de liquidité ? ment concluded between the public consequences. Imagine a situation in and the banking sector and consi- which the government provides mo- der whether the level of risk taken netary aid to banks suffering from by banks was actually rejected by an environmental disaster. Would citizens. Perhaps the blame should any opposition be voiced? Basically, not lie with banks if they reasona- moral hazard covers only intentio-

CHANGING FRONTIERS OF ETHICS IN FINANCE 117 nal behaviour; again, a distinction require the perpetrator to be ready Il est facile de juger should be made between the beha- to sacrifice.” Indeed, governments ex post. L’aléa moral viours focused on the promotion of demonstrated their willingness to ne doit pas toujours welfare and those chasing fraud and help and even made real sacrifices, être considéré comme immoral. Laissant de embezzlement. With such an unders- whereas banks behaved in quite the côté le cas de l’abus, tanding of morality, banks which did opposite fashion. Major scandals inqui relève, à l’évi- not cheat in their financial state- volving the return of monetary aid dence, de la fraude, les ments and did not deliberately lower only to be given the green light to autres situations sont risk indicators should be regarded as pay staggering bonuses to managers difficiles à juger. En acting morally. testify to the deficiency of banks’ wi- conséquence, ni les llingness to contribute their part. banques agissant dans Are moral acts le respect de la loi et always worth “Moral is that which is just.” If avec le soutien eupho- this is so, it will prove beneficial to rique des débiteurs, repeating and fair? briefly explore the principle of justi- ni les gouvernements “Moral is that which is worth rece: “Nobody deserves things merely cherchant à éviter un peating” I will eat my hat if anybody because it is him or her and not so- effet de domino, ne can tell me which elements of bank mebody else,” reads one of the de- méritent d’être unani- or government policies are worth re- finitions (Ajdukiewicz, 1960). “Do mement ostracisés. peating . Even today, a few years after the same in identical circumstances,” the crisis, no clear position has been reads another one (Chwistek, 1936). articulated on whether the govern- However, even this apparently sim- mental capital injections were right, ple rule raises serious doubts. The and interest rates are again very low basic requirement is to make it clear and encourage banks to oversupply whether “just” means (to do) “equa- L’aléa moral est-il tou- credit. Eugene Dupreel in his Traité lly to everyone” or “everyone accor- jours immoral ? Non, de morale says that acts that are de- pas toujours ; même ding to their needs.” If we go for the bien moins fréquem- sirable and worthy of praise tend to needs, which seems more compelling ment que nous ne le be repeated in one of two ways (Du- anyway, then someone else should pensons. Pour justifier preel, 1969). Some of these acts, in be able to measure such needs. Ac- cette thèse potentielle- addition to the value for which we cepting or distributing? Looking ment controversée, je praise them, are useful for the person again at the banking sector, how me réfère à la langue carrying them out; some other acts, does this principle refer to the fact polonaise qui parle by contrast, are harmful or unplea- of refusal of governmental aid to Le- littéralement de la sant. Dupreel notes that the acts of “tentation d’abus”. Or, hman Brothers, while recapitalizing la tentation est-elle the former kind do not need praise others running the risk of illiquidity? immorale, ou bien because the doer does not deserve The only explanation is that Lehman seulement le fait de any special merit. Only the acts of Brothers was assigned to another lui succomber ? De the other kind, as the author under- fundamental category, which would plus, dans notre cas, lines, garner praise and recognition justify the government’s attitude to nous devrions savoir to the doer. “Morally good acts are other salvaged institutions. Or may- exactement de quel those which go beyond remaining in be, in this case, justice does not come abus on parle. De la line with specific rules or laws, and into play?

IS MORAL HAZARD ALWAYS IMMORAL? 118 manipulation d’états instruments that were so complex financiers – certai- It is easy to judge post factum that no one knew what they relied nement. Mais qu’en on and how much they were wor- est-il de l’“exposition “I know one thing: that I know th? What about those billion-dollar excessive aux risques” nothing”, you would like to say with si décriée aujourd’hui swap transactions and forward and ? Qu’en est-il de ces Socrates. An attempt to put together futures contracts that should be con- swaps en milliards the pieces of reflection on moral ha- sidered more of a guessing game that indispensables à la zard reveals how complex the pro- the implementation of a bank’s stra- stratégie bancaire ? blem is. The only thing that is clear is tegy? And if all that occurred in ac- the origin of the term, the rest mean- cordance with the law and with the ders between dilemmas and subjecti- unanimous approval and euphoria of ve judgements. Still, some conclusive borrowers and investors, should it be remarks are needed to add some va- considered immoral? Perhaps, in one lue to all these deliberations. case only: if the bank authorities had Is moral hazard always immoral? known or had been able to predict Selon F. Nietzsche, No, not always; even less frequently how this madness would end. Given il n’y a pas de phé- than we tend to suspect. To justify the sheer panic, bafflement and giant nomènes moraux, this, perhaps controversial, thesis, stocks of own shares that the bank mais seulement des executives ended up with in 2008, it interprétations morales it would be advisable to refer to the is no surprise that it did not dawn on des phénomènes. Ces Polish synonym of the term. A temp- paroles captent l’essen- tation of abuse: can this be immoral them earlier. tiel de la discussion sur in itself? What about saints? Weren’t And what about state authori- la tentation de l’abus. they tempted? Succumbing to temp- ties? This question is simpler to an- De même, la moralité tation would certainly be considered swer. They should by all means fight de l’aléa moral est une immoral, but in our case, it is neces- to prevent the devastating domino question d’interpréta- sary to clearly define what an “abuse” tion. Il n’y a pas une effect and stop the crisis phenomena seule opinion juste, pas is. No doubt, it is the manipulation looming over the economy. As long même l’opinion pu- of financial data in order to obtain as no one proposes a better method blique. Il est facile de the best possible rating. It is also than liquidity packages, they have no proférer des jugements the obscured level of risk associated other choice. Indeed, this is not true post factum, en ou- with sold derivatives. It is also disin- that banks were transferred extra bliant l’enthousiasme formation and non-transparency of capital: government aid mostly in- général aux temps operations. These are some obvious volved the redemption of less liquid de la prospérité. Et, peut-être, après tout, cases of abuse regarded as economic assets or granting long-term loans to lorsque nous attendons offences – their morality, or rather those institutions that pledged the tous avec impatience the lack of it, needs no further ex- tightening of their financial security la prochaine reprise ploration. But what about that rather policies. Again, supporting banks is économique, sommes- stale slogan from today’s perspecti- not tantamount to supporting their nous un peu immo- ve, of “excessive exposure to risk”? directors or managers. Indeed, they raux ? What about those millions of mort- should bear the consequences of gages that should never have been their incompetence. For each of the sold? What about those derivative salvaged institutions such incompe-

CHANGING FRONTIERS OF ETHICS IN FINANCE 119 tence can be proven, since their deci- rality of moral hazard is a matter of sion-makers were not able to predict interpretation, emotions and outlook the disastrous effects of the property of the evaluator. There is no single bubble. and the only right opinion, let alone the public opinion. Passing jud- Conclusion gements post factum does not prove in the least demanding, if one con- “There are no moral phenomena veniently fogets the overwhelming at all, only moral interpretations of enthusiasm in the time of prosperity. phenomena” – Friedrich Nietzsche’s After all, perhaps all of us who are words best fit the discussion of the forever awaiting the economic boom temptation to abuse. Also the mo- are a little immoral? •

References Ajdukiewicz, K. (1960). O Niebrój, K. (2012). Subiektywne sprawiedliwosci. A lecture delivered – intersubiektywne – obiektywne w in Lviv in 1939. (Reprint in: Jezyk i ujeciu Gottloba Fregiego. Analiza i poznanie, Vol. I, Warszawa) Egzystencja, 17 Chwistek, L. (1936). Rola za- The Universal Declaration of Hu- sady konsekwencji w zagadnieniu man Rights (UN 217 A (III) done at sprawiedliwosci społecznej. Przeglad 10 December 1948) Filozoficzny, Kraków Prinz, J. (2011). Morality is a cul- Claassen, R. (2015). Financial turally Conditioned Response. Philo- Crisis and the Ethics of Moral Hazard. sophy Now, Vol. 82 To be published in: Social Theory and Practice, Vol. 41, 3 Rubinow, I.M. (1913). Social In- Dembe, A. E.& Boden, L. I. surance With Special Reference to Ame- (2000). Moral Hazard: A Question of rican Conditions Morality?. New Solutions, 10(3) Witwicki, W. (1957). Pogadanki Dupreel, E. (1969). Traktat o mo- obyczajowe. Warszawa ralnosci. Oxford University Press Wolenski, J. (2005). Epistemo- Hale, B. (2012). What’s so Mo- logia. Poznanie, prawda, wiedza, ral About the Moral Hazard?. Public realizm. Warszawa: Wydawnictwo Affairs Quarterly, 2(1) Naukowe PWN

IS MORAL HAZARD ALWAYS IMMORAL? 120 121

irty Hands and Dirty Money: DDTowards a Framework for Fighting Pollution in Finance

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Finalist

Mar Pérezts Whenever I tell people that my Wall Street by J.S. Bron in 2010; Insi- Mexico-France research focuses on ethics in ban- de Job by Charles Fergusson in 2010, Associate Professor at king and finance (Pérezts, 2012, Pé- Margin Call by J.C. Chandor in EMLYON Business rezts, Bouilloud & Gaulejac, 2011; 2011, and The Wolf of Wall Street, by School & OCE Pérezts & Picard 2014; Pérezts, Faÿ M. Scorsese in 2013. This is but one Research Center*, & Picard, 2015) I usually get a cy- manifestation of the media frenzy Ecully France nical grin followed by “Ethics in around this subject, which can also banking? Ha! Haven’t you read the be found in cartoons, television se- newspapers lately?” As if banking ries and comedy sketches, somewhat and finance were inherently immoral revealing our fascination (or maybe or at least a-moral, and I was wasting obsession) with ethical issues in bu- my time (Pérezts, 2014). siness in general (Trevino & Nelson, But despite the persistent irony, a 2007) and in finance in particular certain societal fascination for these (cf. Godechot 2011b). issues seems equally persistent. Sin- And this obsession inevitably ce the outbreak of the financial crisis brings with it a series of questionssti- in 2007, no fewer than seven major rring our societies who demand * The views expressed films have been released whichques- long-term answers. Indeed, when herein are those of tion the ethics of the financial world: people start asking,”what is a bank the author and do not Capitalism, a love story by M. Moore supposed to be and be for? What is it necessarily reflect those in 2009, Wall Street 2: money never supposed to do?” We are far beyond of the Organization she is sleeps by O. Stone in 2010, Krach, the strict crisis-management phase. affiliated to. by F. Genestal in 2010, Cleveland vs. These are institutional, ontological

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 122 and teleological questions that cha- pliance practices. Such a perspective llenge the very nature, purpose and will allow me to highlight some un- reason for existence of banks – at derlying mechanisms of compliance least in their current form and prac- and attempt to unveil their recep- Notre fascination tices. Furthermore, such questions tion and implications in society. (obsession?) pour les reveal an enduring and underlying For practitioners, this will help to questions éthiques dans societal obsession with purity and ground financial ethics in complian- les affaires en général pollution as studied by anthropolo- ce, and make ethics an object not et dans le monde finan- gists like Mary Douglas (2004, 2005, only of normative concern (a ‘crime cier en particulier est le and punishment’ perspective), but reflet d’une obsession 2013) which affects the financial in- sociétale sous-jacente dustry in a stringent, silent and often rather of more meaningful organiza- avec les questions de understudied way. We cannot seem tional practices in complex everyday pureté et de pollution, to get rid of the idea, lodged deep working settings. telle qu’étudiée par des in the collective sub-conscious,that anthropologues comme wherever money is involved (and Insights into the Mary Douglas. especially large sums of money) the- construction of L’idée que lorsqu’il (dirty) money est question d’argent re is pollution and dirt, i.e. immoral (et en particulier behavior. If, during the recent crisis, banks d’importantes sommes This paper seeks to shed light on and financial institutions were sin- d’argent) il y a de la this deeply rooted issue; how finan- gled out as the major crime scene and pollution et donc un ce – its professions, organizations ethics was supposed to be absent, we comportement immo- and practices – is perceived more or still need to define the role played ral, est profondément ancrée dans notre less consciously as a source of po- by money: the motive? The culprit? inconscient collectif . llution and danger to the economy The victim? Behind the simple yet and broader society (Jacobs, 2012: mysterious word ‘money’ lies the ob- 384). This manifests itself through ject that is both feared and revered, an increasingly generalized mistrust treasured and despised, desired and towards banking and financial ins- stigmatized (Bouilloud & Guienne, titutions, at the crossroads of nor- 1999) and constitutes an interesting mative and ethical questions, but gateway to study the equally am- also and maybe more importantly bivalent and complex relationship Le mot ‘argent’, simple anthropological and sociological between ethics and banks (Zelizer, et pourtant mystérieux, dimensions. Exploring such dimen- 1979). Indeed, if banks and financial cache un objet para- sions allows us to better understand institutions are morally problema- doxal, craint et vénéré, organisational responses such as risk tic, it is largely because they are the tésaurisé et emprise, management, control measures and main vehicles for the circulation of désiré et stigmatisé. compliance practices. Here, I shall wealth in our global economy. attempt to provide insights using For the common citizen, it is easy this anthropological lens on the to identify such institutions with construction of pollution in finance, the personifications provided by as well as on the measures in place the media, such as the cynical cha- to fight such pollution through com- racters of Gordon Geeko or Jordan

CHANGING FRONTIERS OF ETHICS IN FINANCE 123 Belfort. These appear as the new fi- translated into products traded in gures of global power, replacing the the complex whirl of finance (Pé- portraits of the kings and emperors rezts, 2014). that we find on coins and bills sin- “Money is sticky stuff” (Green, ce Antiquity. Political power, along 1989), and just like banks, it is an with religion and money constitute intermediary for social ties, a revela- the three pillars of belonging to a tory of relationships, and not only L’argent est un fait community (Durkheim, 1912), and business ones (Zelizer, 1989). It is a social et culturel, qui the sole reason that would push us cultural fact, which shapes our men- formate nos catégories to pay the price of alienation (Marx, tal categories of value, prestige and mentales indépen- 1982 ). Stock markets are the ‘mo- dament de sa valeur success (an idiot with money is not dern temples’, according to novelist monétaire. the same as an idiot without money, Zola (2009 ), who hold the mono- cf. Bouilloud, 1999). Money trans- poly on value, values and valuables. ports meaning: “by restraining and Hence, financial markets have beco- channeling the flow of money, people me “the new gods who comment on use it as a bearer of social meaning. and change the course of human li- Instead of interpreting restricted circu- ves by delivering their daily verdicts lation as a sign that money has failed from the top of their Olympus” (Go- to perform, we should recognize that 1 dechot, 2001: 13 ). such patterns reflect the creation of Pecunia non olet? meaning. Money is a way to communicate messages as well as command Yet, despite being universally resources.” (Carruthers, 2005:357). present, money remains universally Far from being a universal equi- invisible: it is a “’blind spot’ of re- valent as suggested by the famous Le sale, d’après Dou- search”, a “radical methodological phrase pecunia non olet (money glas, est une catégorie unthinkable thing” and fundamen- has no smell)2, money is not socio- du désordre, du chaos. tally a “taboo” (Bouilloud, 2004:5). logically neutral, and will be used, L’argent, en tant qu’il This results in contradictory feelings perceived, or judged according to transgresse de nom- which are projected upon the entire a variety of factors like its origins - breuses frontières, est financial system, creating confusion donc une source de stolen, earned, inherited…; its uses between the real and the imaginary, pollution. - investments, gifts, hobbies, food and between the individual and co- and health expenses, education…;, llective representations and fanta- and the people involved in the tran- sies. As inescapable intermediaries, saction – a couple, family, friends, banks handle money but also an- business partners, strangers… (Bou- ything that may have monetary value – including our fears or hopes, 2 In the 1st century, Emperor Vespasian is supposed to have said this phrase to his son, 1 When there is no English version available when he complained about the disgusting of quoted texts, the translations are ours. nature of the new urine tax for the tanneries Texts are referenced in the language and the of Rome through the new Cloaca Maxima sys- edition that was used. tem of sewers.

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 124 rdieu, Boltanski & Chamboredon, Drawing on the works of anthro- 1963; Carruthers, 2005; Zelizer, pologist Mary Douglas (2004, 2005, 1989, 1997). It is therefore clear that 2013), the notions of pollution and money does not have the same smell dirtiness provide an interesting ap- – or colour or value or meaning for proach money and markets, and bet- that matter – regardless of its source, ter understand the construction of and independently of its actual mo- our mental schemes of reference, of a netary value (Gaulejac, 2004). symbolic order that operates through separation and discrimination that Money: between life will have a profound influence not and death, sacred and only on our representations but first profane, purity and dirt and foremost on our practices. Dir- tiness is deeply linked to non-con- “Money has become a synonym for formity with conventions of a given life: don’t we say “to earn a living”? order . Today for instance, we speak (…) Money also announces death; it of shades of grey: grey money being places the subject in the position of a the product of undeclared tax money funambulist between loss and gain. for example, and black money resul- Ruin is the reverse side of power, looting from criminal activities (Zeigler, sing one’s most precious possessions, 1990). The origins of money prevail and oneself. Money brings the taste for Le sale, d’après Dou- over its nature (whether ontological risk, the fever of the game, we think we glas, est une catégorie or even legislative) when construc- du désordre, du chaos. can use it to play with death, to defy ting classifications. L’argent, en tant qu’il destiny, and at the same time we com- transgresse de nom- pulsively look for the fall, it is a way Dirtiness, according to Douglas, breuses frontières, est to flirt with death. (…) Money, games, is a category of disorder, of chaos. donc une source de alcohol, drugs, women, are all equiva- Money, in that it transgresses nu- pollution. lents of death, but it is money that gives merous boundaries, is such a sour- access to all others.” (J. Barus-Michel, ce of dirtiness. First, a confusion of 2004: 27). the boundaries of being and having (être et avoir), where the latter be- Money has never been considered comes the measuring item for the suitable for mealtime conversation, former (Barus-Michel, 1999). This perceived as bad taste, and a social changes our relationship to ourselves transgression (Bouilloud, 1999:7; and to others. Second, the boundary Gaulejac 2004). It is not strange then between the sacred and the profane: to find that money is often associated awarding a price to something is akin with a vocabulary of pollution: toxic, to reifing it, and this reification is a rotten, dirty, blood money, dodgy desacralisation: as when insurance debts, dunghill... It is truly a diabolic companies set a price on one’s health element in the etymological sense of or life, or kidnappers ask for a ran- the word: that which separates (dia- som in exchange for a loved one. two) and forgets the fundamental unity (Droit & Henrot, 2010: 89).

CHANGING FRONTIERS OF ETHICS IN FINANCE 125 But pollution is more ambiguous revenues posess a problematic politi- than binary logic would suggest: in- cal meaning that must be managed.” deed the realm of the sacred is so (Carruthers 2005:357-358). because it is polluted and dange- Money is a semiotic instrument, rous (Eliade, 1958: quoted in Dou- which classifies things by giving glas, 2005:30), and must therefore them a certain ‘colour’ or ‘smell’, as be kept apart from the profane, the shown in Douglas’ extensive work common. A strange proximity bet- on the abominations of Leviticus ween the dirty and the polluted is a (2005): jurist-priests become the line as thin as the one between good guardians of such classifications and evil, and therefore profoundly into an established order, just as problematic. For instance, traders compliance officers sanctify forma- see “the lack of money as a fault, lity and paperwork in the financial a failure, a stain in a world where sector today. one’s value comes through compe- Considering dirtiness allows us tition for profits and individuals’ to better understand both sides of status results from their revenues” the coin: order and disorder, cosmos (Gaulejac, 1999:95). This figure of and chaos, the existence of all orga- Les banques appa- the trader is emblematic of the dia- raissent comme nized business and societal relation- lectic between the polluted and the l’endroit idéal où les ships and the transgressive elements imaginaires derrière sacred, or to use Douglas’ term, it which unbalance such relationships. l’argent convergent. is a magician, a sorcerer, a figure of Dirtiness is therefore never an isola- Et en cas de mauvaise transgression, and therefore on the ted fact, because according to Dou- gestion des risques lies margins of society, inspiring a cer- glas (2005), where there is dirtiness, à l’argent, elles peuvent tain fear and respect. And money, devenir une source de there is a system. And this system as any object that transgresses esta- acts by rejecting the elements that pollution pour le reste blished boundaries of a given order, de la société. do not conform or comply, the ano- is seen as a dangerous and impure malies (a-nomos, a-normal). element (Douglas, 2005). Dirtiness, once we’ve moved beyond the con- From dirty money to ceptual prison of hygiene, is simply dirty hands: how banks about something that is not in its become both polluted proper place within the order. and a source of Therefore, it all depends on the pollution internal rules of this order. For example, not all money-laundering These are turned into objects is necesarrily ‘bad’. Indeed, nation of surveillance and control,or into states can ‘launder’ money as a le- rules to indicate what the anomaly gal and also ‘good’ activity: “Money does not conform to, and the patter- from ‘sin taxes’ on tobacco and alcohol ning of such categorizations into a products supports particular ends, like formalized system . public education, partly because these It is not new that professions

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 126 linked to money have endured a ne gagneuses” or whores (Kerviel, longstanding contempt from socie- 2010). What’s worse, far from being ty. Usury was already denounced by an insult, this was claimed with pride Aristotle, and later we find this same even louder in order to further pro- condemnation by most religions3. voke others who stood outside of this This religious image finds itself rein- golden elite. forced in art, like in the painting be- Gambling is another common low of a common motif, and in litera- image used to both accuse finance ture, with characters like Faustus, or and fantasize about it, as British hu- Moliere’s Misanthropistr. morists John Bird and John Fortune Figure 1: Q. Metsys. Le Prêteur commented on in their sketch about et sa femme, 1514. Musée du the subprime crisis aired in 2007: Louvre. Paris “market participants don’t know whether to buy on the rumor and sell on the news, do the opposite, do both or do neither depending on which way the wind is blowing” and “this was the kind of rigorous analysis that banks would pay huge salaries and bonuses for”. Banks appear then as one of the perfect places where such imagina- ries converge, as a series of recent Prostitution, or the selling of events seem to confirm – the subpri- sacred things (like the body) in ex- me crisis in 2007, Kerviel’s record change for money, has also seen wi- rogue trading loss in 2008, closely despread condemnation. It is not a followed by scandals of Bear Sterns, coincidence that Marx calls money a the fall of the Lehman Brothers and prostitute, and that recently the ro- Madoff’s disappearing trick of over gue trader Jérome Kerviel wrote in 50 billion dollars by the end of that his autobiography that in the Société year. What do all these have in com- Générale, the bank where he worked mon? That each time, banks didn’t for, traders were nicknamed “bon- know, didn’t see, didn’t detect any anomaly despite their sophisticated 3 Judaism restricts its forbiddingforbidance of control and risk management mea- usury to betweenamong Jews, which has resul- sures (Favarel Garrigues, Godefroy ted in numerous anti-semitical criticisms with the tragic consequences we know (see Attali, & Lascoumes, 2009). The problem 2002 for a historical account, or Marx’ Jewish is that in our globalized economy, Question). Islamic finance condemns usury as systemic risk is an unescapable fact, well, and Christianity has made poverty the condition for redemption (see The Gospels of and when financial institutions make Mathew 6:24a; 19:24 or Luc, 16:13a) mistakes in handling pollution, they

CHANGING FRONTIERS OF ETHICS IN FINANCE 127 inevitably spill this pollution across 1980, the Basel declaration on AML the rest of society. The boundary of of December 12th 1988 and the 1989 cosmos is transgressed, opening the G7 “Summit of the Arch” which lead door to chaos. to the creation of the Financial Ac- tion Task Force (FATF) as the main Fighting pollution international regulator on AML, it The concern over dirty money is has become a major player in the not new, and its potential dirtiness fight against dirty money and the was identified very early on in the financing of terrorism (Favarel-Gua- stages of production, circulation, re- rrigues, 2003; Scheptycki, 2000; Wi- cycling and counterfeiting as one of lliams & Baudin-O’Hayon, 2002). As the oldest jobs in history. New ways key intermediaries of the economy, of fighting pollution have prolifera- banks always ask two questions: ted since the earliest times. Here I where is the money coming from and will take two examples of practices where is it going? (Rouquié, 1997). currently used by financial institu- They are expected to act as gatekee- Avec l’institutionna- tions worldwide as part of their regu- pers of the legal financial market, by lisation de la lutte latory obligations, and try to discuss becoming watchdogs or ‘sentinels of anti-blanchiment, dirty money’ (Favarel-Garrigues, et aujourd’hui on exige their inconsistencies in the light of al. 2007, 2009). They can no longer des banques qu’elles the anthropological perspective de- intègrent une fonction tailed above. confine themselves to their traditio- de police à leur logique nal commercial logic: policing and commerciale tradition- Current construction regulation have become one of their nelle, et qu’elles soient of dirty money central functions (Edwards & Wolfe, les gardiennes du sys- We have progressively installed 2004, 2005; Reiner, 1997). tème financier légal. means of control at national and in- By focusing not on the production ternational levels, such as the crea- of dirty money or its final reinves- tion of the United States Secret Ser- tment in the legal economy but ins- vice in 1865 to fight counterfeiting, tead on the middle phase of transfor- to author legislative and normative mation by the global financial system, measures to frame practices, to iden- AML is increasingly placing banks at tify dummy companies like Capone’s the forefront of the fight. However, laundries, smurfing methods, cash despite general acknowledgement transfers across borders or off-shore that the problem is on a global scale, transits (Couvrat & Pless, 1988; ratifying a global response is far from D’Aubert, 1993; Favarel-Garrigues et evident. AML legislations differ from al. 2009). one country to the next, even within Recently, anti-money laundering the European Union, making dirty (AML) has gained increasing im- money harder to track because clas- portance and visibility, with direct sifications and control enforcement impact on the financial sector. Since measures may vary from country to the European Council of June 27th country. This constitutes an ideal

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 128 loophole to exploit in order to conti- Dirty hands: nue laundering money – a challenge Know-your-Client still faced by professional international associations such as ACAMS4, Perhaps even more so than AML, and by analysts and regulators no KYC is about classifications, lists matter what organisation they be- and risk ratings aimed at enhanced long to. For example, a strong point risk management and control of cus- of enduring disagreement concerns tomers, i.e. the source of money or bank secrecy in countries like Swit- the beneficiairies of a transaction zerland. There secrecy is considered (Hodgson, 2002; Mulligan, 1998). part of their basic professional ethics When analysts detect a potential towards their clients but it may also client, a current client or even a hinder AML investigations.Poor en- transaction that makes them suspect forcement and/or poor cooperation money-laundering, they are able to in countries where the institutional express theirsuspicions to the inter- framework is weak may also prove nal AML officer, and to national or a hindrance. international financial intelligence La Lutte anti-blanchi- While initially considered as units5. The reputation of the bank ment est étroitement a form of window-dressing, some is of course one of the primary con- liée à la connaissance semblance of a global prohibition cerns, but increasingly important is client (KYC - Know- regime (Djelic & Sahlin-Andersson, also its criminal liability, with, for your-client), avec ses example, penaltiesin France ranging pratiques de profilage 2006; Nadelmann, 1990) now seems from 10 years of imprisonment and et de catégorisation plausible, with the progressive le- des clients, donc de la galization of international relations a 750’000 euro fine to the loss of the source et de la destina- geared towards risk management operating licence. tion de l’argent. was further reinforced after the 9/11 It was strongly resisted at first by attacks (Hood, Rothstein & Bald- financial practitioners: win, 2001; Power, 2004). Pressured “ABA strongly urges the respective by an effective soft law combined agencies to withraw the current pro- with institutional stress (Favarel- posal. Given the widespread and in- Garrigues et al. 2009), the USA has creasingly negative perception of this progressively constrained over 170 proposal, we are very concerned about countries to adopt AML regulations the prospect of having the public lose as a mandatory prerequisite to con- confidence in the banking industry, tinue dealings with their financial and in government insitutions genera- system. lly, if this proposal is not withdrawn. Closely linked to AML are KYC 5 La SEC (Securities Exchange Commission) (Know-your-client) profiling prac- and FinCEN (Financial Crime Enforcement tices, since AML largely relies on Network) in the USA ; the FSA (Financial identity theft and concealement. services authority) and SOCA (Serious Or- ganized Crime Agency) in the UK ; TracFin 4 Association of Certified Anti-Money Laun- in France. At the global level, it is the FATF dering Specialists (www.acams.org) (Financial Action Task Force).

CHANGING FRONTIERS OF ETHICS IN FINANCE 129 Furthermore, the proposal expands the but also at the meso-level of organi- regulatory imbalance between banks sations, namely banks, in charge of and their competitors, increases regu- implementing AML and contributing latory burdens on banking institutions the its institutionalization through and raises serious privacy concerns on the use of a common vocabulary, the part of bank customers” (Cocheo, common IT and surveillance tools, 1999:26). etc. Yet today, through their client This has lead to the creation and supervisory units, banks largely im- the profesionalisation of new activi- plement the proposal. The percep- ties, like AML analysts, officers and- tion has slowly evolved, and despite whistleblowers, who are in charge of persistent criticism, particularly con- internal surveilance and who even- Travailler, que ce soit cerning the weight of bureaucratic tually denounce the malpractices of en tant qu’analystes paperwork involved, it is now accep- the organisation itself to regulators. de la conformité, ted as being of interest to risk mana- This results in numerous organi- courtiers, régulateurs gement and even client satisfaction. sational paradoxes and day-to-day ou professeurs-cher- difficulties for the people in charge of cheurs, doit être relié à Towards an integrated such positions, trapped in the ambi- nos vies et à la vie elle- view of guous position of “internal enemy” même, à notre besoin ethics and compliance (Pérezts et al. 2011, Pérezts & Pi- anthropologique de card, 2014) or at least largely percei- sens. Cela nous ramène KYC indeed implies a lot of pa- à une des significations perwork. Cross-verificatons of the ved as such by colleagues. premières du mot authenticity of documents is requi- By trying to respond to the de- éthique, lié à ethos, red before, during and up to several mands of our so-called ‘risk society’ à notre sens d’être et years after the business relationship (Beck 1992; 1999), we have stren- notre désire inhérent with the client has ended in order gthened the structuring force of our de faire quelque chose to show regulators in case an audit fears and what we perceive as threats de significatif dans la is conducted at a later date. This vie. by reinforcing audit and control concerns clients, and in case of com- (Power 1997, 2004). But while these panies, the actual physical persons mechanisms and policies are largely behind them and the beneficiaries. debated, the anthropological impact Since AML often involves some form on actors of the financial industry of corruption, specific attention is remains largely unexamined : how paid to politically exposed persons do actors actually embody and enact (PEPs), particularly in non-coope- compliance practices? How does the rative, non-democratic or otherwise evolutionary nature of regulations ‘opaque’ countries. affect their work relationships within Favarel-Garrigues et al. (2009) their organization and with the regu- have recently pointed out the need lators? How is compliance (re)cons- to consider AML and related prac- tructed endogenously, and how is tices not only from a regulatory or this changing our perception of dirty international policing perspective, hands and dirty money?

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 130 In my work as a professor and re- directions as to how reclaiming the searcher in the fields of philosophy anthropological perspective on the of management and business ethics, I ambivalence of money is not some am amazed by how students are see- ‘dirty work’ reserved for sociologists kinga deeper analysis of issues such and philosophers who are outside as ethics in finance beyond what is the ‘real world’. Instead, I will try to usually required in teaching CSR, show the positive implications that micro-credit and ethical/green inves- this can yield and the possible ways tments. Far from considering them in which they can be achieved. as a useless yet necessary window- dressing components of the pro- Including a social gramme – a vision far too commonly sciences perspective circulated in business school curri- of finance cula while supporting ‘hard skills’ – Social studies of finance (SSF) is their quest for understanding most Les étudiants et a growing branch within economic of our current practices in business professionnels de la sociology which aims to encourage a and finance is real and should not finance sont de plus en multi-disciplinary dialogue between be neglected. Likewise, when talking plus insatisfaits avec the social sciences (anthropology, so- une approche stricte- to compliance officers, I often get ciology, psychology, philosophy…) ment rationnelle des the feeling that they become weig- and financial and economic theory. marchés. Inclure des hed down by the formalities of their It takes the world of finance, unders- perspectives comme work while they actually hunger for celle des Etudes tood broadly, as a privileged obser- a meaningful practice which goes be- Sociales de la Finance vatory of social change (Godechot, yond ticking boxes. This reassures semble urgent afin de 2011a). Since Weber’s founding stu- me that not everybody is a cynical préparer les étudiants dy of the stock market ([1894] 1999), gambler who is in it for all he or she à être non seulement this emerging group of scholars has can squeeze out of the system by ex- des praticiens efficaces, taken a great interest in studying mais aussi réfléchis. ploiting every possible loophole to the multi-dimensional construction maximize efficiency. of markets, and the impact that the Work, whether as a compliance organisational, technological, and analyst, broker, regulator or resear- institutional changes in the finance cher needs to be linked to our lives industry can have on the individuals and to life itself, i.e. it should rela- and societies (see Smelser & Swed- te to our anthropological need for berg, 2005; Swedberg, 1987). In view meaning. This, in so many words, of the inability of economic or finan- is actually one of the deepest mea- cial theory alone to account for such nings of the word ethics: relating to transformations, SSF is building a ethos, to one’s sense of being and considerable body of work to fill this self, and to one’s inherent desire to gap (see Knorr Cetina & Preda, eds. do something meaningful in this life 2012). Understanding the impact of (Pérezts, 2012). In order to conclude the progressive mathematisation of this paper I will now outline some finance (Walter, 2010), the construc-

CHANGING FRONTIERS OF ETHICS IN FINANCE 131 tion of financial theory itself (Callon, finance and their so-called efficiency 1998; MacKenzie, 2006; Mackenzie have become evident to newer gene- et al. 2007), the transformation of rations particularly since the recent professions (Abolafia, 2001; Gode- financial crisis. They now crave and chot, 2001), the organisation of spa- demand not the golden dream of the ce, information and networks (Beu- eighties achieved through complex nza & Stark, 2004; Hassoun, 2005; modelisations, but a practice that is Walter, 2010) and the representation deeply embedded in the rest of the of value in the markets (Baker, 1984) ‘real world’, and make finance part of among other things can help busi- social life in a deeper and meaningful ness school students – as future mar- way. ket participants – to trace the construction of markets and the interplay Beyond risk between their material and symbolic management and dimensions (Carruthers, 2012; Jaco- normophrenia bs, 2012). Without limiting it to the More than ever, students and approach of behavioral finance (still practitioners are unsatisfied with an largely aimed at reducing psycholo- objective and rational explanation of gical biases to increase market effi- markets. Whether it is the description ciency), I argue in line with other of the Amsterdam Stock market in SSF scholars that a complementary the 17th century by Braudel (2008), view of education in finance should the one in 19th Paris by Zola (2009), be implemented. Students, and fu- Steinbeck’s accounts of the crash of ture practitioners, need more than a ’29 (2003) or the current news re- bucket full of theories, models and ports on Wall Street or the City, we modeling skills – such ‘hard skills’ are no longer naïvely fascinated by are easily bent when a crisis of mea- the Confusion de confusiones (José ning arises: our certainties and trust de la Vega, [1688] 1958) generated in market efficiency and rationality by financial turmoil. Including this disappear in an instant. In such mo- complementary perspective in bu- ments, but also in prevention of such siness school curricula is urgent, in moments, teaching students to have order to prepare students to be not a critical perspective on the practices only efficient but also reflexive prac- and theories that they will use once titioners (Cunliffe, 2004). on the job will give them not only the conceptual, but also and more im- Our society’s current obsession portantly the ethical strength to pull with risk management makes it om- through in difficult times. nipresent, and the growing feeling of insecurity is reinforced by the very But these works remain largely existence of such prevention mecha- marginal not only in research but nisms. We may even have forgotten also in teaching. The limits of an abs- how we came to fear such risks and tract and largely disembodied view of label them as risks in the first place.

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 132 Yet, once they are identified as risks, becomes the object of separations, whether imaginary or real, they be- classifications and purificationse.g. ( come modelized, measurable, insu- KYC and AML). By removing dirty rable, and lead to a series of preven- elements, which are not in their pro- tion methods. But all these elements, per place and therefore constitute a Le revers de l’addiction de nos sociétés which render it objectifiable, cannot threat to order, we are not only ac- contemporaines au make us forget its inherently irratio- complishing a negative gesture, but risque et à sa gestion, nal and imaginary dimension, stron- on the contrary we are positively or- est ce que j’appelle la gly rooted in our collective subcons- ganising our environment. Normati- normophrénie, ou la cious. vity seeks to achieve normality, nor- prolifération de codes, Risks are categorized as anoma- malisation, and conformity. normes et procédures lies, exceptions to the desired normal The reverse side of this addiction de contrôle. Et on peut facilement s’enfer- state of affairs. Their management is to risks is what I call a normophre- mer dans ce système in turn viewed as a positive thing, nia, i.e. an increasing proliferation binaire de risques et and by privatizing it, risk turns into of codes, norms, control procedures de normes. Là, le vrai equity. Their symbolic power has be- and enforcement methods. Today, problème éthique come so important, that managing normophrenia seems to be a fact in n’est peut-être plus risks, and even producing them in the processes of organising. By at- la cupidité, mais bien order to control them later through tempting to cover every possible notre conformité à un exclusive expertise has constituted grey area of the law representing a tel système. an entire market: “in late modernity, potential risk, we have achieved a Au lieu d’opposer l’éthique et la confor- risk production increasingly beco- massive complexification of our nor- mité comme c’est mes at least as important as wealth mative system, with different layers souvent le cas, une production” (Tsoukas, 2005: 40). It of norms overlapping both as legal approche anthropolo- is not a coincidence that the name obligations and soft laws. This in- gique à la conformité chosen for such instruments is se- deed leads to a reorganization of the bancaire nous permet curities. The symbolic battle for the world order, from the “rule of law to d’enraciner l’éthique monopoly and control of risk and the law of rules” (Djelic, 2011). au sein des pratiques information becomes therefore as de conformité, et de Here I argue that we can easily be important or perhaps even more im- mieux comprendre trapped in this binary system of risks le rôle que joue portant than the economic war. and norms. The real ethical problem l’éthique dans la mise There are significant implications might very well turn out not to be en pratique effective for the organisations where such greed, but the conformity to such a de la conformité au risks are conceptualised, measu- system. Cutlure is indeed important quotidien, y compris à red and managed (Hutter & Power, (Osesik, 2013), but in a globalized ses différents niveaux 2005), i.e. concerning their areas of system where “markets happen” in (micro-méso-macro). potential responsibility that will be thousands of transactions per second, constantly negotiated both interna- it is actual people who can make the lly and externally (Maguire & Hardy difference, since it is their responsi- 2013) by redefining what is categori- bility to interpret and ultimately en- sed as risky. Following Douglas, we act compliance policies, constructing see that dirtiness, once identified, them endogenously (Edelman, 2007;

CHANGING FRONTIERS OF ETHICS IN FINANCE 133 Edelman & Stryker, 2005; Edelman & 2007:107). It also means accepting the Suchmann, 2007; Lenglet, 2008, Pé- messiness and complexity of its subjec- rezts & Picard, 2014). It is important tive nature embedded in complex and to focus “not on regulators but [on] bu- often contradictory settings, instead of siness firms and their responses to and blindly denying them in the name of implementation of regulation” (Parker the ideal of a rational homo economi- & Lehmann Nielsen, 2011:2), where it cus (Painter-Morland, 2008, Pérezts is people who will make the difference et al. 2011). An ontologically founded between a mere legitimacy façade and ethics, rooted in the subject, incarnated an truly responsible behavior (Ma- so to speak, which does not fall into cLean & Benham, 2010; Weaver et al., moral relativism, but acknowledges 1999). moral pluralism and constructs a path Instead of setting ethics and com- in its midst (cf. Bauman, 1993, Pérezts pliance in opposition to one anothe- et al. 2015). ras is usually the case, an anthropol- This implies considering ethics as gical approach to compliance allows being simultaneously at work at three us to embed ethics within compliance different levels: incarnated in indivi- practices, and better understand the duals (micro level, not only limited to role ethics plays in the effective mise- psychology, but acknowledging also en-pratique of compliance on a daily the imaginary dimension), nested in in- basis. Indeed, taking this perspective terpersonal relationships (meso level) as a starting point can help us to un- and embedded in organisational and derstand how actors in such institu- institutional settings (macro level) (Pé- tions construct their own moral-rules- rezts, 2014). Unfortunately, numerous in-use (Jackall, 2010) and negotiate works on business ethics tend to isolate them symbolically, discursively and in one or another of these levels, instead everyday practice (Baïada-Hirèche et of seeking to understand the connec- al. 2011, Pérezts, 2014). Considering tions between them. There are indeed ethics as an on-going phenomenon ins- additional methodological challenges tead of a moral content to be applied posed by considering different levels and translated into CSR reports and simultaneaously, but in return an ove- ethics codes opens up an entirely new rall view can provide insights into the perspective on ethics in business. complexity of the phenomenon, and This means studying ethics “in re- envision intersecting solutions that lation to the ambiguous, unpredictable, might not have been identified through and subjective contexts of managerial “level-specific mindsets” (Hitt, Beamish, action [to provide] theoretical resou- Jackson & Mathieu, 2007:1387). Such rces for studying the different ways perspectives could yield interesting de- that ethics manifest themselves in or- velopments both for research and prac- ganizations. […] Ethics is best unders- tice, in order to make ethics more mea- tood and theoried as a form of prac- ningful and truly embedded in daily tice” (Clegg, Kornberger & Rhodes, financial compliance practices. •

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 134 References Abolafia, M. (2001). Making mar- P. Bouilloud & V. Guienne (Eds.), kets: Opportunism and restraint on Questions d’Argent (pp. 7-18). Paris: Wall Street. Cambridge, MA: Harvard Desclée de Brower University Press Bouilloud, J.-P. (Ed.). (2004). Baïada-Hirèche, L., Pasquero, J. Argent, Valeurs et Sentiments. Paris: & Chanlat, J.-F. (2011). Managerial L’Harmattan responsibility as negotiated order: A Bouiloud, J.-P. (2004). Editorial: social construction perspective. Jour- l’envers de l’argent. In J.-P. Bouilloud nal of Business Ethics, 101(1), 17-31 (ed.) Argent, Valeurs et Sentiments. Baker, W. E. (1984). The social (p.5-8). Paris: L’Harmattan structure of a national securities mar- Bouilloud, J.-P., & Guienne V. ket. American Journal of Sociology, (Eds.), (1999). Questions d’Argent. 775-811 Paris: Desclée de Brower Barus-Michel, J. (1999). L’argent Bourdieu, P., Boltanski, L., & ou la magie de l’imaginaire. In J. P. Chamboredon, J.C. (Eds.). (1963). La Bouilloud & V. Guienne (Eds.), banque et sa clientèle. Elements d’une Questions d’Argent (pp. 65-74). Paris: Sociologie du credit. Paris: Centre de Desclée de Brower Sociologie Européenne de l’Ecole pra- Barus-Michel, J. (2004). Com- tique des Hautes Etudes merce de soi et prix du corps. In J. Braudel, F. (2008). La Dynamique P. Bouilloud (Ed.), Argent, Valeurs et du capitalisme. Paris: Flammarion Sentiments. Paris: L’Harmattan Callon, M. (1998). Laws of the Bauman, Z. (1993). Postmodern Markets. Oxford: Blackwell Ethics. Wiley Blackwell Carruthers, B. G. (2005). The so- Beck, U. (1992). Risk society: ciology of money and credit. In N. J. Towards a new modernity. London: Smelser & R. Swedberg (Eds.), The Sage Handbook of Economic Sociology (2 ed., pp. 355-378). Princeton: Prince- Beck, U. (1999). World Risk Socie- ton University Press ty. Cambridge: Polity Carruthers, B. G. (2012). Histo- Beunza, D. & Stark, D. (2004). rical Sociology of modern finance. In Tools of the trade: the socio-techno- K. Knorr Cetina & A. Preda (Eds.), logy of arbitrage in a Wall Street tra- The Oxford handbook of the sociolo- ding room. Industrial and Corporate gy of finance (pp. 491-509). Oxford: Change, 13(2), 369-400 Oxford University Press Bird, J., & Fortune, J. (Writers). Clegg, S., Kornberger, M., & Rho- (2007). Interview: George Parr, in- des, C. (2007). Business ethics as vestment banker, The Last Laugh. practice. British Journal of Manage- London: South Bank Show ment, 18(2), 107-122 Bouilloud, J.-P. (1999). L’Objet Cocheo, S. (1999). Compliance caché des Sciences Sociales. In J. Clinic: Bankers slam proposed Know-

CHANGING FRONTIERS OF ETHICS IN FINANCE 135 Your-Customer rules, ABA Banking The endogeneity of law. Private Equi- Journal ty, Corporate Governance, and the Dy- namics of Capital Market Regulation, Cunliffe, A. L. (2004), On beco- 55, 70 ming a critically reflexive practitioner, Journal of Management Education, Edelman, L.B., & Stryker, R. vol.28 (4): 407-426 (2005). A sociological approach to law and the economy. In N. J. Smelser Couvrat, J.F., & Pless, N. (1988). & R. Swedberg (Eds.), The Handbook La face cachée de l’économie mondiale. of Economic Sociology (pp. 527-551). Paris: Hatier Princeton: Princeton University Press D’Aubert, F. (1993). L’Argent Edelman, L.B., & Suchman, M.C. Sale. Paris: Plon (2007). The Legal Lives of Private Organizations. Ashgate Publishing Djelic, M.-L. (2011). From the Company Rule of Law to the Law of Rules. In- ternational Studies of Management and Edelman, L.B., & Talesh, S.A. Organization, 41(1), 35-61 (2011). To Comply or not to comply - that isn’t the question: how or- Djelic, M.-L., & Sahlin-Anders- ganizations construct the meaning son, K. (2006). Introduction: a world of compliance. In C. Parker & V. of governance: the rise of transnatio- Lehmann Nielsen (Eds.), Explaining nal regulation. In M.-L. Djelic & K. compliance: business responses to re- Sahlin-Andersson (Eds.), Transnatio- gulation (pp. 103-122). Cheltenham: nal governance: Institutional dynamics Edward Eglar Publishing of regulation. Cambridge: Cambridge University Press Edwards, J., & Wolfe, S. (2004). The compliance function in banks. Douglas, M. (2004). Comment Journal of Financial Regulation and pensent les institutions: suivi de ‘La Compliance, 12(3), 216-224 connaissance de soi’ et ‘Il n’y a pas de don gratuit’. Paris: La Découverte Edwards, J., & Wolfe, S. (2005). Compliance: A review. Journal of Fi- Douglas, M. (2005). De la souillu- nancial Regulation and Compliance, re. Études sur la notion de pollution et 13(1), 48-59 de tabou. Paris: La Découverte Favarel-Garrigues, G. (2003). Douglas, M. (2013). Risk and Ac- L’évolution de la lutte antiblanchi- ceptability (Vol. 11). London: Rout- ment depuis le 11 septembre 2001. ledge Critique internationale (3), 37-46 Droit, R.-P., & Henrot, F. (2010). Favarel-Garrigues, G., Godefroy, Le banquier et le philosophe ou la dou- T., & Lascoumes, P. (2007). Senti- ble paire d’yeux. Paris: Plon nels in the Banking Industry: Private Actors and the Fight against Money Durkeim, E. (1912). Les Formes Laundering in France. British Journal élémentaires de la vie religieuse. Paris: of Criminology, 48(1), 1-19 Presses Universitaires de France Favarel-Garrigues, G., Godefroy, Edelman, L. B. (2007). Overlap- T., & Lascoumes, P. (2009). Les senti- ping fields and constructed legalities: nelles de l’argent sale: Les banques aux

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 136 prises avec l’antiblanchiment. Paris: La 40(4), 318-328 Découverte Hood, C., Rothstein, H., & Bald- Gaulejac, V. de. (1999). Argent, win, R. (2001). The government of estime de soi et dignité. In J. P. Boui- risk: Understanding risk regulation lloud & V. Guienne (Eds.), Questions regimes. Oxford: Oxford University d’Argent (pp. 91-100). Paris: Desclée Press de Brower Hutter, B, & Power, M. (Eds.). Gaulejac, V. de. (2004). Histoi- (2005). Organizational encounters res d’Argent. In J. P. Bouilloud (Ed.), with risk. Cambridge: Cambridge Argent, Valeurs et Sentiments (pp. 37- University Press 46). Paris: L’Harmattan. Jackall, R. (2010). Moral Mazes: Godechot, O. (2001). Les traders: the World of Corporate Managers. essai de sociologie des marchés finan- Oxford: Oxford University Press ciers. Paris: La Découverte Jacobs, M.D. (2012). Financial Godechot, O. (2011a) Les Social Crises as symbols and rituals. In Studies of Finance, une nouvelle ap- K. Knorr Cetina & A. Preda (Eds.), proche. Les Cahiers Français (361), T 27-30 he Oxford Handbook of the Sociolo- gy of Finance (pp. 376-392). Oxford: Godechot, O. (2011b). Une finan- Oxford University Press ce-fiction est-elle possible? A propos de trois films récents sur la finance, Kerviel, J. (2010). L’Engrenage : Contretemps, Retrieved from http:// Mémoires d’un trader. Paris: Editions olivier.godechot.free.fr/hoparticle. Flammarion php?id_art=604 Knorr Cetina, K., & Preda, A. Green, C.F. (1989). Business (Eds.). (2012). The Oxford Handbook ethics in banking. Journal of Business of the Sociology of Finance. Oxford Ethics, 8(8), 631-634 University Press Hassoun, J.-P. (2005). Emotions Lenglet, M. (2008). Déontologue on the trading floor: Social and sym- de marché: de la pratique des institu- bolic expressions. In K. Knorr Ceti- tions à l’institutionalisation des pra- na & A. Preda (Eds.), The Sociology tiques (Doctorat), Université Paris of Financial Markets (pp. 102-120). Dauphine Paris Oxford: Oxford University Press MacKenzie, D.A. (2006). An engi- Hitt, M.A., Beamish, P.W., Jack- ne, not a camera: how financial models son, S.E., & Mathieu, J.E. (2007). shape markets. Cambridge, MA: MIT Building theoretical and empirical Press bridges across levels: Multilevel research in management. Academy of MacKenzie, D.A., Muniesa, F., & Management Journal, 50(6), 1385- Siu, L. (2007). Do economists make 1399 markets? On the performativity of economics. Princeton University Press Hodgson, D. (2002). “Know your customer”: marketing, governmenta- MacLean, T.L., & Behnam, M. lity and the “new consumer” of finan- (2010). The dangers of decoupling: cial services. Management Decision, The relationship between complian-

CHANGING FRONTIERS OF ETHICS IN FINANCE 137 ce programs, legitimacy perceptions, sics: Learning Management and Lea- and institutionalized misconduct. dership from Ancient East and West Academy of Management Journal, Philosophy, Springer. 53(6), 1499-1520 Pérezts, M. (2014). L’Ethique com- Maguire, S., & Hardy, C. (2013). me pratique située: étude multiniveaux Organizing processes and the cons- sur l’éthique au travail dans la con- truction of risk: A discursive ap- formité bancaire (Ethics as situated proach. Academy of Management Jour- practice: a multilevel study of ethics nal, 56(1), 231-255 at work in banking compliance). Unpublished PhD Thesis, defended Marx, K. (1982). Le Capital. Paris: 24.02.2014 at ESCP Europe & Uni- La Pléiade - Gallimard versité de Paris 1 Panthéon-Sorbonne Mulligan, D. (1998). Know Your Pérezts, M., Bouilloud, J.P., Gau- Customer Regulations and the Inter- lejac, V., (2011). “Serving two Mas- national Banking System: Towards ters: the contradictory organization a General Self-Regulatory Regime. as an ethical challenge for managerial Fordham International Law Journal, responsibility”, Journal of Business 22(5), 2324-2372 Ethics, 101: 33-44 Nadelmann, E.A. (1990). Global Perezts, M. Faÿ, E., Picard, S., prohibition regimes: The evolution of (2015) “Ethics, Embodied life and norms in international society. Inter- Esprit de Corps: an ethnographic national Organization, 44(04), 479- study with anti-money laundering 526 analysts”, Organization. 22(2): 217- 234 Osesik, K., (2013). Why even good people are likely to do bad Pérezts, M., Picard, S., (2014). things in finance – it’s not the people “Compliance or Comfort zone? The that are flawed, it’s the culture,Finan - work of embedded ethics in perfor- ce and the Common Good, n°40-41 ming regulation”, Journal of Business Ethics, DOI 10.1007/s10551-014- Painter-Morland, M. (2008). Bu- 2154-3 siness Ethics as Practice: Ethics as the Everyday Business of Business. Cam- Power, M. (1997). The Audit So- bridge University Press ciety: Rituals of Verification. Oxford University Press Parker, C, & Lehmann Nielsen, V. (2011). Introduction: from regula- Power, M. (2004). The Risk Ma- tion to compliance. In C. Parker & V. nagement of Everything: Rethinking the Lehmann Nielsen (Eds.), Explaining Politics of Uncertainty. Demos Compliance: business responses to regulation (pp. 1-36). Cheltenham: Ed- Reiner, R. (1997). Policing and ward Elgar Publishing the Police. In M. Maguire & R. Rei- ner (Eds.), The Oxford Handbook of Pérezts, M., (2012). “Ethics as Criminology (pp. 997-1049). Oxford: practice embedded in Identity: Pers- Claredon Press pectives on renewing with a foun- dational link”, in PRASTACOS G.P., Rouquié, S. (1997). L’argent illi- WANG F. and SODERQUIST K. cite et les affaires. Paris: Association E.(eds), Leadership through the Clas- d’Economie Financière

TOWARDS A FRAMEWORK FOR FIGHTING POLLUTION IN FINANCE 138 Scheptycki, J. (Ed.). (2000). Is- lles normes financières: s’ organiser sues in Transnational Policing. Lon- face à la crise. Paris: Springer don: Routledge Weaver, G.R., Trevino, L.K., & Smelser, N.J, & Swedberg, R. Cochran, P.L. (1999). Integrated and (2005). 1 Introducing Economic So- decoupled corporate social perfor- ciology. In N. J. Smelser & R. Swed- mance: Management commitments, berg (Eds.), The Handbook of Econo- external pressures, and corporate mic Sociology (2nd Edition ed.). New ethics practices. Academy of Manage- York: Princeton University Press ment Journal, 42(5), 539-552 Steinbeck, J. (2003). America and Weber, M. (1999). La Bourse (P. Americans, and Selected Nonfiction (S. Morin, Trans.). Paris: Editions Tran- Shillinglaw & J. J. Benson Eds.): Pen- sition guin Books Williams, P., & Baudin-O’Hayon, Swedberg, R. (1987). Economic G. (2002). Global Governance, sociology: past and present: Sage Transnational organized crime and money-laundering. In A. McGrew & Trevino, L.K, & Nelson, K.A. D. Held (Eds.), Governing Globaliza- (2007). Managing business ethics: tion (pp. 127-144). Cambridge Polity straight talk about how to do it right. Press (4th Edition ed.). Hoboken, NJ: Wi- ley Zeigler, J. (1990). La Suisse lave plus blanc. Paris Seuil Tsoukas, H. (2005). David and Goliath in the Risk Society: Making Zelizer, V.A.R. (1979). Morals and sense of the conflict between Shell markets. Transaction Publishers and Greenpeace in the North Sea. In H. Tsoukas (Ed.), Complex Knowled- Zelizer, V.A.R. (1989). The social ge: Studies in organizational episte- meaning of money: “special monies”. mology (pp. 39-68). Oxford: Oxford American Journal of Sociology, 342- University Press 377 Vega, J. de la. (1958). Confusion Zelizer, V.A.R. (1997). The social de confusiones: Diálogos curiosos entre meaning of money. Princeton: Prince- un filósofo agudo, un mercader discreto ton University Press y un accionista erudito (1688). (Se- gunda Edicion). Madrid: Publicacio- Zola, E. (2009). L’Argent. Paris: nes Banco Urquijo Garnier Flammarion Walter, C. (Ed.). (2010). Nouve-

CHANGING FRONTIERS OF ETHICS IN FINANCE 139 CCommon sense

Ethics in Finance, Robin Cosgrove Prize Iberoamerican edition 2012-2013

Finalist

Elia Breijo Pena Even today many people are still medium and long term. We have to Spain clutching their heads and wonde- restore ethical values and live in ac- Graduate in Business ring ‘How did we ever get into this cordance with the truth, rather than Administration and situation?’ The economic, financial a ‘reality’ invented and sustained by Management, Fran- and housing crisis that the world is a semblance of controlled market cisco de Vitoria Uni- now experiencing is appalling, and disequilibrium. When we go to university in Madrid* every aspect of every society throug- versity we are told that the market hout the world has been affected by cannot be controlled, and that we the ‘miracle’ of globalization. Worse, must adapt to it, managing our busi- this recession (like so many before nesses or investments in response to it) has been overshadowed by the the changes imposed on us. Howe- lack of ethical values – which is the ver, in recent decades we have seen most worrying thing about the who- only too often how the market has le crisis. attempted to control itself using ru- The purpose of this paper is les whose effect was to heat up an al- nothing less than to appeal to com- ready overheated economy – as dic- mon sense and the principle of tated by fallible central regulators. * The views expressed prudence (cast aside for reasons of Alexander Pope (1688-1744) herein are those of convenience, self-interest or simply said that ‘to err is human; to forgi- the author and do not greed) in every area of society, but ve, divine’. Some have added ‘to rec- necessarily reflect those of the Organization he is above all in the financial sector, so tify is for the wise’ – and, since the affiliated to. that we may return to economic damage has been done and there is growth that is sustainable in the no point in adding fuel to the fire,

COMMON SENSE 140 we have to be wise, learn from our forcing economic agents to take mistakes and finally see this crisis for unnecessary risks. To take just one La crise financière, éco- what it is: an opportunity for change. example, one of the many causes of nomique et immobi- To grasp this opportunity, we must the current crisis was the low inter- lière a touché l’en- erect the basic pillars of growth (pru- est rates imposed by central banks semble de la société, dence, training and equilibrium) on all over the world. By keeping inter- mais elle a surtout mis solid ground (reality), with a strong, est rates low, what these institutions en avant le manque de valeurs éthiques, ce qui dynamic roof (willpower) to protect did was increase demand for cheap est le plus inquiétant. the structure. money. The law of supply and de- Le but de ce texte est See the following illustration: mand tells us that, when an increase de faire appel au bon in demand exceeds the increase in sens et au principe supply, the prices of the product – de prudence, dans le in this case, the rates of interest on domaine financier, money – must increase in order to afin de revenir à une croissance économique maintain market equilibrium. And durable. Il faut restau- yet this did not happen. So as not to rer les valeurs éthiques hamper their competitive growth, et vivre en conformité the central banks used monetary avec la vérité. policy to keep interest rates lower than they should have done. This Solid ground: reality policy forced financial institutions Nous devons être sages, Any decision, whether it be in the to increase supply in some way or apprendre de nos er- economy or in any other area of so- other just to stay in business. This is reurs et voir cette crise ciety, must be based on reality, for where human imagination came into comme une opportu- otherwise we would not be able to play, with the development of the nité de changement. perform even the most basic tran- notorious ‘subprime’ mortgages and Les piliers fondamen- sactions, from applying for a loan other mechanisms designed to turn taux de la croissance to buying a loaf of bread. To make illiquid assets into securities nego- sont la formation, la tiable on secondary markets. At the prudence et l’équi- a decision to consume we first need libre, le tout avec de real money, for however great our same time, under pressure of market la volonté et une base desire to consume may be, the ines- forces, financial institutions tried to solide qui est la réalité. capable bottom line is reality. Yet fi- increase their liquidity by granting nancial institutions have responded loans to people with a high risk of to our immoderate desire by creating default. This artificial growth in cre- various means of consumer credit dit was built on the sandy, unrelia- or other instruments that have fed ble soil of a market with too much this expansion in artificial credit. In public intervention. The regulators recent decades we have seen how opened a seemingly protective um- decisions made by businesses were brella that many convinced them- largely determined by variables exo- selves could never leak. When rea- genous to the actual market (such lity caught up with the institutions’ as governments, or central banks), balance sheets, and hence with all

CHANGING FRONTIERS OF ETHICS IN FINANCE 141 the businesses that had bought these on taking all these factors into accou- negotiable securities throughout the nt, they tend to be more successful in world, billions of dollars evaporated their investments than governments, Toute décision doit in a matter of minutes – for balance- which confuse profitability with in- être fondée sur la sheet assets were recorded at their réalité. Les institutions terest, and security with risk. financières ont répon- market prices. These were much Governments have an important du à notre désir immo- higher than the assets were actually part to play in controlling abuses and déré en créant divers worth – and now all the unnecessary protecting investors, especially if they moyens de crédit à la risks the system had been forced to set out to increase the available infor- consommation qui ont bear came home to roost. mation on market players. However, nourri cette expansion Our financial system depends on du crédit artificiel. Ces information will never be perfect – dernières décennies, trust. Intermediaries’ main function this is a natural limitation of the mar- les décisions prises is to ease the flow of money from ket – and so central banks and other par les entreprises ont savers to investors through trust, public institutions will never be able souvent été détermi- since savers do not trust investors to know the full impact of their ac- nées par des variables but do trust financial institutions. tions upon the market. Thus, in the exogènes à la réalité If the intermediaries fail to do their clear absence of systemic vision, go- du marché, ce qui a jobs properly, trust breaks down – vernments, central banks and other obligé les spécialistes and the system collapses. à prendre des risques regulators should avoid intervening inutiles. Although this is just one examin the day-to-day workings of the ple of what has happened in recent markets, for – among other things Alors que le secteur years, it is easy to see how excessi- – this may favour established major financier repose sur la ve public intervention can damage businesses and curb new initiatives confiance, l’interven- the financial system. When central that are more innovative and, if they tion publique excessive banks believe they the mar- have the necessary opportunity and a fortement nui au are funding, perhaps more profitable. système financier. Les ket and act to maintain sustainable banques centrales ont growth within in, they lose contact Markets are fairly free to self-regulate: perdu le contact avec with reality and with the real value they find and exhaust opportunities la réalité. of assets and investments, creating a for arbitration; but when information discrepancy between the risks assu- is imperfect abuses also occur, for in Si la survie des med and the returns to be obtained. that case a handful of people are able entreprises financières This sounds like common sense – to play with a great deal of informa- dépend de la prise en and that is precisely what it is. The tion. That is why, as stated above, the compte de nombreuses variables, elles ont West has got used to manipulating a role of such institutions must be to tendance à avoir plus market with thousands of variables, increase the available information on de succès dans leurs most of which are ignored when de- the market, to penalize abuses by bu- démarches que les cisions are made. Cultural standards, sinesses, to protect investors and to gouvernements qui levels of satisfaction with politicians supervise compliance with the basic confondent rentabilité and people’s levels of education are principle of prudence, which will be et intérêt, sécurité et no less important variables than in- described below. The result will be a risque. flation, interest rates or taxes. Even market with less intervention, more though businesses’ survival depends freedom and more justice for all.

COMMON SENSE 142 The role of the regulators must nancial system, and lack of it is what be confined to this, for too much has got us where we are now. When intervention creates a gulf between regulators kept interest rates low, Les banques centrales businesses and reality. The more in- ‘anything goes’ became the order of et autres institutions fallible the regulators think they are, the day, and financial institutions publiques ne seront jamais en mesure de the wider the gulf becomes – and the threw caution to the winds. Many connaître l’impact de wider the gulf, the more painful the businesses depend on efficient risk leurs actions sur le eventual readjustment. So why not management in order to survive, but marché. En l’absence stay as close to the solid ground of re- it is of truly vital importance to the de vision systémique ality as possible, rather than have to success of any financial institution. claire, elles devraient jump off high cliffs to get back down When banks were forced to keep in- éviter d’intervenir dans there? That is common sense. terest rates low at a time of growing le fonctionnement demand for credit, they imprudently au jour le jour des The first pillar: prudence granted substantial loans to unem- marchés, qui sont assez libres de s’autoréguler. Before discussing the value of this ployed people and turned them into Ces institutions pillar, we need to understand what liquid assets in order to survive in the doivent se contenter the word means. Etymologically it competitive market. The lenders took d’augmenter l’informa- comes from the Latin prudentia, the money and invested it in hou- tion disponible sur le which in turn comes from the La- sing speculation: house after house marché pour pénaliser tin providentia, i.e. looking ahead, was bought simply to be sold at a les abus commis par les being able to see the future conse- profit, and public investments were entreprises et protéger made with dubious rates of return, les investisseurs. Le quences of one’s present actions. In for purely selfish reasons. Regulators résultat sera un marché this paper it is used more in terms avec moins d’interven- of accounting, but its etymologi- also forgot the principle of pruden- tion, plus de liberté et cal origins are the same: prudence ce when they decided to change the de justice pour tous. means the caution that every person rules for company balance sheets so – whether an individual or a legal en- that assets were no longer recorded tity – should observe when making at their purchase prices but at their La prudence, premier decisions, the ability to analyse and market prices – in other words, they pilier, signifie étymo- to distinguish the truth amid the haze artificially inflated trust out of all logiquement la mise proportion. Businesses, in turn, were en garde que toute of disinformation. This pillar is di- caught in a spiral of competition, personne doit obser- rectly related to risk and return: hig- ver lors de la prise de her rates of return mean greater risk, interest and speculation that spread décisions. Directement and so greater prudence is required to the smallest investors – who have liée au risque et au when making a decision. This pillar been hit hardest by the whole situa- rendement, elle est is of immense value to the economy. tion, for they are far worse placed une notion fondamen- Banks rely on it to stay in business, than businesses to obtain truthful tale pour le système companies invest on the basis of it information. When reality, and real financier. and even the smallest investors are value, caught up with these inflated very much aware of this principle balance sheets, the readjustment was when making decisions. very painful for all concerned, but especially for the most vulnerable Prudence is essential to the fi-

CHANGING FRONTIERS OF ETHICS IN FINANCE 143 people: small investors. And this is Once trust in them evaporated, the what has hampered economic reco- whole system ground to a halt. very most of all – for they, the small Beaucoup d’entre- savers, are the very people regulators The middle pillar: prises dépendent de training la gestion efficace des were supposed to protect. They no risques pour survivre. longer trust the system, and with As already stated, the most wo- Ces dernières années, good reason: their money has vanis- rrying thing about the crises we are les principes de pru- hed in investment funds that were now experiencing is the lack of ethi- dence ont été oubliés, given the highest ratings by suppo- cal values in the economic system en particulier par les sedly impartial agencies. And now and in education, and the disturbing régulateurs quand ils that the agencies have been proved ont décidé de changer dehumanization of the global edu- wrong, they are not being forced to certaines règles. cation system, whose consequences Les petits investisseurs face the consequences. Those who can be seen in all areas of human life. ont été parmi les plus have misbehaved beneath the regu- Especially in the economy, profes- touchés et ont perdu la latory umbrella must not be allowed sional success has come to depend confiance qu’ils avaient to get away with it. It is only when on greed, selfishness, individualism accordée au système. investors see justice done in the and lying. The current ideal is to L’intervention des market that they will dare to invest win; if you are at the top of the pyra- banques centrales et and credit will again start circulating autres institutions mid, you are considered a success. through the system – which is why publiques dans les Yet nowadays success is confused marchés doit cesser public disintervention in markets is with power and fame. To be truly urgemment. so urgently needed. successful, professionals must have In short, companies’ and banks’ experience – not just CVs full of all balance sheets must once again re- the right things, but specific obsta- Il faut être prudent si cord the purchase prices of their as- cles they have surmounted and ba- nous voulons retrouver rriers they have overcome in order to le chemin du retour sets, and prudence must once again à la confiance et à la become a key part of their decision- achieve their full potential. croissance économique making. Only thus, by keeping a Today, in offices throughout the stable. La confiance cool head, can we find the way back world, we can observe the phenome- dans les intermédiaires to trust and stable economic growth. non of demotivation: people unable financiers doit être It is vital to restore market trust and to find meaning in their lives, wan- rétablie. credibility, otherwise there is a risk dering through the corridors with Le pilier du milieu est that normal market mechanisms will no other aim than to get back home la formation. Face au manque de valeurs break down. If investors cannot en- at night. The conformity of easy, éthiques dans le sys- trust their money to intermediaries – comfortable living is distracting us tème économique et through deposits, investment funds from our potential and depriving dans l’éducation, il faut and other instruments – who can the world of top researchers, ethical privilégier la véritable they trust? Are we about to see the investors and great philosophers. expérience qui garantit re-emergence of small local mone- Winning is a concept that is part l’efficacité. ylenders? Probably not, but we must of success. The dehumanization of face the fact that the market’s engi- education does not mean the end nes have been very badly damaged. of this – for it is the goal everyone

COMMON SENSE 144 is still blindly pursuing – but so- intervene – is aggravated by the poor mething worse, which is mistaken individual training of its economic for success: the idea that what you agents. Professionals need to be trai- have says what you are worth. And ned not only in finance and accou- this is the root of the problems we nting, but also in philosophy, socio- La démotivation crois- now face: anything goes, provided logy and other humanist subjects, as sante dans les bureaux you are worth something. How well as law and politics. They must et la déshumanisation often have we seen businessmen know how to work in teams, so that des activités financières commit crimes in order to maximi- they can pool their strengths and ont généré la domi- ze their personal profits, or gover- create synergies. In most industria- nation du concept de nments give preferential treatment lized countries’ education systems, succès. Il est l’objec- to ‘friendly’ businesses, purely out tif à atteindre et il teamwork is indeed encouraged – but détermine ce que vous of self-interest? Such things destroy it is not taught, for the social com- valez. Tel est le triste trust, and the repercussions are di- ponent of man has been forgotten. constat actuel. sastrous. Who will ever reinvest in a Teamwork involves collaboration business whose CEO has run off with rather than cooperation – in other millions? Who will deposit their mo- words, it means that individuals arri- ney in a bank that has failed to make ve at conclusions and solutions they a correct market analysis? The lack would not have arrived at by them- La seule façon de of truth, information and partners- selves, and so optimize their perfor- prévenir la récurrence d’une crise comme hip that appears to underpin profes- mance. Such collaboration depends celle que nous vivons sionals’ success has destroyed trust on individuals sharing their ideas actuellement est la both within and outside the system, generously and openly. This notion formation. Les profes- corrupting it and preventing it from is completely at odds with today’s sionnels doivent être working as it should. culture of the power of information, formés dans la finance and yet it is the lack of truthful in- et la comptabilité, mais The only way to prevent recurrence of a crisis like the one we are formation – in the Information Age – aussi dans la philo- that has helped us dig this hole under sophie, la sociologie now experiencing is training – but et d’autres disciplines not just any training. What the sys- our feet. humanistes, ainsi que tem needs is professionals with all- Such systemic training of the le droit et la politique. round training. Excessive speciali- individual must be provided from Ils doivent apprendre zation, without a broad humanistic earliest childhood right through to à travailler en équipe, base, produces blinkered people. postgraduate university studies. Such pour unir leurs forces all-round training will ensure that et créer des synergies. They lack a systemic view of what is going on and end up making the professionals are able to analyse and wrong decisions, with serious conse- understand the problems they face quences – and, to make matters wor- more broadly, fully and holistically, se, unpredictable ones, for people do so that they can make the best de- not know exactly who they are dea- cisions and keep any adverse conse- ling with. The disinformation that quences to a minimum. affects the system in general – and Being an ethical person does not this is where governments should just require good all-round training,

CHANGING FRONTIERS OF ETHICS IN FINANCE 145 but also great determination and proportionality generates trust in the Les professionnels awareness in order to make the right system by making it to some extent pourront alors prendre choices – a predisposition to do good, predictable. If the return on a trea- de meilleures déci- which must be promoted by a just so- sury bond is 8%, we know there is a sions en minimisant ciety in which bad behaviour has bad les conséquences high risk of losing our money. The fâcheuses. Ils devront consequences. Justice will be done problem is when this equilibrium is faire preuve de in the economy when the market is upset and investments that appear to détermination et d’une free to self-adjust, for it will expel challenge this proportionality rule sensibilité accrue. businesses that do not create enough appear on the market, offering high Notre système finan- value; but the same coherence must returns for low risk. Common sen- cier a urgemment apply to everything professionals do. besoin d’une généra- se tells us one of two things: either tion de professionnels All-round professionals would whoever is offering the product does capables de voir au- have made an exhaustive analysis of not know what he is offering (which delà de leurs décisions investment funds before risking their is most unlikely), or else it is a scam en étant créatifs et depositors’ money in them; all-round – in other words, people who are bet- novateurs. Si nous vou- professionals would not have jeo- ter informed than the rest are using lons changer le mar- pardized their companies’ viability ché, c’est nous même their knowledge for personal gain. by speculating in securities that in- In recent years, unfortunately, the- qu’il faut commencer flated their balance sheets; all-round par changer. re has been a proliferation of such professionals would have known products, which take advantage of that high-return investments are also Le troisième pilier, investors’ lack of information. Many high-risk investments; and so on. l’équilibre, est have been duped, but others have fo- essentiel. La notion Our financial system urgently needs llowed their instincts and kept out of de proportionnalité a generation of professionals who est ici importante car are able to see beyond their deci- trouble. elle permet de créer sions and be creative and innovative The best example of equilibrium une confiance dans le without forgetting that there is no is to be found in businesses. All busi- système en le rendant escaping from reality. The market nesses have to balance their budgets: plus prévisible. Le meilleur exemple is the outcome of the decisions made their assets must equal their liabilities d’équilibre doit être by the people in it – which means it plus their net worth. In the final sta- trouvé dans les entre- is simply a reflection. If we want to ges of the boom, businesses all over prises, qui doivent en change the market, we must change the world had balance sheets that priorité équilibrer leurs ourselves. were far removed from reality, with budgets. Pour rester billions’ worth of underlying losses solides, saines et hon- The third pillar: that remained undeclared thanks to nêtes, il faut aux entre- equilibrium prises financières un creative accounting by their finance personnel dynamique, Equilibrium is essential in all departments. However, as stated ear- une grande prudence areas of society, not just the eco- lier, when a business is built on the et enfin de l’équilibre nomy. If justice is to be done, the pu- sandy soil of lies, it ends up leaning et de la cohérence pour nishment must fit the crime. Univer- like the Tower of Pisa and eventually optimiser leurs perfor- sity results are usually proportionate collapses under its own weight. For mances. to the effort the student makes. Such a business to remain strong, healthy

COMMON SENSE 146 and upright, it needs three main think of financial markets as ogres. La volonté est le supporting beams: (1) dynamic staff The only way to change this is to tra- moteur du changement with all-round training and a sys- in people – and the only way to train et le toit principal né- temic view of the market; (2) large cessaire à la croissance. them is to want to. Il faut changer ses doses of caution that encourage it to We live in a dynamic world, a seek real information about the mar- habitudes et considérer complex environment. There are ket, rather than rely on appearances; le bien-être des géné- thousands of businesses constantly rations futures. Pour and (3) equilibrium and coherence, innovating, and spending thousands changer la situation allowing it to maximize its perfor- of millions on the process. Why? Be- actuelle, il faut former mance because it operates as a who- les individus et pour le rather than as the sum total of its cause the only way to survive in the cela, il faut une volonté various departments. market is to adapt to the environ- profonde de changement. Businesses have to be dynamic ment et d’amélioration. The roof, and the engine in order to survive, but governments Tout repose sur la of change: willpower do not. Businesses do not control the market, but simply adapt to it; volonté, mais utilisée à Every journey begins with the bon escient, c’est à dire but governments – far from adap- first step. To change a situation, pour le bien être de la ting to market changes – thought société et non pas pour you have to want to change it. The were the market. This ignoran- satisfaire des fins per- leaders of the world’s countries they sonnelles ou une vo- have to see their nations’ need for ce turned the desire for change into lonté de puissance. Si change and truth. Willpower is the a desire for power. They all thought un seul gouvernement most difficult part of the structure to they knew what was best, for bet- avait eu la volonté de build, for it is made up of habits that ween them they formed the market. cesser de se focaliser Yet reality, and the real value of in- sur le court terme et are acquired by repetition. Good de tester l’efficacité actions lead to good results, and vestments, trump all speculation. de ces piliers, la crise bad ones to bad ones. Willpower is The market has meted out the pu- n’aurait pas duré aussi difficult enough at individual level, nishment we deserved. All countries longtemps. La volonté but with countries the difficulty in- fear change, because what they have protège et garantit les seems to work from time to time, piliers évoqués comme creases exponentially, for no coun- le toit protège une try wants to take the first step in the and they prefer not to take risks. On maison. Sans lui, il n’y wrong direction and risk being left the other hand, change brings more a que quatre murs à la behind on the road to growth. And change. But not all change is for the merci des éléments. yet we urgently need to abandon better. If it is in accordance with hu- short-term thinking and consider man nature there will be hope; but, the well-being of future generations. if not, we will keep on having the Disinformation, lack of ethics, poor same problems, and keep on destro- training and greed are now floo- ying ourselves. If just one govern- ding through our financial system, ment had had the willpower to stop which is a reflection of our society. focusing on the short term, look be- Whether from ignorance or fear, yond the next general elections and the citizens of many countries now test the effectiveness of these pillars,

CHANGING FRONTIERS OF ETHICS IN FINANCE 147 the rest would have followed suit ling which we could not make judge- and the crises would not have lasted ments and decisions based on reality. La cohérence est une so long. This century’s professionals have for- notion très importante gotten the systemic view. A decision car il est nécessaire Willpower protects the pillars affects more than one variable; in fact d’agir et de penser sur just as a roof protects a house. Faced it affects all the variables that depend la base du bon sens. with a harsh climate and unpredicta- on it, and the ability to see these links Quand nous sommes ble events, we must always have the cohérents, nous entirely depends on the person that willpower and determination to do sommes moins suscep- is looking. That is why we must train tibles de prendre de the right thing – for a house without professionals to see them – not just mauvaises décisions. a roof would be nothing but four the obvious numerical ones, but also La cohérence conduit walls at the mercy of the elements. the social and human ones, as well as à innover pour créer the holistic system of the economy de la valeur ajoutée, The beauty of coherence and business. What is more, reality l’incohérence détrui- sant la confiance dans Besides training or the proposal to is governed by a key principle that le monde financier. reduce public intervention, the pur- we all have to live by, namely that Nous avons une belle pose of this paper is to raise aware- everything is in equilibrium. When occasion de passer à ness of the need to act and think on businesses or other institutions fail un modèle de crois- the basis of common sense. The main to take account of this, they lose sance stable et durable problem right now is the lack of trust touch with reality; and eventually à moyen et long in the financial system – made wor- that means having to lie. But lies soon terme. Les marchés se by the lack of information throug- catch up with you, and there is a great dépendent finalement hout the economic structure. There likelihood of incoherence, which – as des personnes qui les composent. Pour res- are many ways to restore trust, some already stated – destroys trust. taurer la confiance, ce of them very ingenious and innovati- We are in serious trouble; but the sont donc les gens que ve, but the most obvious one is also greatest obstacle is refusing to make nous devons changer the most effective: common sense. the necessary leap. We now have a en priorité. When we act on the basis of common golden opportunity to shift to a stable sense, we are coherent, and when we growth model that is sustainable in are coherent we are much less likely the medium and long term. Markets to make wrong decisions. Coherence are not good or bad in themselves, but means that we will act correctly, but depend on the people within them. If not unadventurously. It leads us to in- we want to change the direction of novate in order to create added value the market and create trust, we have that is recognised by the market, and to change the people within it. to make prudent decisions. However, So let’s do it. • in order to be coherent and prudent, we need a broad basis of training, fai-

COMMON SENSE 148 References Alé, R. (2012). Empresa y huma- Geach, P. T. (1977). The virtues. nismo: una justificación causal de Cambridge: Cambridge University la empresa. FIDAE Press

Alé, R. & Carmona, N. (abril, Huerta de Soto, J. (1998, fourth 2012).La crisis en España, Revista edition 2009). Dinero, crédito ban- Mar Océana, 28 cario y ciclos económicos. Madrid: Unión Editorial. Alfaro Drake, T. (2012). ¿Son los especuladores unos parásitos chu- Johns, K. (2010). Why society pasangre o cumplen alguna función is becoming over-protective. Re- útil en los mercados? Retrieved from trieved from www.helium.com/ tadurraca.blogspot.com.es/2012/07/ items/2010944-look-out-you- son-los-especuladores-unos-parasi- may-become-offended-by-what-is- tos.html said-about-society-in-this-article.

Fernández-Villaverde, J. (2012). Morris, T. (1997). If Aristot- La Salida de la Crisis: cómo y cuán- le ran General Motors. New York: do. Madrid: Hotel Wellington. Henry Holt

Frankl, V. (2006). Man’s search Pope, A. (1711). An Essay on Cri- for meaning. Boston: Beacon Press . ticism

CHANGING FRONTIERS OF ETHICS IN FINANCE 149

Part II

Ethics, Technology and Innovation 150 151 HHard Coding Ethics into Fintech

Ethics & Trust in Finance Global edition 2016-2017

Third Prize ex-aequo

1 Brett Scott Fintech fuses digital technology These innovations increase South Africa with traditional finance. The field of the speed and lower the costs of Senior Fellow, digital finance that results is often providing financial services, and may Finance claimed to be a disruptive hybrid that enable services to reach a wider range Innovation Lab*, will displace ‘old’ finance. However, of people. That said, they do not London a significant amount of fintech necessarily challenge the underlying innovation can best be understood principles of the existing financial as the automation of traditional system. Indeed, fintech mostly aims finance, or the automation of its to make the existing system faster, user-experience layer. Many fintech more convenient and cheaper for start-ups build platforms that either people to interact with. We should replace financial professionals thus ask whether the digital format with algorithms – for example, an challenges or reinforces established automated ‘robo-advisor’ wealth systems of financial ethics. manager2 – or that replace front- Furthermore, we should consider office customer service staff with whether it introduces new ethical self-service interfaces, as in the case issues previously not as prominent of artificial intelligence ‘chatbots’3. * The views expressed within finance, such as data ethics. herein are those of 1 Financial technology This essay aims to lay out a the author and do not 2 See, for example, Wealthfront (https://www. necessarily reflect those programme for the ethical study of wealthfront.com/) and Betterment (https:// fintech. Since the financial crisis, of the Organization he is www.betterment.com/) affiliated to. 3 See, for example, Kasisto (http://kasisto. much attention has been given to the com/) and Cleo (https://meetcleo.com/) ethics of ‘high finance’, the world of

HARD CODING ETHICS INTO FINTECH 152 investment banks and trading. The at and watching out for. Part four of everyday finance of retail banks and this essay thus sets out five discreet pension funds, despite scandals such research programmes that are Fintech fait fusionner la as PPI, has often escaped attention. required if we are to understand the technologie numérique ethics of fintech. avec la finance tradi- Furthermore, the fintech companies tionnelle, et peut être building services on top of these le mieux appréhendé institutions have been viewed largely The power dynamics of comme l’automatisation as positive innovators who will only monetary contracts de la finance tradition- benefit customers. A more balanced Basic finance – debt or equity – nelle. Les start-ups de and critical view needs to be involves the creation of contracts fintech cherchent à developed. We cannot allow ethical that give one party rights to future remplacer les profes- considerations to be post hoc ‘add- sionnels de la finance money in exchange for granting par des algorithmes, et ons’ to technological innovation. rights to present money to another à remplacer le per- They must be considered prior to us party. The latter party may use the sonnel au service du building dependence upon digital money to mobilise labour, resources client par des interfaces finance. and technology to produce goods and numériques. Il se peut This essay will proceed in four services, which in turn are exchanged que cela rende l’inte- parts: in markets for money, which creates raction avec le système the flow of future money promised in financier plus facile 1. I start by describing finance pour les gens, mais il as a realm of monetary contracts, the contract. faut nous demander but draw a distinction between the In an idealised sense, a contract quel est son impact sur professional financial industry that implies a certain equality between l’éthique en finance. creates these contracts and the retail signatories to the contract. In reality, customers who accept them. though, when it comes to retail 2. I then argue that the fintech finance many people experience Cet essai énonce un industry is attempting to automate financial contracts as a one-way programme pour the creation of these contracts, and ‘service’ offered to them – or perhaps l’étude éthique de la our interaction with them. forced by circumstance upon them – fintech en quatre par- by a large financial institution. ties. La première partie 3. In order to assess how this process impacts ethics, I then In the best case this can be a décrit la différence mutually beneficial contract. In the de puissance entre establish a baseline snapshot of the worst case it can involve ‘asking l’industrie financière ethical dimensions of existing retail permission to be exploited’. A qui crée des contrats finance. financiers et les clients power differential exists between 4. This makes it possible to de détail qui accepte ces individuals and institutions. For contrats. consider how the digital format example, a person ‘applies’ for a La deuxième partie might impact those existing ethics. mortgage from banks who advertise montre comment le It is impossible to their willingness to entertain such Fintech est en train comprehensively assess every ethical contracts, but the legal, informational d’automatiser la créa- issue raised by fintech within a single and political resources of the banks tion de ces contrats. essay. It is possible, however, to are often much greater than that La troisième partie identify what we should be looking of the customer. Likewise, a retail

CHANGING FRONTIERS OF ETHICS IN FINANCE 153 établit un instantané de investor trying to invest for future financial companies is to present l’éthique de la finance returns often operates via a large retail customers with standardised de détail. La quatrième intermediary like a mutual fund. menus, interfaces and rule-sets for partie propose cinq Retail finance thus either involves interaction: If you want this mortgage, programmes de re- large institutions offering small-scale fill out this form and prove X, Y and Z. cherche pour examiner comment le nouveau contracts to large numbers of people, The scale necessitates bureaucratic format numérique peut or it involves large institutions pooling rule systems, brings a tendency to rely impacter cette éthique. the money of small-scale investors upon statistics and modelling rather to enable them to collectively offer than personal interaction, and creates large-scale contracts to other large pressure to automate processes to institutions. lower the costs of interacting with so La finance implique many small players. la création de contrats The automation of monétaires, mais Following the distinction beaucoup de gens financial contracting established above, we can see two appréhendent les We can thus distinguish between broad components of financial contrats proposés par two camps. On the one hand we services that can be automated. la finance de détail have the financial sector, consisting The first is the internal activities comme une proposition of large, well organised financial of financial professionals within à sens unique, émanant d’une grande institution institutions that specialise in offering financial institutions. The second is financière aux pouvoirs financial contracts, or in investing in the institution’s points of interaction légaux et politiques those on other’s behalf. Then we have with customers who approach to bien plus importants the general public, the dispersed, make requests. qu’eux. La finance de uncoordinated retail customers détail consiste soit en who often feel like passive receivers Automating financial de grandes institutions of ‘financial services’. We may professionals: machines qui offrent de petits distinguish between members of the to robots to AI contrats standards à un grand nombre de general public who are subject to In principle, financial contracts personnes, soit en de obligations to financial institutions require little more than a written grandes institutions – like someone who must pay their document with a legal system to qui agrègent l’argent de mortgage – and those who feel the enforce it. Indeed, an ancient financier petits investisseurs afin institution is obligated to them, like may have used manual tools such as de leur permettre d’of- a pensioner or a bank depositor, but a quill pen and paper, along with an frir collectivement des the common factor is their feeling abacus and calculation methodologies contrats à plus grande of being on the ‘receiving end’ of a échelle à d’autres to work out a contract. Modern contract. grandes institutions. financial institutions, however, use Le client de détail The disparity of scale is crucial. more advanced technologies to speed moyen est se sent The retail customer may feel dwarfed up the process for deciding who gets écrasé par les grandes by the financial institutions they use, to enter contracts, for calculating institutions financières and those institutions are often so large contract terms, for executing the qu’il utilise. Elles sont as to be unable or unwilling to engage contracts, for valuing the contracts souvent si grandes with the particular circumstances once created, and for transferring qu’elles ne sont pas of each customer. The impulse of them.

HARD CODING ETHICS INTO FINTECH 154 capables de prendre Manual tools have been and decision-making processes en considération les surpassed by financial machines. For within financial institutions. While caractéristiques particu- example, an Excel spreadsheet partly they may not immediately threaten lières de chaque client. automates and greatly speeds up the professionals who work in corporate La grande taille est à process of storing and analysing l’orgine d’une pres- finance – such as experienced sion pour automatiser large amounts of data. Likewise, an bankers financing a major les processus afin de automated credit-scoring system infrastructure project – they are baisser les coûts d’inte- may take in data inputs about a proliferating within retail finance, raction avec autant de person – such as their spending where large numbers of smaller petits acteurs. behaviour, location and age – and decisions have to be made. output a score for them. Increasingly, though, we are Automating the user- Des pans entiers des seeing the rise of financial robots, experience layer: from services financiers machines endowed with the ability service to self-service peuvent être automa- to take in variable inputs and execute tisées. En premier, les pre-set decisions based upon that Financial institutions are activités des profes- data. Automated trading algorithms increasingly automating the process sionnels financiers à are perhaps the most well-known via which customers interact with l’intérieur des institu- of these, but a ‘robot’ might also financial professionals. This is tions financières. En include, for example, a system that made possible by technologies like second, l’interaction home computers and smartphones de l’institution avec les automatically approves a loan to a clients extérieurs. person who scores above a certain that allow people to communicate threshold on a credit-scoring model. their intentions to institutions via At the frontiers we have financial an Internet connection. Interaction artificial intelligence, financial options can be presented to Les institutions robots with variable parameters customers via smartphone apps and financières modernes internet banking portals. This also utilisent des technolo- that can shift depending on the data necessitates the development of gies pour accélérer le presented to them, allowing them processus de création, to make more advanced decisions ways for people to prove who they de valorisation et de or predictions. A traditional credit- are when communicating, such as transfert des contrats scoring model operates with a pre- smartphone biometric finger-print financiers. Un exemple set methodology implemented as a readers. To make these self-service de machine financière step-by-step algorithm that takes experiences feel more ‘human’, est le système de nota- data inputs and converts them institutions are experimenting tion de crédit automati- sé. Les robots financiers deterministically into data outputs. with ‘chat-bots’, digital interfaces sont des machines qui A machine-learning system, though, presented as living beings with sont capables d’intégrer can calibrate its operations in personality, equipped with natural des intrants variables et response to past data, ‘learning from language processing (NLP) d’exécuter des décisions past experience’ rather than merely capabilities that allow them to définies d’avance, tel ‘following orders’. interpret human speech or writing. qu’un système pour These technologies are being Institutions are also developing new approuver automati- used to remove human calculation ways to automate customer support.

CHANGING FRONTIERS OF ETHICS IN FINANCE 155 quement des prêts à des The digital institution FX company, wealth manager and gens qui obtiennent un short-term loan company via a single bon score de crédit. These innovations give rise smartphone app6. to visions of completely digital financial institutions that integrate Towards an ethical an automated customer interaction L’intelligence artificielle assessment of fintech process with an automated decision- appliquée à la finance, The replacement of financial making process. Thus, the ‘old’ model implique des robots professionals with algorithms, and in which a customer walks into a qui peuvent prendre the replacement of customer service des décisions plus branch to consult with a manager – staff with self-service interfaces avancées, telles que le who looks over their business plan may cut costs and allow financial système d’apprentissage and makes a loan decision – may be institutions to deal with a greater automatique qui peut replaced with a customer inputting calibrer ses opérations volume of customers, but what are data via a smartphone interface into en réponse aux données the ethical implications? To grapple a machine-learning model that has passées, « en apprenant with this, we must first sketch out been granted power to approve or de l’expérience passée » a baseline model of retail finance reject the application. At the frontiers plutôt qu’en « suivants ethics, against which we can assess des ordres ». are systems that do not even require fintech. the customer to input data, but that extract data about them from Retail finance ethics are external sensors, such as the location complicated by the power Les institutions data on their phone4. differential between the large-scale financières sont en financial institutions and the small- train d’automatiser le The digitisation process can scale customers. The greater level processus par lequel be applied on both sides of banks’ of power, expertise, information, les clients interagissent balance sheets, with automated and co-ordination possessed by avec les professionnels interfaces presented to both financiers. Les options large institutions suggests that they depositors and borrowers. In the case d’interaction peuvent should be subject to greater ethical of fund management and financial être présentées via des scrutiny and responsibility than advisory, points of interaction with applications de smart- the individual customer. Using this retail investors are being automated. phone, qui nécessitent lens, we can see three broad fields of de nouveaux moyens These different strands of automation potential ethical concern: pour que les clients are also enabling the rise of umbrella s’identifient, tels que platforms that mediate between 1. How retail borrowers are des lecteurs d’em- a single customer and multiple treated preintes numériques underlying institutions via APIs5. A 2. How retail depositors and sur smartphone. person might interact with a bank, investors are treated

4 See, for example, Costa et al. https://www. 3. The ethics of what gets omidyar.com/insights/big-data-small-credit financed by large institutions that Le vieux modèle selon 5 Application Programming Interfaces. This take money from retail customers lequel un client rentre is a theme of the EU PSD2 directive. For a dans une succursale summary, see https://www.evry.com/en/news/ 6 See, for example, the services offered by pour consulter le mana- articles/psd2-the-directive-that-will-change- Fidor (https://www.fidorbank.uk/) and sola- banking-as-we-know-it/ risBank (https://www.solarisbank.de/)

HARD CODING ETHICS INTO FINTECH 156 ger qui prend une déci- We see historical examples projections and equations. The latter sion de prêt peut être of abuses in all these fields. The is presented as fuzzy and emotional, remplacé par le client predatory issuance of punitive loans a discretionary realm where you can qui rentre des données to vulnerable borrowers might bring in your personal values. à travers l’interface du be an example within the first smartphone dans un This distinction is false on two modèle d’apprentissage category. Scandals around banks’ grounds. Firstly, within ‘normal automatique qui a le mis-selling insurance products to finance’ there are embedded ethical pouvoir de valider l’ap- small businesses, or funds charging principles that are so taken-for- plication. Il existe déjà excessive fees may fall into the granted that they are almost invisible. des systèmes qui n’ont second. This essay, however, will For example, it is taken for granted même pas besoin que focus on the third category. le client rentre des don- that it is unacceptable to knowingly nées, mais qui extraient finance a company that uses slave The ethics of financing th des données sur celui-ci labour. ‘Rational’ 18 century à partir de censeurs An institutional equity investor financiers financed slave plantations, externes, tels que des helps to finance a property company but once slavery was rejected as a données de localisation developing an office block. In such norm, an anti-slavery principle was du téléphone. Le pro- a process, things are created – a incorporated as a baseline principle cessus de digitalisation building – and things are destroyed – into ordinary finance. Thus, what peut être appliqué des forests used for timber. The workers ends up being called ‘ethical finance’ deux côtés des bilans de banque, avec les who built it could be treated fairly or really only concerns those issues interfaces automatisées unfairly, and the tenants who move that are still morally debated, such présentées aussi bien in might be subject to dangerous as whether undermining ecological aux déposants qu’aux conditions or safe ones. The financier systems is acceptable. Mainstream emprunteurs. thus becomes implicated in webs financiers continue to finance of ambiguous ethics. Their money ecologically destructive projects, is used to mobilise energy towards while the ‘ethical finance’ sector may ends that impact both ecosystems self-consciously choose not to. Pour pouvoir analy- and other people, and they receive ser les implications This relates to a second point, éthiques du Fintech monetary benefit from that. which is that the term ‘ethical’ is nous devons d’abord Property development is – often used shallowly to refer to being ébaucher un modèle de comparatively speaking – an self-consciously ‘good’. This is in base de l’éthique dans uncontroversial industry, but whole contrast to a more holistic notion le contexte de la finance of ethics as any principles people de détail. industries like weapons, tobacco Il y a trois larges and fossil fuels are viewed by many use to guide their interactions with champs de préoccupa- as being fundamentally problematic. others. Ethical finance is presented tion éthique poten- Within the financial sector this is as the realm where you go to tielle. Premièrement, sometimes resolved by making a overtly act with ethics, implying that comment les emprun- distinction between ‘normal finance’ normal finance is somehow outside teurs de détail sont and ‘ethical finance’. The former the realm of ethics, an amoral traités. Deuxièmement, is presented as a default realm zone where you focus on ‘being comment les déposants of rational and amoral economic rational’. This narrowly defined et les investisseurs de principles, a world of mathematical ‘rationality’, however, is an ethical

CHANGING FRONTIERS OF ETHICS IN FINANCE 157 détail sont traités. Troi- position. Specifically, it is a form 2. Arguing that the moral sièmement, la place de of consequentialism7 we might call character is undetectable, multi- l’éthique dans ce qui est monetary egoism. This is a modified faceted, ambiguous or unknowable financé par de grandes version of ethical egoism8, and states in advance. This was used in the institutions qui utilisent wake of the financial crisis, where l’argent des clients de that an investment is ‘right’ if it leads détail. Cet essai va se to personal monetary gains. ‘we didn’t know that would happen’ concentrer sur la troi- This is given formal expression was a common refrain. sième catégorie. in the mathematical risk-reward 3. Arguing that, even if it is calculations of investment: ‘How bad, the financier is not ethically much future money will I get, relative to responsible, or is subject to a higher- order duty or good that overrides the Les financiers sont how much money I have to put in now, impliqués dans un tissu relative to how much risk I must take bad. de relations ou prévaut in the process?’ These calculations are This latter category of justification une éthique ambiguë. nested within a substrate of norms strategies is aided by the scale and Leur argent est utilisé seen to be outside the realm of egoist hierarchal management structure pour des investisse- calculations, like slave labour. of financial corporations. Large ments qui ont un im- projects may be fragmented into pact sur les écosystèmes Ethical neutralisation smaller sections, such that nobody ainsi que sur les autres techniques gens. À l’intérieur du feels responsible for the whole. secteur financier, ceci If we believe in concepts like ‘the Such settings also allow individuals est parfois reconnu du public interest’, it is necessary to to assign blame to an ‘irresponsible’ bout des lèvres par la instil deeper ethical reflection beyond junior or a dominant senior. distinction entre « la monetary egoism among financial Additionally, the sheer scale and finance normale » et « professionals. This faces hurdles. geographic dispersion of financing la finance éthique ». La activities can add layers of abstracted finance normale est une When confronted with ethical distance. A controversial coal mining zone dans laquelle les criticism, financial professionals have acteurs sont des « êtres a range of neutralisation techniques, project in Colombia, for example, rationnels ». Cette « ra- all of which need to be subject to is reduced to numeric models on tionalité » étroitement ongoing challenge. These include: a screen in London. Indirectness définie est, cependant, abounds, such that few feel directly 1. Arguing that a controversial une position éthique. responsible, or even perceive distant investment or behaviour is not bad Spécifiquement, il injustices. s’agit d’une forme de (morally neutral), or that it is in fact conséquentialisme que good. Even when direct responsibility nous pouvons appeler can be ascertained, financiers can égoïsme monétaire, une 7 An ethical school that considers the out- justify actions by asserting a higher comes of an action to determine the moral version de l’égoïsme moral priority (I had a good reason for character of that action éthique qui énonce 8 Ethical egoism asserts that a moral action is it). A common version is to simply qu’un investissement one that maximises an individual’s self-inte- invoke monetary egoism. When a est « bon » s’il permet rest. This weighing of personal costs vs. bene- fraudster defends themselves by des gains financiers fits is unlike consequentialist utilitarianism saying ‘I needed money to feed my personnels. that weights up costs and benefits to a collective. For a short summary, see Shaver https:// kids’, they appeal to their children’s plato.stanford.edu/entries/egoism/#2 wellbeing as a justification. A

HARD CODING ETHICS INTO FINTECH 158 Il est nécessaire monetary egoist might leave off the responsibility: The fund’s scale and d’insuffler une réflexion ‘feed my kids’ part. Financiers may diversification add moral dispersion éthique plus profonde not be engaged in anything illegal, and responsibility dilution, allowing au-delà de l’égoïsme but within the sector it remains statements like ‘we invest in many monétaire parmi les professionnels finan- comparatively common to assert companies and cannot follow them all, ciers. Cela fait face à that there is some inherent rightness or be held directly responsible for their des obstacles, car les to the private pursuit of monetary actions’, or ‘we are but one investor professionnels ont une self-interest that overrides whatever among many’. série de techniques de public consequences might stem 4. Appeal to collectives: The neutralisation pour from a financing activity9. Monetary presence of a competitive market with contrer la critique egoism is the counterpart to the other investors allows moral escape éthique. Celles-ci hatches like ‘many others are doing it’. incluent soir le fait de concept of ‘negative externalities’, nier qu’un investisse- social losses incurred as a result of 5. Assert inevitability: This ment controversé est economic agents’ private pursuit of includes statements like ‘If I didn’t do mauvais, soit d’argu- individual gain. it, somebody else would’, the implied menter que même si argument being ‘It will happen anyway, To illustrate other justification l’investissement n’est therefore I’m not really responsible’. strategies, let us take a hypothetical pas éthique, le financier 6. Add diversionary moral example of a paper company n’est pas éthiquement indignation: ‘It is irresponsible for us to responsable, car il est engaged in irresponsible rainforest not to. Without these forestry companies assujetti à un ordre destruction, financed in part by you wouldn’t have paper’. This ignores supérieur bon qui a large diversified fund manager. that paper can be produced more prime sur le mau- When challenged, the portfolio sustainably. vais. Les stratégies de manager might: justification incluent 7. Finally, they can resort to, 1. Deny personal agency (I l’égoïsme monétaire, en ‘If you don’t like this, we also offer an had no choice): Subsets of this might affirmant que la pour- ethical fund’. suite privée d’intérêt include presenting themselves as a personnel monétaire ‘jobsworth’ (‘I’m just doing my job. I take The financial ethics est vertueuse et qu’elle orders from senior management’), or of the public prime sur les consé- presenting themselves as an embattled One fall-back position of quences publiques qui follower of the ‘invisible hand’ (‘we just peuvent découler de institutional investors is to assert respond to what the market demands. l’activité financière. that they are only responsible for the We’d go out of business if we didn’t’). D’autres stratégies de financial interests of their clients, and 2. Assume the role of a loyal justification com- that it is up to those clients to specify prennent le fait de nier servant, as in ‘I have a responsibility to acceptable investments. There is l’autonomie de l’action my clients. Speak to them if you have a some merit in this argument10, but personnelle (« je n’avais problem’. pas le choix, je fais 3. Deny direct causal 10 There are debates on the nature of the fidu- simplement mon travail ciary duty institutional investors owe to their »), assumant le rôle 9 This inspires ethical finance practitioners clients, relative to environmental and social d’un loyal serviteur (« to try win support in mainstream finance by responsibilities. See for example, the 2014 UK j’ai une responsabilité arguing that you can ‘make money by being Law Commission report on the topic http:// envers mes clients »), good’, an attempt to align monetary egoism www.lawcom.gov.uk/app/uploads/2015/03/ with broader ethics lc350_fiduciary_duties.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 159 refusant la responsa- it glosses over the large difference in general public to ignore the ethical bilité causale directe information and power between retail consequences of financial decisions. (« nous investissons customers and institutions. We can thus argue that a more dans de nombreuses compagnies et nous ne While there are campaigns – ethical financial system would 11 pouvons pas être tenus such as divestment campaigns – actively: directement respon- that try to mobilise retail investors 1. Encourage greater ethical sables de leurs actions into demanding higher ethical reflection from financial professionals »), faisant appel à des standards from institutions, public prior to their decisions. comportements de levels of financial literacy remain 2. Connect them more closely groupes (« beaucoup low, and ordinary customers may to the ethical outcomes of their d’autres le font »), be authentically perplexed about faisant valoir la fatalité decisions. finance beyond a shallow surface (« si je ne l’avais pas understanding. 3. Encourage customers to take fait, d’autres l’auraient a more active and demanding stance fait »), et l’indignation In such a context, it is easy for on ethics. morale de diversion (« the ethical norms of expert financial ce serait irresponsable institutions to be accepted by the 4. Encourage customers to de notre part de ne pas broader public as ‘financial common understand what is happening behind le faire »). sense’. These ethical standpoints the scenes with their money. are embedded within the marketing We might generalise these by language of financial products, and saying the financial system should aim Les investisseurs ins- many customers do not have enough to create opportunities for moments titutionnels affirment time or energy to deconstruct this. of ethical pause, reflection on the souvent qu’ils sont Indeed, financial products are implications of investments beyond seulement responsables often marketed to people in narrow monetary returns. This is different des intérêts financiers functional terms that focus on to asserting that people should be de leurs clients, et qu’il ‘what this product will do for you ‘good’. Rather, it is to say they should revient à ces derniers individually’, rather than broader understand and take responsibility de préciser ce que sont for investments they are implicated pour eux les investis- structural descriptions of ‘how it will sements acceptables. do that and who else it impacts in in, rather than denying responsibility. Ceci ne tient pas the process.’ compte de la grande Assessing the ethical différence de pouvoir Combatting ethical implications of digital entre les clients de indifference finance: a proposal détail et les institutions. Les connaissances One need not agree with every In the context of the ethical en matière financière element of the assessment of financial angles sketched above, the process dans le secteur public ethics above to agree that – in of automating finance raises two demeurent faibles et les general – it would be a positive step broad sets of questions. Firstly, does normes éthiques des to challenge any process that allows the process of automating various établissements finan- both financial professionals and the elements of the jobs of financial ciers spécialisés sont professionals alter the ethics of acceptées comme « du their decision-making or lead to bon sens financier ». 11 See, for example, the GoFossilFree movement https://gofossilfree.org/ new ethical justification strategies?

HARD CODING ETHICS INTO FINTECH 160 Secondly, does the automation of the is common in society: we see it in customer experience affect customer simple examples like an indifferent awareness of ethical issues, and waiter shaking his head and pointing Un système financier customer rights? to a menu when a customer makes a plus éthique devrait request for something that is not on encourager les profes- It is beyond the scope of this essay sionnels financiers à to comprehensively answer this. The it. The menu has no agency, and yet mener une réflexion aim rather is to propose the outlines becomes an objectified ‘actor’ in the éthique plus ample of a comprehensive research agenda situation. With advanced financial avant de prendre leurs that we urgently need to undertake if machines, robots and AI, this process décisions, à les associer we are to evaluate the ethical impacts of pointing to a third-party ‘actor’ may plus étroitement aux of fintech. What follows are short increase. Furthermore, as financial résultats étiques de summaries of five areas of concern robots execute decisions themselves, leurs décisions, et à professionals may increasingly feel ‘it encourager les clients that need to be tackled by dedicated wasn’t me’. à prendre une position research programmes. plus active et exigeante envers l’éthique. Research programme 1: Research Does automation reduce programme 2: Does the ethical awareness automation reduce and responsibility of customer awareness Le processus d’automa- of ethics? tisation de la finance financial professionals? soulève deux séries de A cynic might flippantly argue Fintech companies put a positive questions. En premier, that ethical awareness among spin on the speed, ease and frictionless le processus d’automa- financial professionals is already low, nature of digital finance, but does tisation de différents but it seems unlikely that automation frictionless finance increasingly éléments du travail detach the customer from deeper des professionnels would increase ethical awareness. It awareness of what lies behind financiers altère-t-il is plausible that as decision-making l’éthique de leur prise processes are increasingly automated, financial instruments? ‘Friction’ can de décision ? En se- individual financial professionals will be a negative way of framing ‘contact’, cond, l’automatisation feel increasingly less responsible for ‘engagement’ or ‘texture’. Much like affecte-t-elle la prise de the decisions, or perhaps will not shopping online can feel ‘less real’ conscience du client even be aware of the decisions. than testing products in a shop, so des problèmes éthiques, interacting via a smartphone interface Once set up, automated financial et de ses droits ? with financial contracts is a more systems can take on the superficial detached psychological experience. appearance of being external to, The frictionless interface may further and autonomous of, the individuals reduce scope for moments of ethical Comme les processus that manage them. This may allow pause. Indeed, robo-advisor services de prise de décision financial professionals to use them and startups like Nutmeg12 actively sont de plus en plus to further deny moral agency and tell people that they need not think automatisés, les pro- responsibility. The process of fessionnels financiers about what to invest in, marketing the individuels peuvent deferring to a non-human third party se sentir de moins en that apparently makes decisions 12 See https://www.nutmeg.com/

CHANGING FRONTIERS OF ETHICS IN FINANCE 161 moins responsable des ability to obtain a diversified portfolio décisions. Les systèmes Research programme 4: at the click of a button. Could this Does automation lead to financiers automatisés create a sense of investment as a peuvent sembler super- ‘magical process’, that ‘just happens’, financial surveillance? ficiellement être indé- rather than a deep process with real Digitisation increases personal pendants des individus qui les gèrent, ce qui moral implications? data trails. As non-digital interaction permet aux profession- options are removed, people are nels financiers de nier Research handing over ever greater amounts toute nature morale de programme 3: Does of richer data, such as the exact time l’action et la responsa- automation reduce at which they paid for something and bilité. accountability to their smartphone location when they retail borrowers? did it. People are often unaware that such data is being collected, and fail to understand where it is taken from L’incapacité d’avoir The inability to access credit can accès au crédit peut be damaging to a person’s economic and what it is used for. mettre en péril le bien- wellbeing, adding credence to the They may be pushed into giving être économique d’une idea that institutions should offer consent for its usage as a condition personne, et les éta- accountability when rejecting for accessing basic services. In blissements devraient them. The indifference displayed innovation areas like ‘insurtech’ rendre compte de leur by ordinary automated systems is (insurance technology) smartphones action quand ils le famously encapsulated in the phrase and wearable devices like Fitbits refusent. À l’inverse ‘Computer Says No’, but this could des modèles financiers can be used by large institutions to courants où la cause du become acute as we move into the monitor behaviour to determine a refus peut être commu- realm of machine learning. person’s risk profile13. These systems niquée à un client, les Unlike ordinary deterministic are currently optional, but as the managers des systèmes models where the cause of rejection technology becomes ubiquitous d’apprentissage auto- can be identified and communicated it could become mandatory for matique II ne peuvent individuals to grant access to this pas nécessairement dire to a customer, machine learning data, or else face exclusion and pourquoi un client a été designers cannot necessarily account exclu de ces services. for why a customer gets placed in punitive costs. a certain bracket. In a traditional Many people feel intuitively algorithm, the designers take past concerned about questions of privacy human learning and encapsulate it – like ‘Am I being spied on?’ – but a La numérisation within an ‘if-then’ algorithmic form potentially deeper concern is the signifie que les gens (for example, if person has less the use of peoples’ data to steer their remettent des quantités , but in behaviour. Financial data reveals very toujours plus grandes X income, then not desirable) de données plus com- the case of machine learning, the deep insights into how people act in plètes. Les gens ne sont automated system is designed to the world, and – when combined with souvent pas conscients make inferences itself, which may other data sets – potentially allows que de telles données remain unknown to the creators of institutions to ‘know you better than sont collectées, et the system. puisque la technologie 13 See, for example, Fitsense (http://fitsense. io/) and WeSavvy (http://wesavvy.com/)

HARD CODING ETHICS INTO FINTECH 162 devient omniprésente, you know yourself’. We already sense il pourrait devenir Research programme 5: this trend in online recommendation Does automation reduce obligatoire pour des engines that use your past interaction individus d’accorder data to suggest future paths of customer autonomy? l’accès à ces données, behaviour. These fall within the Digital finance is often presented sous peine d’être exclu et d’être exposé à des broader field of predictive analytics, as increasing consumer choice, coûts punitifs. Ceci which not only allow institutions to but what starts as a choice can soulève des problèmes potentially predict your behaviour, later become mandatory. Email, en matière de protec- but also to potentially manipulate it for example, started as an exciting tion de la vie privée. with ever-increasing accuracy. While new communications option but Les données financières this may be narrowly useful, it can quickly became required, resulting in révèlent aussi des also feel disconcerting, and reduce economic exclusion for those who did informations très pré- peoples’ sense of autonomous agency. not use it. Likewise, automated self- cises sur la façon dont checkout counters at supermarkets les gens agissent dans A related long-term question might initially be pitched as an le monde. Ainsi, les concerns the psychological impacts option, but simultaneously provide établissements peuvent that occur when people learn they supermarkets with a justification for non seulement prédire are being monitored. Are we seeing potentiellement votre reducing the number of checkout the incremental growth of a financial comportement, mais clerks, which in turn may reduce ‘panopticon’ that might cause people aussi le manipuler avec the convenience of using the clerks. to censor and regulate their own une exactitude de plus Institutions seeking to cut costs behaviour out of fear that their every en plus grande. through automation gradually make private move may be subject to it harder and harder to use non- monitoring? automated options, ‘inspiring’ people La finance numérique This question complements to ‘choose’ self-service. est souvent présentée Research Programme 3. The fields We are currently in the stage comme permettant of big data and machine learning are where financial institutions are au consommateur linked, in that machine learning competing to showcase new digital d’augmenter ses choix, models are trained using large options, but we are likely to see them mais ce qui débute amounts of data collected from comme un choix peut converge on a common set, which multiple sources. Advanced artificial they will then gradually use as a s’avérer être obligatoire intelligence systems may use such plus tard. Les établis- justification to remove non-digital data to come to a deep understanding sements financiers options that are costlier for them to présentent actuellement of your character, but what if – on maintain. At that point, we may get de nouvelles options the other hand – the systems are locked into dependence upon digital numériques, qu’elles incompetent and make arbitrary, finance. utilisent ensuite pour unaccountable, Kafkaesque decisions? This raises perhaps the most justifier le retrait des The rejected borrower seeking philosophical concern. Let’s return options non numé- accountability might face a dead-end, to the waiter analogy used in Section riques qui sont plus trying to guess what element of their 4.1. An empathetic, innovative waiter coûteuses pour elle. Le behaviour has caused the rejection. self-service numérique can rise above a menu, showing implique que les clients flexibility towards customers. The

CHANGING FRONTIERS OF ETHICS IN FINANCE 163 interagissent avec des self-service world, however, only has In closing managers cachés à tra- customers interacting with hidden vers un menu établi par managers via a menu set by those Above, I have speculated on ses managersL’élargis- managers, with no ‘waiter’ figure some potentially negative ethical sement des choix peut to mediate between them. Menus implications of fintech. These need être une illusion. both define available choices – by not transpire and, indeed, there are highlighting acceptable options – and great opportunities to use fintech for limit them, by rendering invisible promoting social and environmental 14 Alors qu’il y a de options that are not tolerated. good . That said, unless we actively grandes opportunités Digital interfaces and apps might start to research these questions and d’utiliser fintech pour come in many colours and designs, embed awareness of them into our promouvoir le bien but if financial institutions begin to innovations, we may sleepwalk into social et environnemen- converge on a common set of options, an increasingly ethically-disabled tal, il est crucial de re- the sense of wide choice may be an financial system. • chercher les potentiels éthiquement négatifs de illusion. Without an intermediary nos innovations. Sinon connection to company management nous risquons d’être via flexible or empathetic frontline des somnambules dans customer service staff, users may find un système financier de themselves feeling even more like plus en plus handicapé passive acceptors of services from éthiquement. distant, unfathomable financial gods. 14 See UNEP 2016

HARD CODING ETHICS INTO FINTECH 164 References Betterment (2017). Retrieved Law Commission, (2014). from https://www.betterment.com/ Fiduciary Duties of Investment Intermediaries. Law Com No 350. Cleo (2017). Retrieved from Retrieved from http://www.lawcom. https://meetcleo.com/ gov.uk/app/uploads/2015/03/lc350_ fiduciary_duties.pdf Costa, A., Deb, A. & Kubzansky, M. (2016). Big Data, Small Credit: Nutmeg (2017). Retrieved from The Digital Revolution and Its Impact https://www.nutmeg.com/ on Emerging Market Consumers. Shaver, R. (2014). Egoism. Omidyar Network. Retrieved from Stanford Encyclopedia of Philosophy. https://www.omidyar.com/insights/ Retrieved from https://plato.stanford. big-data-small-credit edu/entries/egoism/#2 Evry Norge, (2017). PSD2 - the solarisBank (2017). Retrieved directive that will change banking as from https://www.solarisbank.de/ we know it. Retrieved from https:// www.evry.com/en/news/articles/ UNEP Inquiry into the Design psd2-the-directive-that-will-change- of a Sustainable Financial System, banking-as-we-know-it/ (2016). Fintech and Sustainable Development: Assessing the Fidor (2017). Retrieved from Implications. Retrieved from http:// https://www.fidorbank.uk/ unepinquiry.org/wp-content/ uploads/2016/12/Fintech_and_ Fitsense (2017). Retrieved from Sustainable_Development_ http://fitsense.io/ Assessing_the_Implications.pdf GoFossilFree (2017). Retrieved Wealthfront (2017). Retrieved from https://gofossilfree.org/ from https://www.wealthfront.com/ Kasisto (2017). Retrieved from WeSavvy (2017). Retrieved from http://kasisto.com/ http://wesavvy.com/

CHANGING FRONTIERS OF ETHICS IN FINANCE 165

aking Innovation in Finance MMEthical

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Second Prize

Anne Godbold “Inventing and innovating rise of virtual currencies including United Kingdom are the most exciting and risky Bitcoin, the emergence of peer-to- Management Consul- activities in business and absolu- peer lending (which in 2014 in Bri- ting Analyst, tely necessary if companies are to tain was worth £1.7bn (The Guar- Accenture*, London thrive” dian, 2015a) and the evolution of Financial Times, 2014 mobile payment solutions. The market has been disrupted by new en- As established banking firms see trants bringing innovative products. their return on equity fall due to in- These firms include Nutmeg, Marke- creased competition and regulatory tInvoice, GoHenry, and Crowdfun- pressures, they are finding themsel- der who have become well-known ves motivated to innovate to deliver names. Technology companies have their strategic growth objectives. also joined in with the best known Competition in the UK financial offerings being Google Wallet and services market has been low. The ApplePay. market has been dominated by the The market is changing due to “Big 4” banks for personal banking. * The views expressed a series of disruptors. These include: herein are those of Further, many investment banks the author and do not made being a “one stop shop” for • Technological developments necessarily reflect those increasing possibilities in both digi- of the Organization she is investors’ banking needs their core affiliated to. business strategy (Financial Times, tal and social media capabilities. 2015). The finance industry is seeing • Customer dissatisfaction and massive change in the form of the lack of trust in providers.

MAKING INNOVATION IN FINANCE ETHICAL 166 • Change in customers’ tastes: sanctions fines). These stories have o Rise of the “millennial” damaged both the industry’s repu- consumers who are digital and social tation and customer confidence in Les établissements ban- media savvy. finance. caires les plus en vue o Increasing power of the Several negative news stories re- sont poussés à innover “grey pound”, as the ageing popu- lated to unethical financial products afin d’atteindre leurs lation who have experienced low have come into the public eye. The objectifs stratégiques interest rates are looking to ensure best known is PPI (Payment Protec- de croissance straté- their pensions are not eroded. gique. tion Insurance) where banks have • Regulatory changes include paid £22bn compensation to custo- competition enquiries into current mers (British Broadcasting Corpora- account markets and the investment tion, 2015a). Millions of customers banking market as well as the senior manager’s regime regulation which were mis-sold insurance policies to holds senior managers accountable protect themselves against falling ill Le marché de produits for what happens within their firms. or job losses. Many did not need the- de services financiers se policies and/or were unaware they The Financial brand (2014) est en train de changer were paying for them. substantiellement. found 24% of senior bankers put Another example relates to Cre- C’est la conséquence product innovation as their inves- d’une série de facteurs tment priority). Firms are re-con- dit Suisse and Yorkshire Building So- qui incluent des capa- sidering their business models and ciety who were fined by the Financial cités technologiques looking to create ethical products. Conduct Authority (FCA) (Finan- croissantes, les goûts However, innovation poses ethical cial Conduct Authority, 2014e) for des consommateurs, risks that have not previously been selling an investment product where les comportements et seen, considered or managed. there was no chance the customer les changements démo- could receive the highest return lis- graphiques. This essay will explain what is driving change, the ethical challen- ted in the promotion material. ges posed by innovations and how Interest rate hedging products, firms can ensure that they make the “swaps”, is another example of an correct ethical evaluation by only ethically dubious product. They putting products to market that were designed to protect consu- have the customers’ interests at their Le La plupart des mers from changing interest rates entreprises gardent le heart. on their debts. However, the hedge souci éthique pré- Most Firms Have exposed the consumer to risk of rate sent à l’esprit et sont Ethics at the Forefront movements. Many small businesses désireuses de mettre purchased these thinking they were fin aux accusations mé- of Their Minds reducing their risk. Following FCA diatiques des dernières intervention, 17,000 redress deter- années et à leurs effets We have been bombarded with préjudiciables. negative news headlines relating to minations have been sent to custo- banking conduct (including Libor, mers culminating in £1.8 billion re- FX and Gold-fixing scandals, and dress payments (Financial Conduct numerous money laundering and Authority, 2013a).

CHANGING FRONTIERS OF ETHICS IN FINANCE 167 A final example to highlight is that guide our behaviour combined Payday Loans. This lending product with the legal rights and duties that received a huge amount of negative are acceptable in society (Steare, R, news with MP’s even questioning the 2006, pp. 22 and Oxford Dictiona- service in parliament. Many questio- ries, 2015). It is not surprising that ned the ethics of such an expensive true innovation, which disrupts the product that was used by vulnerable status quo, can lead to numerous individuals who were bamboozled ethical challenges. This is because by the maths and desperate for im- there can be many conflicting inter- mediate cash. ests amongst the many stakeholder Following the financial crisis the groups which include shareholders, UK parliament requested a review of employees, customers, board mem- banking standards and culture. On bers and regulators . What is in the La question qui se publication of this report by the Par- best interest of shareholders and em- pose est la suivante : liamentary Commission on Banking ployees may, at least at first, appear lorsque l’on développe Standards (“PCBS”) the Chair stated different to what is in the best inter- des produits innovants that “Recent scandals, not least the fi- est of the customer. Ethics is about comment peut-on être xing of the LIBOR rate … have exposed managing the conflicting personal sûr qu’on le fait de shocking and widespread malpractice” desires and interests of the stakehol- manière éthique et que (Parliamentary Commission, 2013). der groups (Steare, 2006 pp. 55-58). l’on place l’intérêt du client au-dessus des Mark Carney, Governor of the Historically, financial services profits de l’entreprise Bank of England, summed it up thus: have relied on “Duty-Based Ethics” ? Lorsque le client n’a “In the run-up to the crisis, banking with individuals following prescri- pas de visage comment became about banks not businesses; bed rules which focus on the action peut-il prévaloir dans transactions not relations; counter- and its intention rather than the con- les décisions et com- parties not clients…When bankers sequence (British Broadcasting Cor- ment le produit peut-il poration, 2015b and Steare, 2006, véritablement répondre become detached from end-users, their à ses besoins? only reward becomes money” (Bank of pp. 28). England 2014a). Many believe that this approach What is ethics? led to individuals failing to consider the effect of their actions. As firms So the question emerges: when try to move away from the past they developing new and innovative pro- are aiming to adopt a new approach. ducts how do you ensure you are Martin Wheatley, Chief Executive of behaving ethically and putting the the FCA, references Steare’s book, customers’ interest above the firm’s arguing for “a more sophisticated in- need for profit? When the customer terpretation of integrity in business. is faceless, how do you put them at One that is not simply defined by the the forefront of your decisions and ethics of obedience, but actually looks understand what they need from a towards the ethics of care and the product? ethics of reason” (Financial Conduct Ethics are the moral principles Authority, 2014d).

MAKING INNOVATION IN FINANCE ETHICAL 168 To put this in terms of ethical Banking Strategy and pressure innovation: in financial markets pri- to drive profit ces change and the final return is not guaranteed . However, what matters Recently banks have struggled to is that the product achieves adver- make a good return on equity. Low tised returns in normal markets. It interest rates and increased regu- should be suitable for its prescribed lation have eroded margins. Many target market. The customer should banks have outlined future growth understand the risks. The product strategies to shareholders and to must offer value to the customers. achieve this they will need to ensure At all stages of the transaction and they innovate. throughout the product’s life the Technology firms should be able to demonstrate it has the customers’ interest at Technology has driven innova- De nombreux facteurs heart. tion as new capabilities have allowed sont des moteurs du “The goal of innovation is to upset products to be developed using new changement. Il est current beliefs, behaviours, relation- platforms, tools and networks. For important de les iden- example, increased smartphone and tifier puisque ce sont ships and technologies…” Business eux qui les façonnent Roundtable for Corporate Ethics In- tablet ownership (predicted to reach en dernière analyse. novation, 2008. 3.4 devices per person by the end of 2015 (The Telegraph, 2015) has led Si l’on souhaite que Innovation has the power to totale produit final soit to the development of payment ser- lly change a market and even make éthique, il faut com- vices such as Barclays Pingit (which a market completely disappear and prendre ce qui peut allows customers to move money via empêcher qu’il en soit another appear. It may involve the their mobile). Other technological ainsi. development of a product, the con- developments include robo-advi- solidation of several existing ideas or sing, virtual currencies and payment the release of a new format for sale. solutions such as Apple Pay and Innovation can be driven by a number of factors including a new idea, Google Wallet. a customer challenge, a new techno- Customers embrace new technological development or a regulation. logy and firms can use it to persona- lise their service. For example: What are the drivers for • UK banks text customers when innovation in Finance? they are approaching their current There are multiple factors dri- account limit. ving change. It is important to un- • Asset managers often have in- derstand these drivers because they ternet-only products. shape the ultimate change. If we • Firms utilise social media to want the final product to be ethical, run promotion campaigns. we need to understand what factors might prevent that happening.

CHANGING FRONTIERS OF ETHICS IN FINANCE 169 Customers: “The Millennials” ce ethically risky ideas coming into and the “Grey Pound” fruition. Evolving customer tastes and The Competition and Markets preferences are forcing innovation. Authority (CMA) The “Millennials”, the next genera- Competition is a significant dri- tion, are disillusioned by banks, no ver to improving conduct. Where a longer trust their services and are market has many competitors, with demanding change. This generation no entity controlling the market and does not fear the internet, having where customers can easily switch grown up using it. Whilst data privacy is important to them, access to provider, the firm’s reputation can funds, speed and ease of transactions differentiate it from its competitors. Depuis la crise finan- is critical. They have embraced so- Potential customers consider the cière, la régulation firm’s treatment of its existing cus- a été l’outil de choix cial media and technology to suits their lifestyles. tomers and this encourages firms to pour éviter d’autres put ethics at the heart of their busi- scandales et crises. La The aging population and pur- ness. responsabilité person- chasing power of pensioners (and nelle que les régula- those looking to save in their pen- Historically, competition has teurs ont en point de sion) is also causing changes in the been low in financial services. As the mire et la concurrence market. Low interest rates are cau- PCBS report stated, “[t]his lack of pourraient avoir une competition… is an important reason grande influence pour sing people to look for innovative changer la culture et ways to prevent their funds being why banks can sustain poor standards augmenter la part des eroded. of conduct and do not seem to feel the produits conçus de fa- same pressure to respond to reputa- çon éthique. Toutefois, Regulation tional damage as would be the case in même si la réglementa- The finance market is closely many other industries” (Parliamen- tion a un pouvoir fort tary Commission, 2013b). sur l’innovation, elle regulaThe finance market is closely n’est pas suffisante. regulated. New regulations can lead The CMA promotes competi- to products being banned or altered tion with the aim of making markets which in turn necessitates the deve- work well for consumers, businesses lopment of new products to replace and the economy. It has substantial them. The FCA’s financial penalties powers to enforce change based on have increased considerably: “in the its investigations. The CMA is inves- two and a half years to 30 September tigating personal and small business 2014, the FCA and FSA imposed more banking accounts. Despite systems than £1 billion in fines” (Grant Thor- in place which make switching ac- nton, 2015). However, the reputatio- count easier, few have done this. The nal damage, from regulatory censure results of this investigation could can be even more costly, often lea- drive innovation in current accounts ding to a sharp decline in customer and force firms to reconsider how confidence. This is helping to redu- they differentiate their products

MAKING INNOVATION IN FINANCE ETHICAL 170 Personal Accountability and fibre cables changed how traders the Senior Managers Regime and hedge funds did business. The importance of speed was (allegedly) “[I]f you want ethical cultures, exploited by high frequency traders then you need ethical leaders.” (Stea- to front-run client transactions. The re, 2006). lack of transparency made it diffi- The FCA regulation intends to cult for anyone to understand what hold senior individuals responsible was going on. It is unclear whether for what happens within their firm. firms had considered the ethics of Mark Carney explained “Businesses the new technology and the effect it do not make decisions; individuals do” would have on their customers and (Bank of England, 2014b). This re- the market. gulation is expected to cause a large cultural shift among leaders, moving Ethical challenges Les quantités de don- nées disponibles grâce away from a rule-based approach from data aux canaux numé- to a more sophisticated ethical ap- An example of data privacy ethics riques confrontent proach. This change should help en- relates to new products like Osper les entreprises avec sure that innovations are rigorously (2015) and Go Henry. They offer a des opportunités, evaluated, risks assessed and ethica- mais aussi avec des Prepaid Debit Card for young people lly dubious products prevented from and parents. They allow parents to dilemmes éthiques. entering the market as, if not, there Elles doivent évaluer know what their child is spending could be severe penalties. ce qu’elles peuvent their money on. These products utiliser pour aider Whilst regulation is a powerful could prevent situations such as chil- le client et quelles force in ethical innovation, it is in dren using debit cards online to buy données ne devraient not enough. This is something even cigarettes and drugs (The Guardian, pas être consultées. the regulator is aware of. Wheatley 2008). However, there is a question Cela peut paraître stated “Governments tend to respond surrounding whether children (es- facile, mais ne l’est pas, to scandal with regulations, without car il faut prendre en pecially if over 16 years old) should considération tous les considering that it’s this ‘obedience or should not be entitled to any data scénarios possibles. culture’ that often fails in the first pla- privacy? ce.” (Financial Conduct Authority, 2014d). Ethics of new communication tools Ethical challenges from new technology Social media allows firms to interact with their customers in new innovations ways. The use of Facebook, Linke- New technologies present new dIn and YouTube presents ethical conundrums and potential conflicts conundrums as the customers’ inter- of interest which need to be conside- ests and the firm’s interest may ini- red and managed. One such situation tially appear to mismatch, especially is explained by Lewis (2014) who when considering how the firm uses sets out allegations explaining how already visible data, such as relation-

CHANGING FRONTIERS OF ETHICS IN FINANCE 171 ship status, private photos etc, and • Charge £3 for a replacement how can firms use these platforms to card. sell products? GoHenry: An example in practice relates to • After a month’s free trial, peer-to-peer lending sites. The FCA monthly membership costs £1.97 released a warning about the online per child. marketing practices of such sites. • Charge 50p per load from a de- Peer-to-peer lenders connect savers bit card. with parties that want to borrow. Both parties benefit from better ra- • Charge £5 for a replacement tes than they would receive from a card. bank. Providers include Funding I highlight these fees to illus- Circle (allowed 7,000 businesses trate the question: how does a firm Les commissions to borrow £490m (The Guardian, ensure it is delivering value for the sont un domaine très 2015a), Zopa and RateSetter (The customer – integral to ethical busi- sensible pour toute Guardian, 2015c). There are also ness practice? Assuming everyone entreprise. Com- investment-based crowdfunding knows the charges in advance does prendre ce qui crée de products where people invest in un- that make it ethical? These are fees la valeur pour le client listed shares or debt securities issued for services that most UK banks do est compliqué, mais certains pensent que by business. The FCA has concerns not charge. Fees are challenging for toutes les entreprises that some lenders are mis-selling new products and need to be carefu- doivent être capables their products: “Benefits are empha- lly considered with putting together de le faire et de décider sised without a prominent indication new offerings. en connaissance de of risks” and information is “insuffi- cause. Un tel exercice cient, omitted or … cherry-pick[ed]”. Ethics of increased met en lumière les complexity services pour lesquels Ethics of new fee les clients sont prêts AAs customers look to manage à payer alors que structures risk and ensure a good return on certaines entreprises New products can solve a real their money, this desire, partnered seraient tentées de les customer problem and initially ap- with increasing technological de- fournir gratuitement. pear to improve the market. But ca- velopments, has led to the develo- reful consideration needs to be given pment of ever increasing complex to the whole offering. products such as UCIS and CFDs. Take the example of Osper and These are hard for customers to un- Go Henry who charge multiple fees derstand. They struggle to interpret for different services (data consoli- the product features and evaluate dated from The Guardian (2014). the risks involved. An FCA behavioural economics paper found that Osper: consumers use rules of thumb that • Free for the first year and then lead to errors in their expectations of after £10 a year per child. the value of complex products (Fi- • Charge £5 to close the account. nancial Conduct Authority, 2013b).

MAKING INNOVATION IN FINANCE ETHICAL 172 A follow-up paper found that firms What does good ethi- cannot rely on customers to unders- cal innovation look like? tand complex products and make good decisions about them (Finan- Products and services that are cial Conduct Authority 2014c). It ethical have the customers’ needs at set out that investors have unrealis- the heart of their design. Good ethi- tically high expectations of product cal innovation often includes some return and are unable to evaluate of the following: and compare complex products and Increased access to banking L’innovation respec- alternatives. This means consumers tueuse de l’éthique services place les besoins du may be making bad choices (Finan- Lack of financial inclusion is a client au cœur du pro- cial Conduct Authority, 2014c). jet. On peut faciliter huge problem for many would-be ceci et faire en sorte Use of Third Parties users of financial services. Having access to financial services reduces que le produit aide le Utilising third parties to make client à résoudre un income inequality, boosts econo- sales or provide services such as problème réel. Les en- mies, and helps the poor manage client introductions means that the treprises doivent alors risk (World Bank Development customer is not close to the enti- prendre en compte des Research Group, 2014). Bill Gates produits qui ont un ty that designed the product. The states that access “help[s] the poor impact pour le client. Il distance can make it harder for the radically transform their lives” (The en va ainsi d’un accès product manufacturer to understand facilité aux services Verge, 2015). the customer’s needs and vital infor- financiers, d’une Further, the World Bank Deve- mation can be lost. It can also make culture centrée sur le lopment Research Group (2014a) it harder to ensure that the person client et de la mise en found that digital payments can selling the product understands all avant de l’éthique, de promote women’s economic em- l’assistance au client the features and risks of the product. pour l’aider à faire powerment, thus reducing inequa- This is crucial to ensuring the cus- lity. Innovations such as the mobile de bons choix, de la tomer can make effective decisions. diminution du nombre banking services from M-Pesa and d’intervenants dans This increases the risk of mis-selling bKash enable individuals in cou- une procédure et du and the customer purchasing an un- ntries where access to banking is travail en toute trans- suitable product. limited (i.e. Bangladesh, Kenya) to parence. Due to the nature of the services make transactions via phone. More they provide, third parties such as than two thirds of the Kenyan adult those who assist financial services in population use M-Pesa (The Econo- winning or retaining business from mist, 2014). clients pose a risk of bribery and co- These mobile payment services rruption. In the majority of FCPA have helped to reduce petty corrup- enforcement actions the cause has tion; that is, the everyday abuse of been a third party making a corrupt power by low and mid-level public payment, another ethical risk for officials interacting with citizens in firms to consider. their everyday life (Transparency In-

CHANGING FRONTIERS OF ETHICS IN FINANCE 173 ternational, 2015). To illustrate, in they have been facing and/or seeks 2009 the Afghanistan government to improve a service is likely to lead switched to mobile transfers to make to an ethical outcome. salary payments direct to the poli- Ensuring this culture is in place ce. Many recipients received a 30% can be challenging, especially becau- pay increase (Foreign Affairs, 2014). se individuals employed in financial They had removed the corrupt midd- services are often motivated to maxi- lemen from the chain. mise their financial rewards. However, whilst mobile pay- However, one firm that has suc- ments have the potential to reduce ceeded is a subsidiary of the German corruption by increasing transparen- Volksbanker Raiffeisenbanken (VR) Les innovations telles cy and reducing middlemen – it is Group (Loch, Sting, Huchzermerier, que la possibilité de not always straight forward. Foreign and Decker, 2012). For example, faire des paiements à Affairs (2014) cautions that firms they developed an innovative con- partir des téléphones need to consider all impacts. For sumer credit product “easyCredit”. portables sont révolu- example, it appears that in Kenya Loch, et al (2012) found it was uni- tionnaires et ont per- mobile payments are being used to que because the entire proposition mis aux gens d’accé- bribe police (Foreign Affairs, 2014). der à de nouveaux was based on fairness (unknown in Further, mobile payments could services bancaires. Si the consumer credit market). Fur- ces modalités ont pu facilitate “smurfing”, (criminals di- ther, the firm provided extensive diminuer la corruption viding illegal transactions into nu- training to all staff to ensure they dans certains pays, merous small transactions to avoid understand the firm’s core value“We dans d’autres elles ont detection). are an honourable merchant” and facilité des activités expected this to be reflected in all Firms that value ethics occultes, par exemple activities. All new products under- le paiement des pots- Firms that appreciate the value go testing in credit shops to ensure de-vin. Cela montre que des innovations of being an ethical firm and see it fairness. They listen to customers’ peuvent avoir des as a competitive edge are likely to needs and respond for example, by conséquences imprévi- innovate to solve customers’ pro- including a 30-day customer retrac- sibles. blems and not seek to exploit them tion period. All products have inde- financially. Timothy Hudson, Global btedness protection built into them Head of Conduct Risk at UBS, states to protect the customer (unique in UBS “place a very high value on our the market) as they believed it in the reputation: it can be a huge competiti- customers’ best interest (Loch et al, ve advantage” (Ethical Corporation, 2012). 2014). Helping the Customer Make Customer-Centric Culture the Right Choice When innovating, a firm’s cultu- Customers often make the wrong re is crucial to ensure a good outco- decisions about products though me for all. An innovation that puts inertia, lack of understanding and a customer first, solves a challenge lack of time. Firms can design pro-

MAKING INNOVATION IN FINANCE ETHICAL 174 ducts with this knowledge and help Transparency the customer make the right choice. Thaler, R. & Sunstein, C. (2009, Transparency helps ensure ethi- pp112) found that firms can “nud- cal outcomes. When a consumer un- ge” people to make them wealthier. derstands the fees, and what parties Firms should consider how they are earning on transactions, they are set default options for products. To more likely to be treated fairly and to illustrate: firms could show product make good decisions. options by level of risk or lifestyle This is illustrated by Thaler & portfolio which could allow a cus- Sunstein (2009, pp138) who set out tomer to easily select the product that people struggle to translate abs- which suited them the most (Thaler tract concepts such as return and vo- & Sunstein, 2009, pp136-137). latilities in their lifestyle when they Les entreprises ont are old. As many companies move to besoin de savoir Shorten chain (i.e. not broking) comment les clients online communication to advise cus- Transactions that shorten the pensent et de quelle tomers and advertise their services façon ils prennent chain, engendering a more direct this issue needs to be considered in leurs décisions d’achat. customer-firm relationship are likely the product design. Web-only offe- Ils ne se comportent to lead to ethical outcomes. This is rings, such as Nutmeg, have digitali- pas toujours de because the ultimate firm is more sation and changed how advice and façon rationnelle et likely to understand the customer, investment management is delivered les entreprises doivent and the customer the product they les aider à prendre (Financial Times Advisor, 2015). are selling. It also limits the addi- They set out risk thresholds and leurs décisions. Le fait tional commission payments and so d’avoir une culture communicate to customers in rea- reduces the cost to the consumer. d’entreprise adéquate dily understandable language. They où les besoins du client An example includes CurrencyFair, use visual displays for maximum cla- sont au centre peut a peer-to-peer market for foreign ex- rity, disclosing fees and translating change. They match buyers and se- faciliter la réalisation difficult concepts into values that de cet objectif. llers allowing them to swap curren- consumers understand: cy. The CEO explains they created it as “transferring money abroad was not “If you invest £36,500 the way it could (and should) be: sim- Your fee will be 0.9% per year ple, fast, and above all, cheap!” (Cu- That’s just £6.32 per week rrencyFair, 2015). Customers can Which could be worth an exchange currency without paying additional +£2,552 after 10 years” expensive bank fees. The rates on Finally, transparency can reduce CurrencyFair are much lower than the financial crime risks, preventing those of the market leading banks. tax evasion and money laundering. They estimate that their share on a To illustrate: one global bank is wor- transaction equates to only 9% of the king with market sellers to help them average bank fee on the equivalent take payments from customers via a transaction (The Wall Street Journal mobile service rather than by cash. Blog, 2014). This means the seller is no longer

CHANGING FRONTIERS OF ETHICS IN FINANCE 175 handling large amounts of cash and some have the potential to lead firms all payments can be traced back. The away from this. Developing products temptation to not declare revenues is ethically risky. Innovation poses is removed and the risk of the trader scenarios and risks not previously being used to launder cash reduced. experienced but ethical innovations Il y a de nombreux moteurs de changement. Traders benefit as well as they are not are possible and can help both indi- Certains promeuvent losing sales due to customers not ca- viduals and firms to succeed. l’agenda éthique et rrying cash and they spend less time There are many things on a mi- d’autres le bloquent. managing cash floats and cashing in cro-, firm-wide level that entities Le développement de at the end of the day. and individuals should do to ensure nouveaux produits est ethical innovation. However, Thom- risqué d’un point de Accountability son Reuters (2014) found only 43% vue éthique. A l’échelle de l’entreprise, il y a Innovation which has strong per- of finance firms consider conduct de nombreuses actions sonal accountability at its core leads risk factors when discussing business que les institutions et to ethical outcomes. This is common strategy and so with this considera- les individus devraient in small entities where any adverse tion I also set out some macro, bro- mener pour s’assurer media or regulatory decision could ader considerations to ensure firms que l’innovation est make them quickly insolvent. do this. éthique. Cependant, Thomson Reuters Effective regulation Micro Factors (2014) a trouvé que seules 43 % des One of the FCA’s objectives is At a firm level, firms can ensure sociétés financières to ensure that the relevant markets that new products are ethical. An in- prenaient en considé- function well (Financial Conduct novation framework for the business ration les risques de Authority 2014a). The regulator be- to work within should help ensure manquement au code lieves innovation is key to achieving strong ethical outcomes. This fra- de conduite lors de this as a powerful driver of effective mework should encompass the fo- l’élaboration de leur competition. They set up Project In- llowing elements: stratégie. novate (Financial Conduct Autho- Strategy/Objectives: Firms should rity, 2014b) to support innovation set out their innovation strategy and that benefits consumers. They allow objectives. This should include put- firms to consult with them and they ting the customer first. This message Au niveau de l’entre- support them with authorisation pro- must be shared with all staff. prise, la première cess. mesure pour s’assurer Risk Aware Culture: Firms should que les nouveaux How Can You Ensure ensure the firm is risk aware and puts produits sont éthiques Future Innovation customers’ interests first. Innovators est de fixer un cadre is Ethical? need to be aware where ethical di- pour l’innovation et de lemmas lie. Firms that make ethics a vérifier qu’il est effecti- It has been highlighted that many competitive edge are likely to deliver vement respecté. finance firms hold product innova- ethical products. tion high on their agenda. There are Performance Incentives: Emplo- many factors driving change. Some yees need be incentivised to solve real drivers push the ethical agenda and

MAKING INNOVATION IN FINANCE ETHICAL 176 customer problems rather than to allows the firm control and makes maximise profits. Incentives should two-way information from both the also encourage testing and collabora- customer to the firm and back easier. tion across the firm. Risk Assessment: Firms must ri- Governance: Senior managers gorously assess what the risks are and need to understand the customers’ consider all the features of the pro- Au niveau du pays needs and ensure that the charac- duct they are looking to launch. Key ou de la région, teristics and objectives of the target questions include: certaines structures customers are considered. They need • Is this product going to help the facilitent l’innovation strong oversight and ensure rigorous customer with a real problem? de produits éthiques. challenge based on evidence . They Les gouvernements • Is the product delivering customer need to consider what are the con- devraient veiller à ce value? flicts of interest between stakeholder que le marché soit • What risks could the product pose compétitif, à utiliser la groups and whether these have been to the customer? réglementation pour effectively managed. Ensuring firm- encourager la mise wide collaboration, that is, conside- • Systems: Firms must stress test and en œuvre des change- ring a wide spectrum of opinions and model products using historic data, ments de culture, de la views will help ensure the product is projected future data and dummy responsabilité person- designed effectively. customer scenarios to ensure they nelle, et de la trans- Processes: understand the product and how the parence chaque fois customer will respond to stress si- que cela est nécessaire • Know your customer: Firms need tuations (job loss/change in interest pour aider le client à to identify who is going to use the rates etc). prendre ses décisions. product – this includes understanding their objectives, financial ne- Macro Factors eds, ability to take risk and financial understanding. They should identify Some drivers for innovation are when the product will be used. Firms larger than can be managed at an should use data available to unders- entity level. These macro factors en- tand customer behaviour (this inclu- courage firms to put the micro factors Il y a eu un change- des internal and external data such as into place: ment dans l’appétit du FCA customer types). Firms should Competition: Regulators should consommateur pour collaborate with customers throug- actively encourage and support com- les produits financiers. hout the innovation process and petition within financial services. Dans un environne- allow them to feedback and test all This may mean working with new ment de concurrence entities to help them deal with the croissante, les entre- new products. prises commencent à • Know your distributor: Firms regulatory burden and ensure that chercher dans l’éthique should consider how the product will they can reach the market in a timely un avantage compétitif. be sold. They should consider if they fashion. It might mean considering Elles tiennent alors à really need to use third parties or if action when firms dominate markets. s’assurer que l’éthique this function can be taken in house to Regulation: Smart regulation est au cœur de toutes ensure the sales chain is short. This should encourage individual respon- les transactions, tout sibility and be backed up with enfor-

CHANGING FRONTIERS OF ETHICS IN FINANCE 177 au long du cycle de vie cement action with strong penalties customers looking beyond conven- du produit. when ethical failure occurs and cus- tional products for solutions. These Faire le bon produit, tomers are not put at the forefront changes, combined with the increa- s’assurer d’emblée qu’il innovation. sing technological capacity and indi- corresponde à l’intérêt viduals’ competence in using it cau- du client, débouchera Transparency: Regulators should sur les changements help firms understand what the risks sed a change in appetite for financial nécessaires are, what customer problems they products. are aware of, and help supply any There has been a significant shake data that firms could use to shape up in the market and firms are star- solutions (innovations). They should ting to make ethics a competitive di- also ensure rules and expectations of fferentiator and ensure it is the heart firms are clear. of all transactions, throughout the Recession reduced interest rates, product lifecycle. reduced expenditure, caused indi- Getting the product right, ensu- viduals to consider their borrowing, ring it is in the customers’ interest and how to ensure their savings were right from its conception will make not eroded. The constant “bad news” it easier to deliver the change requi- stories have damaged confidence in red. • established banking firms and led to

References Bank of England (2014a). Speech introduction/duty_1.shtml by Mark Carney: Inclusive capitalism: Business Roundtable for Corpo- creating a sense of the systemic. Re- rate Ethics Innovation (2008) Ethics, trieved from www.bankofengland. and Business. Retrieved from http:// co.uk/publications/Documents/spee- www.corporate-ethics.org/pdf/inno- ches/2014/speech731.pdf vation_ethics.pdf Bank of England (2014b) Panel CurrencyFair (2015) About Us. remarks given by Mark Carney at the Retrieved from www.currencyfair. IMF Annual Meeting Seminar on The com/about-us/ Future of Finance, Washington on 12 Ethical Corporation (2014) Banks October. Retrieved from www.banko- briefing: Conduct risk management. fengland.co.uk/publications/Pages/ Retrieved from 3.amazonaws.com/ speeches/2014/766.aspx cms_assets/accounts/690b848f- British Broadcasting Corporation 131d-4af6-a319-824db8c89e5b/ (BBC) (2015a) Years before PPI scan- site-50109/cms-assets/docu- dal is over, says Financial Ombuds- ments/193600-480789.final-version- man. Retrieved from www.bbc.co.uk/ v2.pdf news/business-30695720 Financial Conduct Authority British Broadcasting Corporation (2013a) Interest Rate Hedging Pro- (BBC) (2015b) Duty-based ethics. Re- ducts. Retrieved from www.fca.org. trieved from www.bbc.co.uk/ethics/ uk/consumers/financial-services-pro-

MAKING INNOVATION IN FINANCE ETHICAL 178 ducts/banking/interest-rate-hedging- Getting financial promotions right. products Retrieved from www.ftadviser. Financial Conduct Authori- com/2015/01/21/ifa-industry/your- ty (2013b).Occasional Paper No 1: business/getting-financial-promo- Applying behavioural economics at tions-right-gEW6eyaeRVt6H1aa- the Financial Conduct Authority. pktoSJ/article-0.html Retrieved from www.fca.org.uk/your- Foreign Affairs (2014) Don‘t Bank fca/documents/occasional-papers/ On It. Retrieved from www.foreig- occasional-paper-1 naffairs.com/articles/141493/marisa-l- Financial Conduct Authority porges/dont-bank-on-it (2014a). Retrieved from http://www. Government UK (2015) Commer- fca.org.uk/about/why-we-do-it/statu- cial use of consumer data. Retrieved tory-objectives from www.gov.uk/cma-cases/com- Financial Conduct Authority mercial-use-of-consumer-data (2014b) Project Innovate – Call for Grant Thornton (2015) Six is- Input. Retrieved from www.fca.org. sues facing the financial services uk/ industry in 2015. Retrieved from Financial Conduct Authority http://www.grant-thornton.co.uk/ (2014c) Occasional Paper No 9: Two en/Thinking/Six-issues-facing- plus two makes five? Survey eviden- the-financial-services-industry-in- ce that investors overvalue structured 2015/#sthash.7Gy47H30.tmkNdYdg. deposits. Retrieved from www.fca. dpuf org.uk/static/documents/occasional- Lewis, M (2014) Flashboys Crac- papers/occasional-paper-9.pdf king The Money Code Great Britain: Financial Conduct Authority Allen Lane (2014d) Speech by Martin Wheatley Loch, C., Sting, F., Huchzerme- titled Ethics and Economics. Retrie- rier, A., and Decker C. (2012) Finding ved from www.fca.org.uk/news/spee- the Profit inFairness Harvard Business ches/ethics-and-economics Review Financial Conduct Authority Osper (2015) Stories. Retrieved (2014e) FCA Fines Credit Suisse and from osper.com/stories Yorkshire Building Society for Finan- Oxford Dictionaries (2015) Ethics. cial Promotions Failures. Retrieved Retrieved from www.oxforddictiona- from www.fca.org.uk/news/fca-fines- ries.com/definition/english/ethics credit-suisse-and-yorkshire-building- Parliamentary Commission society-for-financial-promotions-fai- (2013) Changing banking for good. lures Retrieved from www.parliament.uk/ Financial Times (2014) Thirteen business/committees/committees-a-z/ traits of a truly innovative organisa- joint-select/professional-standards-in- tion. Retrieved from www.ft.com the-banking-industry/news/changing- Financial Times (2015) UK inves- banking-for-good-report/ tment banks face competition prove. Parliamentary Commission Retrieved from www.ft.com (2013b) Changing banking for good Financial Times Advisor (2015) : Conclusions and Recommendations.

CHANGING FRONTIERS OF ETHICS IN FINANCE 179 Retrieved from www.publications. The Guardian (2015c) Is peer-to- parliament.uk/pa/jt201314/jtselect/ peer lending too good to be true? Re- jtpcbs/27/2704.htm trieved from www.theguardian.com/ Steare, R (2006) Ethicability (n) money/2014/feb/15/peer-to-peer-len- how to decide what’s right and find ding-nicola-horlick the courage to do it. Great Britain: Ro- The Telegraph (2015) Getting ger Steare Consulting Limited 2006 it Right: Shaping Solutions that fit Thaler, R. and Sunstein, C. (2009) the digital market for customers. Re- Nudge Great Britain: Allen Lane: Pen- trieved from www.telegraph.co.uk/ guin sponsored/business/business-repor- The Financial Brand (2014) Bi- ter/11432122/cgi-shaping-solutions- gger Challenges & New Priorities digital-market-customers.html Face Banking Industry. Retrieved The Verge (2015) Technology will from thefinancialbrand.com/42559/ build a better, safer, healthier work by challenges-priorities-banking-indus- 2030. Retrieved from www.theverge. try-study/ com/2015/1/22/7870497/bill-gates- The Economist (2014) The Check interview-future-verge-guest-editor is in the tweet. Retrieved from www. The Wall Street Journal Blogs economist.com/news/finance-and- (2014) CurrencyFair Finds a Lu- economics/21633884-sending-and- crative Online-Transfer Niche. receiving-money-your-smartphone- Retrieved from blogs.wsj.com/di- getting-easier-cheque gits/2014/03/06/currencyfair-finds-a- The Guardian (2008) Is your lucrative-online-transfer-niche/ 15-year-old buying Viagra? Retrie- Thomson Reuters (2014) Con- ved from www.theguardian.com/mo- duct Risk Report 2014/2015. Re- ney/2008/jun/28/banks.consumera- trieved from images.info.acce- ffairs lus.thomsonreuters.biz/Web/ The Guardian (2014) Retrieved ThomsonReutersGRC/%7B47d5b745- from Debit card firms cash in on di- eb26-4da5-9574-9234ab0aa83e%7D_ gital pocket money for kids. Retrie- Conduct_Risk_Report_Jan2015.pdf ved from www.theguardian.com/ Transparency International (2015) money/2014/jul/03/debit-card-firms- FAQS on Corruption. Retrieved from digital-pocket-money www.transparency.org/whoweare/or- The Guardian (2015a) RBS to su- ganisation/faqs_on_corruption/2/ ggest peer-to-peer lending to rejected World Bank Development Re- business loan applicants Retrieved search Group, the Better Than Cash from www.theguardian.com/busi- Alliance, and the Bill & Melinda Ga- ness/2015/jan/22/rbs-business-loans- tes Foundation to the G20 Global peer-to-peer-lending Partnership for Financial Inclusion The Guardian (2015b) RBS to su- (2014) The Opportunities of Digiti- ggest peer-to-peer lending to rejected zing Payments. Retrieved from docs. business loan applicants. Retrieved gatesfoundation.org/documents/ from www.theguardian.com/busi- G20%20Report_Final.pdf ness/2015/jan/22/rbs-business-loans- peer-to-peer-lending

MAKING INNOVATION IN FINANCE ETHICAL 180 181 TThe Digital Panopticon: a Chance for Ethical Change

Ethics & Trust in Finance Global edition 2016-2017

Finalist

Charmaine The Price of Immorality rife and ethical considerations are a Fernandes mere afterthought. In 2016, it was estimated that, United Kingdom Steep financial penalties, when Management over the last 15 years, market compounded by the reputational Consultant, misconduct has cost the UK impact to firms and individuals Accenture*, London Financial Services industry £53 actors, are a significant price to billion in fines, legal fees and pay at both a macro and micro compensation pay outs alone level, but as more examples of (Treanor, 2016). Additionally, misconduct emerge, it appears that market enforcement research many banks view such penalties identified that in 2014, market simply as an operating cost. This integrity violations accounted for was underscored by the 2014 CEO 84% of total FCA fines (Duff and of BNP Paribas, who stated that the Phelps, 2015, p.16). With such $9bn fine imposed for violation of US damming statistics, alongside a Sanction laws would have “no major plethora of misconduct cases hitting impact on the business” (Plender, the headlines and instances of mis- 2014). This dismissive culture * The views expressed selling, rate-fixing and front running is now deeply engrained within herein are those of tarnishing industry integrity, it is the industry, and the European the author and do not no surprise that trust in financial Systemic Risk Board acknowledges necessarily reflect those services is at an all-time low (CII, that the “fear of penalties alone is of the Organization she is affiliated to. 2017). It all portrays an industry unlikely to prevent misconduct” where opportunistic behaviours are (ESRB, 2015). Such thinking has

THE DIGITAL PANOPTICON: A CHNAGE FOR ETHICAL CHANGE 182 been evidenced more recently. One enhanced supervision strategies and En 2016, on a estimé market analyst stated in reference to regulatory reporting requirements, que durant les 15 der- PPI compensation remediation: “It embedded in legislation such as EU nières années, les irré- is a sign of Lloyds strength that it Market Abuse Regulation, Banking gularités commises sur le marché ont coûté à can shrug off £1.6bn of misconduct Conduct Rules, MiFID II and REP- l’industrie des services charges to post a strong rise in CRIM to name but a few. financiers britanniques profits” (Burton, 2017). In parallel, compliance functions £53 milliards uniquement en amendes, frais Against this cultural backdrop, are responding by leveraging juridiques et indemni- industry regulators face significant innovative regulatory technologies sations. Dans une in- challenge. In 2015, we saw the (RegTech) to meet these enhanced dustrie où les compor- FCA impose the industry’s largest supervisory controls. The global tements opportunistes ever fine to date – on Merrill Lynch demand for regulatory, compliance sont monnaie courante for transaction reporting failures. and governance software is expected et les considérations The penalty, £18.9m, sought to d’ordre éthique ne to reach $118.7 billion by 2020 reflect Merrill Lynch’s continued surviennent qu’après (Accenture, 2017). failure to address the “root cause” coup, les régulateurs In the light of this evolving and ont à faire face au of their misconduct and sent a firm défi considérable de regulatory message to the industry dynamic RegTech movement, this traiter les irrégulari- (FCA, 2015). However, as the paper examines the environmental tés commises par des volume and size of fines intensify drivers that foster market abuse and entreprises où prévaut to address firms complacency with goes on to explore the effectiveness une forte complaisance regard to misconduct, regulators of the new technological controls à l’égard des écarts de that serve to discourage misconduct conduite. La réponse are faced with a tough economic in financial services. At the de la part des fonctions balance: banks are “highly de vérification et de leveraged and any fine that does macroprudential level, it explores conformité vient par have a palpable impact… could whether the threat of enhanced la multiplication des have systemic implications” market surveillance is truly technologies novatrices (Plender, 2014). With this in mind, effective to deter market abuse in en matière de régle- a clear need exists to evaluate the an industry where individual self- mentation (RegTech). interest is culturally engrained and Dans le sillage de ce effectiveness of alternative market mouvement RegTech, controls in deterring market abuse. driving substantial negative social externalities for the industry and, cet article examine In response to this regulatory les moteurs contex- indeed, society. challenge, there has been a shift in tuels qui favorisent les abus du marché et the focus of industry supervision Finally, applying a forward- explore l’efficacité des and across the industry in recent looking lens, it focuses on the nouveaux contrôles à years. Regulators have increased social ecology of the industry and composante technolo- the intensity and focus of their considers cultural reform, with a giques pour décourager oversight, “to deliver pre-emptive, view of holistically remoulding the la mauvaise conduite rather than reactive… supervision” conduct framework that underpins au sein du service (Financial Stability Board, 2014). opportunistic behaviours within the financier. We have seen the introduction of financial services sector today.

CHANGING FRONTIERS OF ETHICS IN FINANCE 183 The Environmental decision-making process. This Incubators and Ethics statistic is particularly interesting, Pour évaluer l’efficacité suggesting weakened integrity when des solutions RegTech, of Misconduct faced with moral awareness, leading il est utile d’examiner to unethical business decisions and, d’abord ce que signifie To evaluate the effectiveness être « éthique » et ce of RegTech solutions in deterring consequently, market abuse. qui conduit à des com- market misconduct, it is useful to Fundamentally, this research portements contraires first consider what it means to be leads us to question what the à l’éthique à l’intérieur “ethical” and what drives unethical environmental factors are that drive des services financiers. behaviours within financial services. financial services representatives to Rousseau suggère que The question of ethics is one is cast aside this innate, human moral c’est l’environnement qui corrompt l’indivi- one of the very fundamental drivers awareness in the workplace and act du, une théorie renfor- of human behaviours, entrenched in opportunistically. Rousseau (1987) cée par Bandura dans the norms and mores of society and offers an interesting perspective, la Théorie d’Appren- a complex topic that has challenged suggesting that it is the environment tissage Social (1977) businesses for decades (Stead et al., that corrupts the individual, a theory qui affirme que les 1990). A plethora of literature exists reinforced by Bandura’s social individus apprennent in the field of ethical behaviours, learning theory (1977), which asserts des comportements with researchers considering an that individuals learn acceptable acceptables en obser- behaviours through observational vant leurs modèles de individual’s social, economic and comportement. Les religious background to name learning from their role models. études de la prison but a few factors (Treviño and Somewhat revealingly, a study by de Bentham (Semple, Youngblood, 1990). the Chartered Management Institute 1993) nous offrent un However, this paper leans on found that 29% of financial services aperçu précieux par research by Hamlin et al., (2011), managers interviewed rated their lequel l’individu « se that assessed the ability of a child to organisation as having mediocre or contrôle lui-même de poor standards of ethical behaviour peur d’une punition distinguish right from wrong. Their (CMI, 2016). » depuis la garde du experiments highlighted innate panoptique central. feelings of empathy as well as the On balance, a view of the industry Tandis que la surveil- repeated tendency to “choose good” is depicted whereby misconduct is lance réglementaire when faced with a moral decision. broadly accepted by the masses, and et de conformité a Revealingly, analysis conducted regulatory and legal penalties are toujours été répandue by MoralDNA™ for the Chartered cast off as a simple operating cost, à travers l’industrie, a relatively small item on a firm’s elle n’a jamais été Management Institute contradicts aussi plus puissante ou these findings, evidencing that profit-heavy balance sheet. agile (Deloitte, 2016). financial services leaders tend to From a macro perspective Comment cette vague suppress empathy, with their sense therefore, consideration should be RegTech va-t-elle chan- of ethical care stronger at home than given to how we protect the industry ger la face des services at work (CMI, 2016). Rest (1986), and society from the negative financiers ? suggests that “moral awareness” – externalities of such opportunistic the identification of a moral issue behaviours. Further, at a micro – is the first stage of the ethical level, how can firms prevent “good

THE DIGITAL PANOPTICON: A CHNAGE FOR ETHICAL CHANGE 184 Depuis quelques people from doing bad things”? This leads us to the question, how années, l’industrie a (Kaptein, 2012). The Bentham will this disruptive RegTech wave, observé une percée prison studies (Semple, 1993) offer impact the face of financial services? technologique majeure us some valuable insight in to the quand un foisonne- The RegTech Panacea ment de start-ups human psyche. Hobbes (Hobbes techniques ont inondé cited by Bennett, 2015) asserted that Over the last few years, the le marché alors que les the “bestial nature” of man drives Industry has observed significant entreprises s’emploient self-interests and that as such, the technological disruption as a flurry à démontrer la rigueur “intervention of a higher authority” of tech start-ups has inundated the de leurs contrôles is a necessary control. Bentham’s market, offering technologies in the internes et inves- tissent de plus en plus prison studies introduced a central trade surveillance, risk analytics dans des solutions panopticon that provides complete and fraud prevention spaces to RegTech pour aider oversight for the watchman (the name but a few. As regulatory leurs écosystèmes regulator), however those under requirements increase and internes à promouvoir observation are unable to look in. supervisory controls tighten, firms une conformité plus As Foucault (1977) describes it:’, are eager to demonstrate the rigour efficace (Accenture, “he is seen, but does not see; he is of their internal controls. They are 2017). En substance, increasingly investing heavily in l’industrie financière the object of information but never est entrée dans l’ère du communication”. As a result of RegTech solutions to support their panoptique numérique, this asymmetric information, the internal ecosystems and to facilitate avec des solutions individual “polices himself out of more efficient compliance across techniques qui four- fear of punishment”. their lines of defence (Accenture, nissent un contrôle 2017). In essence, the industry rapidement renforcé et In the wake of the global financial has entered the age of the digital un aperçu détaillé dans crises, many financial institutions panopticon, with vendors providing des analyses jusqu’alors have invested heavily to remediate firms with rapidly enhanced inexploitées. existing control weaknesses oversight and offering data solutions and respond to the heightened Cependant, comme that can provide detailed insight in l’histoire l’a démontré, regulatory focus on oversight. to previously untapped analytics. la peur du contrôle Despite these efforts however, firms For example, vendors are offering et de la surveillance “continue to fall short of regulatory solutions that can identify “internal n’ont pas dissuadé expectations, by maintaining highly collusive networks” through holistic les services financiers manual regulatory and compliance analysis of a firms e-communications de commettre des processes which lack meaningful and therefore enable firms to abus. Tandis que les take pre-emptive action against solutions RegTech data insight” (Humphries, 2016). permettent certai- Further, nd whilst regulatory and misconduct (Catelas, 2017). nement aux entre- compliance surveillance has always However, as history has prises de prendre des been prevalent across the industry, demonstrated, the threat of oversight décisions de risque it has never been more powerful or and surveillance has not deterred plus adéquates grâce agile than the technological offerings misconduct in financial services à des analyses de that are flooding the market today to date. Further, whilst RegTech données améliorées et (Deloitte, 2016). solutions certainly empower firms to

CHANGING FRONTIERS OF ETHICS IN FINANCE 185 à un puissant aperçu make more informed risk decisions organisations in with procedures, du risque, est-ce through enhanced data analytics and systems and structures provides no que le seul fait de se powerful risk insight, will a focus on guarantee that people will do the concentrer sur de telles such solutions alone truly be enough right thing”. Certainly, the Old solutions permettra to curb market abuse? Testament example helps to bring de réduire l’abus du marché ? this to life. In this instance, Eve’s The Effectiveness of debate with the Serpent evidences Afin d’explorer cette Regulatory Surveillance her “moral awareness” (Rest, 1986) question plus loin, il in the Garden of Eden and despite the threat of powerful, est utile de s’appuyer all-seeing market surveillance To explore this question sur le paradigme de alongside the inevitable threat of further, it is helpful to draw on the l’Ancien Testament consequence, opportunism and self- Old Testament paradigm of Adam d’Adam et Eve dans interest prevail. le jardin d’Éden. Bien and Eve in the Garden of Eden. qu’il s’agisse d’une Parallels can be drawn between the On balance therefore, whilst pseudo réalité simpli- opportunistic behaviours prevalent offering firms very relevant and fiée, cet exemple sou- within the financial services industry intelligent insight, there is a very lève des considérations and the ethical challenges faced real risk that the rapid adoption très pertinentes autour by Adam and Eve. Further, and in of RegTech solutions will become de l’efficacité des particular, this example gives rise to an ineffective, supposed, panacea contrôles du marché for a firm’s compliance challenges et du rôle important interesting considerations around the (Deloitte, 2016 p.g 6). Market de la culture quand on effectiveness of powerful RegTech cherche à pousser les solutions in curbing misconduct. supervision, reinforced by RegTech gens «aux bons choix» solutions and regulatory parameters (Hamlin et al., 2011). In this Biblical paradigm, we are are necessary controls to detect told that a set of simple, governing and prevent instances of market En offrant aux entre- principles has been established abuse and misconduct. However, prises un aperçu très within the Garden of Eden. Acting as demonstrated by Adam and Eve, pertinent et intelligent, against these, Eve plucks the ultimately “without strong ethical il y a un risque réel forbidden fruit from the tree of cultures, regulation and compliance que l’adoption rapide knowledge and colludes with Adam, will never be enough”. (CII, p.4, de solutions RegTech aware that their act is prohibited and devienne une panacée 2017). that it will invoke the wrath of the inefficace pour tous les défis de confor- all-seeing, all knowing regulator. Cultivating an Ethical mité d’une entreprise Although a simplified pseudo- Conduct Culture (Deloitte, 2016 p.g 6). reality, this old-world example raises The European Systemic Risk very relevant considerations around La surveillance du mar- Board states that the prevention of the effectiveness of market controls misconduct is the preferred approach, ché, renforcée selon today and the important role of des solutions RegTech rather than addressing the issue culture when seeking to drive people est nécessaire pour after the event has occurred (ESRB, détecter et empêcher to “choose good” in the face of 2016, p.9). From an environmental les abus de marché et moral hazard (Hamlin et al., 2011). perspective, we have identified that la mauvaise conduite. Kaptein (2012) asserts, that “fencing the threat of surveillance, along with

THE DIGITAL PANOPTICON: A CHNAGE FOR ETHICAL CHANGE 186 Cependant, comme regulatory reprisal alone, are simply cela a été démontré par Spreading Ethical not sufficient to deter market abuse. Conduct from Adam et Eve, en fin How therefore can we achieve a shift de compte « sans une in the ethical conduct of the industry Grassroots to Tree Tops forte culture éthique, la and nurture a culture whereby “good Misconduct breeds mistrust, and régulation et la confor- mité ne seront jamais people, do good things”? (Kaptein, in a fragile political and economic suffisantes ». 2011). environment such a combustible The first line of defence is viewed equation threatens irrevocable, D’un point de vue as an integral control mechanism systemic damage to the health of the environnemental, nous in the “fight against market abuse” economy as a whole. It is therefore avons constaté que and serves to “protect against, detect clear that the financial services la menace de surveil- and to help prevent against market industry has a very real, social lance, avec seule- responsibility to embed good, ethical ment des représailles abuse” (FCA Market Watch, 2016 practices across its workforce and to réglementaires, ne sont p. 5). However, against this cultural pas suffisants pour backdrop we need to ask whether discard the culture of “unfettered dissuader les abus du Compliance functions doing enough misconduct” (McLannahan, 2017) marché. to effectively prevent market abuse. embedded across the sector. Comment pouvons- Between 2014 and 2015, the industry As established thus far, managing nous dès lors assurer observed a 24% increase in the the conduct of the financial services un changement dans volume of suspicious transaction is a complex task, requiring careful la conduite éthique de reports raised (Binham, 2015), with l’industrie et favori- balance of regulation, compliance ser une culture par firms seeking to identify and report and culture. As previously noted: laquelle « les bonnes instances of market abuse before “without strong ethical cultures, personnes font les they were uncovered by regulatory regulation and compliance will bonnes choses » ? scrutiny (Duff and Phelps, 2015). never be enough” (CII, p.4, 2017). La première ligne de This statistic is particularly However, to observe a true shift in défense est vue comme revealing, demonstrating as it does conduct, dedicated reform efforts un mécanisme de are required across all organisational contrôle intégral dans an environment in which firms levels within both the industry and le « combat contre are focused on reporting post- les abus du marché misconduct detection, rather than individual firms. », cependant, dans on employing truly effective control un contexte culturel mechanisms to prevent misconduct Finding the Right Cure complaisant est-ce que and market abuse. This culture is for the Misconduct les fonctions de confor- further illustrated by the Merrill Pandemic mité sont suffisantes? Lynch transaction reporting scandal When considering how to Entre 2014–2015, touched on earlier in this paper. Here l’industrie a comptabi- address this challenge, it would lisé une augmentation the firm exhibited a blatant disregard be imprudent to not reflect on the de 24 % des Rapports for known misconduct over a period management of ethical conduct in sur des transactions of eight years. This highlights that other industries. This paper begins suspectes (Financial efforts are required to uplift the this analysis at the macro level, Times, 2015), par des ethical standards of the financial examining the medical industry for entreprises cherchant services industry. direction on ethical leadership, and

CHANGING FRONTIERS OF ETHICS IN FINANCE 187 à rapporter les cas then goes on to reflect on ethical an individual’s “bestial instincts” d’abus avant qu’ils conduct at the organisational level. (Hobbes cited by Bennett, 2015) n’aient été découverts At the core of the healthcare when they are faced with moral par l’examen minu- hazard? tieux réglementaire profession sits medical ethics. (Duff et Phelps, 2015). Essentially, this is centralised Addressing the first of these Les entreprises se around four key principals (Clinical questions, the introduction of an concentrent sur la Ethics Network, 2017), further ethical code for banking is one détection et le rap- underpinned by the Hippocratic that has been heavily debated and port sur la mauvaise oath, that create a moral code that continues to divide opinion. In conduite a posteriori governs ethical practices and conduct 2013, the Dutch Banking Association plutôt que d’employer within the field: introduced a mandatory oath des mécanismes de contrôle véritablement I. Autonomy: enabling individuals to applicable across the workforce. efficaces pour sa pré- make informed decisions The pledge echoed that of the four medical principals. Critically, vention. II. Beneficence: promoting what is employees pledged not to misuse best for the patient Le comportement their banking knowledge and to be inapproprié et la faute III. Non – Maleficence: avoiding the aware of their social responsibilities suscitent la méfiance, causation of harm to society throughout their business et dans un environne- IV. Justice: distributing benefits, risk transactions (Fox, 2015). ment politiquement and cost fairly et économiquement ResPublica, a leading British fragile, une telle As in every industry, cases of think tank championed adoption of configuration devient negligence and misconduct do of such an oath in the UK. However explosive et entraîne course exist within the medical field. the Parliamentary Commission des dégâts irréver- However studies have identified that on Banking Standards found that sibles pour la santé de “doctors, nurses and other medical “investing too much in a single l’économie dans son practitioners emerge as the most solution might be a false summit” ensemble. trusted” roles within the profession. (BBA, 2014). Instead, in 2015, the Il est donc évident que The top three reasons for this trust Financial Conduct Authority and l’industrie des services were: the professional expertise of Prudential Risk Authority introduced financiers a une the practitioners; having no reason the final rules for “improving responsabilité sociale to doubt them; and belief in their accountability in the banking sector” réelle afin d’inculquer honesty and integrity (Wellcome outlined in the Senior Managers de bonnes pratiques Trust, 2016). Regime, The Certification Regime éthiques à ses colla- and Conduct Rules (FCA, 2015). borateurs et de rejeter The relevance of this particular la culture permissive research to the financial services This paper argues, however, dominante. Industry is two-fold. Firstly, how that, although such guidelines Gérer la conduite des much of society’s trust in these are a necessary component services financiers est professionals, can be put down to the of managing misconduct and une tâche complexe, symbolic moral code to always act in unethical behaviours, without qui exige un équilibre the best interests of the customer? cultural foundations ultimately prudent de régulation, And secondly, to what extent does such efforts are “devoid of purpose” de conformité et de this personal ethical pledge rein back (Fox, 2015). Further, it challenges

THE DIGITAL PANOPTICON: A CHNAGE FOR ETHICAL CHANGE 188 culture. Sans de fortes the Parliamentary Commission’s technological advances removing the cultures éthiques, statement that suggests an oath interpersonal relationships prevelant la régulation et la would be an ineffective “single in traditional banking. conformité ne seront solution”, whilst acknowledging jamais suffisantes. A plethora of research suggests that the management of misconduct Cependant, si l’on that the likelihood of misaligned veut constater un vrai is a delicate balance of regulation, behaviour is significantly reduced changement dans les compliance and conduct. Although when trust and a common, human comportements, des seemingly abstract, this is evidenced relationship exists (Griffin, R and efforts de réforme sont in the medical field, where social O’Leary, K., 2004). In an increasingly indispensables à tous trust and confidence in the medical digital age, driven by technological les niveaux organisa- profession in many ways can be advancement, an industry-wide oath tionnels de l’industrie attributed to the moral code of would certainly serve as a reminder et des entreprises. ethics embedded in the professional to financial service professionals of discourse. Essentially, therefore, this A cet effet, il serait their duty of care to society. imprudent de ne pas paper offers the view that an industry- examiner la gestion de wide pledge would act as a symbolic Ethics Are More Than conduite éthique dans social commitment and complement Just Skin Deep d’autres industries. Des the other market controls that serve études de l’industrie to deter misconduct in the financial In 2017, the French beauty médicale ont identifié services sector. company L’Oréal was recognised que « les médecins, les by the Ethisphere Institute as the infirmières et d’autres The Death of Distance World’s most ethical company praticiens médicaux (Ethisphere, 2017). Aside from their apparaissent comme Again looking to the healthcare des rôles de référence » industry, we explore the effectiveness strong corporate social responsibility, à l’intérieur de la proof such a pledge at the individual what is it that sets this company out fession. La pertinence level, examining to what extent such from the rest? From an operating de ce constat pour oaths prevent an individual from perspective, in 2000, L’Oréal was l’industrie des services acting opportunistically when faced one of the first companies in France financiers est double. with moral hazard. to establish a code of ethics and later, Tout d’abord, quelle in 2007, they appointed a dedicated part de la confiance de The patient – doctor relationship chief ethics officer (L’Oréal, 2017). la société dans ces pro- is particularly revealing, with trust fessionnels peut-elle acting as “the defining element in In essence, this suggests that, at être mise sur le compte the patient/physician interpersonal firm level, operating model reform du code moral sym- relationship” (Pearson, S and is required across financial services bolique de toujours Raeke, L., 2000). Alongside cases with greater emphasis placed upon agir dans les meilleurs ethical conduct. To some extent, we intérêts du client ? of misconduct, the decline of trust Ensuite, dans quelle in banking can to some extent are seeing evidence of this change mesure cet engagement be attributed to the modern face being championed with many banks éthique personnel of banking today. In essence the seeking to manage “bad behaviour décourage les « ins- “death of distance” (Cairncross, at the source” (Engler, 2017). JP tincts bestiaux » d’un 1997) has contributed to the death Morgan and Goldman Sachs, for individu (Hobbes cité of relationships and trust, with example, are amongst a few Banks

CHANGING FRONTIERS OF ETHICS IN FINANCE 189 par Bennett, 2015)? establishing proactive “central Returning to the question this Un engagement large supervisory teams” that seek to paper set out to explore, RegTech de la part de l’indus- identify problem areas and strengthen is certainly an effective asset to trie agirait comme the firm’s internal supervisory this ecology offering powerful une volonté sociale framework, acknowledging that a new insight to compliance functions symbolique complétant les autres contrôles du organisational structure is required to and regulators. However, as earlier marché qui servent à truly confront misconduct (Engler, highlighted, it should not be viewed dissuader la mauvaise 2017). Ultimately however, with as a panacea for market abuse. conduite. reference to Bandura’s (1977) social Rather, as the industry continues to learning theory, if change is to be adopt disruptive RegTech solutions, La relation patient– successfully adopted, it is important we should embrace the opportunity médecin est particu- for senior leaders to set the standard to leverage this change to realise a lièrement révélatrice, for the organisation’s cultural agenda. real and effective shift in conduct ou la confiance agit The introduction of the role of across the industry. This should be a comme « l’élément déterminant dans la chief ethics officer to a firm’s board, shift to a culture in which the innate relation interperson- alongside dedicated, preventative human desire to want to “choose nelle patient–méde- supervisory teams certainly sets good” overrides the opportunistic cin » (Pearson, S et the organisational tone in favour of behaviours that business can present. Raeke, L., 2000). La ethical conduct. Certainly, it is fair to argue that baisse de confiance this is a topic far wider than the dans les banques peut Managing the Delicate realms of financial services alone, être attribuée dans Ecology of Financial une certaine mesure with misconduct an ailment afflicting au visage moderne Services Conduct society as a whole. However, as in the du secteur bancaire On balance, therefore, the old adage “be the change you want to aujourd’hui. En subs- management of misconduct is a see” (perhaps somewhat ironically), tance, «la mort de la delicate ecology composed of a fine the first step in this journey starts distance» (Cairncross, equilibrium of industry regulation with us. The financial services 1997) a contribué à la and organisational compliance. professionals of today must chart the mort des relations et new ethical culture of tomorrow. • de la confiance, et les At the core lie ethics and culture. progrès technologiques Throughout this paper we have ont éliminé les rela- explored these individual constructs tions interpersonnelles in turn and conclude that, in isolation, qui prévalaient dans these components are quite simply le secteur bancaire ineffective and will have limited effect traditionnel. without being cultivated as part of an Une pléthore de ethical culture. recherches suggère que la probabilité d’un comportement inadéquat est signi- ficativement réduit lorsque la confiance et une relation humaine,

THE DIGITAL PANOPTICON: A CHNAGE FOR ETHICAL CHANGE 190 commune existent (Griffin, R et O’Leary, References K., 2004). Dans un Accenture (2017). The Growth Catelas (2017). What we Do. monde de plus en plus of Regulatory Technology is Retrieved from: http://www.catelas. numérique, un serment Changing the Financial Services com. propre aux professions Landscape. Retrieved from: http:// Clinical Ethics Network (2017). financières servirait financeandriskblog.accenture Ethical Framework. Retrieved from: certainement à rappe- .com/regulatory-insights/reg-tech/ http://www.ukcen.net/ethical_issues/ ler aux professionnels growth-of-regulatory-technology- ethical_frameworks/the_four_ leur devoir de prendre is-changing-the-financial-services- soin de la société. principles_of_biomedical_ethics. landscape. Chartered Insurance Institute L’exemple de l’Oréal Bandura, A. (1977). Social (2016). Good Leadership – Culture, suggère que le secteur learning theory. Retrieved from: Ethics and Conduct in Financial des services financiers https://books.google.co.uk/books/ Services. Retrieved from: http://www. a aussi besoin d’une about/Social_learning_theory. cii.co.uk/media/739 1800/good_ réforme opérationnelle html?id=IXvuAAAAMAAJ. au niveau des entre- leadership_culture_and_leadership_ prises, avec un accent Bennett, J. (2015). Leventian Part ciiandcmi.pdf. plus grand mis sur 1: man. Retrieved from: http://www. Deloitte (2016). Is RegTech the la conduite éthique. earlymodernt/exts.com/assets/pdfs/ New FinTech? Retrieved from: https:// L’introduction d’une hobbes1651part1.pdf www2.deloit te.com/ie/en/pages/ fonction de directeur Binham, C. (2015). Global financial-services/articles/RegTech- en éthique au sommet regulators shift focus to risk and is-the-new-FinTech.html. de l’entreprise, à côté des fonctions de conduct. The Financial Times, 4 May. Duff and Phelps (2015). Global surveillance dédiées Retrieved from: https://www.ft.com/ Enforcement Review. Retrieved from: à la prévention, pose content/e965566c-f1b1-11e4-98c5- http://www.duffandphelps.com/ certainement le cadre 00144feab7de insights/publications/compliance- organisationnel adé- British Bankers Association and-regulatory/global-enforcement- quat pour la conduite (2014). A Bankers Oath: Part of the review-2015. éthique. Answer? Retrieved from: https:// Engler, H. (2017). US big banks Tout compte fait donc, www.bba.org.uk/news/bba-voice/a- building front-office supervisory teams la gestion des écarts bankers-oath-part-of-the-answer/#. to handle conduct, non-financial risk. de conduite est un WX34Yo-cEgo. Reuters, 28 March. Retrieved from: exercice d’équilibrisme Burton, L. (2017). Lloyds Bank http://www.reuters.com/article/bc- dans un contexte où takes another 1bn hit. The Telegraph, finreg-bank-conduct-supervision- se chevauchent la 27 July. Retrieved from: http://www. idUSKBN16Z2J8. régulation de l’industrie, la conformité telegraph.co.uk/business/2017/07/27/ Ethisphere (2017). The World’s organisationnelle, avec lloyds-bank-takes-another-1bn-hit- Most Ethical Companies to Make au cœur, l’éthique et ppi-compensation-claims/. the 2017 World’s Most Ethical la culture. Prises une Cairncross, F. (1997). The death Companies List. Retrieved from: a une, ces composants of distance: how the communications http://worldsmostethical companies. sont tout simplement revolution is changing our lives. New ethisphere.com/honorees/. inefficaces et de portée York: Harvard Business School Press.

CHANGING FRONTIERS OF ETHICS IN FINANCE 191 limitée. RegTech est un European Central Bank Financial Conduct Authority apport certainement (2017). ECB Banking Supervision: (2017). Market Abuse. Retrieved from: valable qui offre un SSM supervisory priorities 2017. https://www.fca.org.uk/markets/ aperçu puissant aux Retrieved from: https://www. market-abuse. services de conformité bankingsupervision.europa.eu /ecb / et aux régulateurs ; Foucault, M. (1975). Discipline mais ne devrait pas être pub/pdf/publication_supervisory_ and Punish. Retrieved from: https:// considéré comme une priorities_2017.en.pdf. books.goog le.co.uk/books/ panacée pour contenir Financial Services Compensation about/Discipline_and_Punish. les abus du marché. Au Scheme Industry News (2015). New html?id=AVzuf-r22eoC lieu de cela RegTech devrait être mis à report shows continuing “trust gap” Fox, J. (2015). Time for bankers profit comme l’occa- in UK financial services but industry to start swearing. Bloomberg, 1 sion de passer à une seen as competent. Retrieved from: April. Retrieved from: https:// culture dans laquelle https://www.fscs.org.uk/industry/ www.bloomberg.com/view/ le désir humain inné news/2015/november/new-report- articles/2015-04-01/dutch-bankers- de « choisir le bien » shows-continuing-trust-gap-in-uk- start-taking-an-oath-to-behave- l’emporte sur les com- financial-services-but-industry-seen- better. portements opportu- as-competent/. nistes caractéristiques Griffin, R. (2004). The dark side des milieux d’affaires. Financial Stability Board (2014). of organisational behaviour. San Ceci est certainement Guidance on Supervisory Interaction Francisco John Wiley and Sons Inc. un sujet beaucoup with Financial Institutions on Risk Hamlin, J. (2011). Young infants plus large que les seuls Culture. Retrieved from: http://www. prefer prosocial to antisocial others. royaumes des services fsb.org/wp-content/uploads/140407. Cognitive Development, 26(1), 30-39. financiers, cependant, pdf. la première étape de Humphries, J. (2016). The ce voyage commence Financial Conduct Authority rise of RegTech and what it peut-être par nous ; Press Releases (2015). FCA Fines means for your business. Forbes, les professionnels des Merrill Lynch International £13.2 14 December. Retrieved from: services financiers million for transaction reporting https://www.forbes.com/sites/ d’aujourd’hui affrétant forbesfinancecouncil/2016/12/14/ la nouvelle culture failures. Retrieved from: https:// the-rise-of-regtech-and- éthique de demain. www.fca.org.uk/new s/press-releases/ fca-fines-merrill-lynch-international- what-it-means-for-your- %C2%A3132-million-transaction- business/#2f89de445935. reporting. KPMG, (2016). Evolving Banking Regulation Part 5. Retrieved from: Financial Conduct Authority Press Releases (2016). FCA Publishes https://assets.kpmg.com/content/ Final Rules to make those in the Banking dam/kpmg/pdf/2016/02/evolving- Sector More Accountable. Retrieved banking-regulation-part-5.pdf. from: https://www.fca.org.uk /new The European Systemic Risk s/press-releases/fca-publishes-final- Board (2015) Misconduct Risk Report. rules-make-those-banking-sector- Retrieved from: https://www.esrb. more-accountable. europa.eu/pub/pdf/other/150625_ report_misconduct_risk.en.pdf

THE DIGITAL PANOPTICON: A CHNAGE FOR ETHICAL CHANGE 192 Kaptein, M. (2011). Rest J. R. (1986). Moral Understanding unethical behaviour development: advances in research and by unravelling ethical culture. Human theory. New York: PreagerGoogle Relations, 64(6), 843-869. Scholar. Kaptein, M (2012). Why do Good Rousseau, Jean-Jacques. (1987). People Sometimes Do Bad Things: 52 Basic political writings. Translated Reflections on Ethics at Work. Retrieved by Donald A. Cress. Indianapolis: from: http://www.ethicsmanagement. Hackett, 1987. info/content/Why%20good%20 Semple, J. (1993). Bentham’s people%20sometimes%20do%20 Prison: A Study of the Panoptican bad%20things.pdf. Penitentirary. Retrieved from: https://books.google.co.uk/ L’Oréal Press Releases (2017). books/about/Bentham _s_Prison L’Oréal names as world’s most ethical _A_Study_of_the_Panoptic. company. Retrieved from: http:// html?id=ayjLuTdVkTYC www.loreal.com/media/press- releases/2017/mar/loreal-named-as-a- Stead, E. (1990). An integrative 2017-worlds-most-ethical-company- model for understanding and managing ethical behaviour in McLannahan, B. (2017). BNP business organisations. Journal of Paribas to pay $350m over forex Business Ethics, 9(3), 233-242. manipulation. The Financial Times, The Economist (1998). The 24 May. Retrieved from: https://www. Benevolence of Self Interest. Retrieved ft.com/content/2e1cf51a-409a-11e7- from: http://www.economist.com/ 9d56-25f963e998b2. node/179495. Pearson, S. & Raeke, L. (2000). Treanor, J. (2016). Misconduct Patients’ trust in physicians: many has cost UK Banks 54bn over 15 years. theories, few measures and little data. The Guardian, 11 April. Retrieved Journal of General Intern Medicine from: https://www.theguardian.com/ 15(7), 509–513. money/2016/apr/11/misconduct-has- Plender, J. (2014). Big bad bank cost-uks-banks-53bn-over-15-years- fines are here to stay. The Financial ppi Times, 8 July. Retrieved from: https:// Treviño, L. (1990). Bad apples www.ft.com/content/be4915b6-05f5- in bad barrels: a causal analysis of 11e4-89a5-00144feab7de ethical decision-making behaviour. Journal of Applied Psychology, 75(4), Quinn, J. (2014). Hippocratic Oath 378-385. for Bankers rejected by Ethics Chief. The Telegraph, 8 February. Retrieved from: Wellcome Trust (2016). Public http://www.telegraph.co.uk/finance/ Trust in Medical Research. Retrieved newsbysector/banksandfinance from: https://wellcome.ac.uk/ /10626534/Hippocratic-oath-for- sites/default/files/trust-in-medical- bankers-rejected-by-ethics-chief.html research-graphic-wellcome-apr16.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 193

ig Data in Finance: Ethical BBChallenges

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Finalist

Alicja Choma Along with the advent of the In- in mind, special attention should be Poland ternet, the volume of generated and paid to the most sensitive social is- PhD student in stored data began to grow at an un- sues, in particular data protection. Management, Poznan precedented rate. Until now, tech- university of nological limitations have prevented The phenomenon economic*, Poland any efficient analysis of this data over of Big Data any given time. It is only during the Every day people generate an past few years that we have seen the abundance of information about emergence of tools that can harness themselves, their behaviour and Big Data to produce accurate results their interests. On an average morin just a few seconds. Today, the sub- ning you fire up your Internet brow- ject of data exploitation has come to ser and open a website. During the the fore. This phenomenon has been milliseconds that pass between clic- referred to as Big Data. It affords tre- king on a link and the desired con- mendous growth opportunities but tent being displayed on the website, also raises controversial questions amazing things take place, leaving a about privacy. The current situation lasting footprint in the virtual space. * The views expressed favours the business community, The data created during this brow- herein are those of which may lead to data misuse and sing routine is transferred to a dozen the author and do not necessarily reflect those unethical conduct in the financial different companies. Almost imme- of the Organization she is sector. This industry is grounded on diately, any interested financial insti- affiliated to. trust and ethical concerns are inva- tutions are capable of observing your riably given precedence. Bearing that activity (Madrigal, 2012).

BIG DATA IN FINANCE: ETHICAL CHALLENGES 194 Le terme Big Data Big Data is a new concept and This term accommodates a num- se réfère aux grands defining it is key in analysing the be- ber of concepts: a huge amount of volumes de données haviour of financial institutions dea- data; analysis of social media; future structurées aussi bien ling with data. The term refers to a generation data management; real- que non-structurées. large volume of data, yet the specific time management; and much more. Le Big Data est généré par un flux continu de volume of qualifying data remains Whatever is included in the Big Data données que crée l’éco- to be delimited by institutions in- label, organisations are beginning nomie moderne. Elles vestigating the phenomenon. Most to understand and discover how to proviennent des inte- definitions highlight a data set of process and analyse information sets ractions sociales, des indefinite size that cannot as yet be in an unprecedented manner. In this équipements mobiles, processed by the hardware and soft- way, a small but growing group of de la R&D, des infras- ware used for such purposes. pioneers is able to deliver incredible tructures IT et de tout business results (IBM, 2012, p. 1). équipement de trans- Traditionally, the term “Big mission de données. Le Data” was used to describe the New possibilities in Big Data comprend des huge volumes of data analysed by the world of finance données aux structures large organizations, such as Goo- All sectors and industries are différentes, repose sur gle, or for research projects carried keen to make the most of the op- la haute vitesse de créa- out by organisations such as NASA portunities which arise from the tion de données et la (Merv, 2011, p. 3). Today, Big Data capacité de dégager de advanced analysis of Big Data. Besi- is mainly understood as a set of data l’information fiable. Ce des market leaders such as IT giants stream generated by the modern eco- concept apparaît dans Google and Microsoft, the financial nomy and comprising data produced de nombreux contextes: industry is also seeking new data l’analyse des énormes during social interaction, by mobile solutions, both locally and globally. volumes de données, devices, R&D, simulations, IT in- Within the Polish market alone, the- des medias sociaux, la frastructure, and other equipment re are several players who are incre- gestion des données sur and tools that handle data transmis- asingly toying with the idea of fra- les générations futures, sion (Vasset, 2012, p. 1). la gestion en temps réel ming policies which enable the use etc. Birst defines Big Data strategies of Big Data. The banking industry is as those which extensively utilize looking for new solutions and mo- parallel and specialized systems to dels which will enable the construc- extract and take advantage of the tion of a more accurate customer knowledge hidden under the surface profile. Depending on the organisa- L’industrie financière of dispersed and unstructured data. tion, this involves the exploitation of cherche des nouvelles They transform whole industries, solutions en matière de its own or external data or even the gestion des données, create winners and attract those who sale of aggregate information about tout comme les géants follow them (Birst, 2012, p. 2). customers’ purchasing habits to du secteur IT, Google Big Data is a large-volume data other organisations. These methods ou Microsoft. L’indus- collection possessing a varied struc- are expected to help develop better trie bancaire aussi pour ture, fast data creation speed, and contributions and enhance customer obtenir des profils de the ability to generate reliable in- credibility. However, it is easy to client toujours plus formation. Big Data is ubiquitous cross the fine line of financial ethics précis. and yet the concept sows confusion. and abuse data.

CHANGING FRONTIERS OF ETHICS IN FINANCE 195 Les institutions Financial institutions store large tructured data that had never had financières détiennent volumes of their own data regarding any real value before. For example, d’importants volumes customers’ purchasing behaviours, millions of telephone conversations de données sur les com- and even more sensitive data on their with customers yield millions of use- portements d’achats de ful pieces of data. Today, telephone leurs clients de même financial position. Obtaining further que de l’information information on their location and calls are a key tool in helping banks sensible sur leur situa- online activity is straightforward. implement new strategies aimed to tion financière. Leur When comparing the situation of significantly reduce the number of défi consiste à trouver banks to that of other organisations, complaints (The Economist, 2013). plus d’information spa- the former enjoy a far more privi- All financial institutions exploi- tiale et sur le comporte- leged position. There is no other ting Big Data act in accordance with ment on-line. institution that can create such an Selon la Conférence the law; however, the current ru- organisée par The extensive customer profile, as they les and regulations were laid down Economist en 2013, have no access to information about more than ten years ago and are in- l’industrie financière est the customer’s general behaviour in effective at safeguarding privacy in parmi celles qui ont le the market and their financial status. the virtual world. The regulations plus de bénéfices à tirer After collecting more data, banks on data protection currently in force du Big Data. can benefit in the same way as other date back to 1995. Significantly, at Toutes les institu- data-gathering companies. All that that time only 1% of the European tions financières qui is required to obtain a desired data exploitent du Big Data population used the Internet. The agissent dans le cadre set is a) any location information world has changed dramatically and de la loi. Toutefois, les received via the mobile banking app the law must keep pace. Legislators règles et régulations and b) the customer’s approval for apparently fall behind technological actuelles datent d’il y a the bank to access social networking progress and some institutions deci- au moins 10 ans et ne sites in return for a more profitable de to take advantage of this. Howe- protègent plus la sphère deal for the customer. ver, it is vitally important that the privée à l’heure du financial industry looks to foster pu- monde virtuel. Business leaders in different sectors are now asking themselves how blic trust. The global crisis of 2008 they can benefit from their data re- has eroded that trust, so banking sources in a more effective way. Mc- institutions can no longer afford to Kinsey points to the banking sector act riskily. La vente de données as experiencing the highest data in- sur le comportement tensity (Manyika, 2011, pp. 15-26). Data as a commodity d’achat des clients est aujourd’hui une acti- In June 2013, programmers, analysts Selling data on customers’ pur- vité importante pour and CEOs gathered in San Francisco chasing habits is becoming criti- l’industrie financière. at a conference on Big Data, Ideas cal in the financial industry. Large Les grandes banques Economy: Information Forum 2013, banks and credit card issuers are et les émetteurs de and concluded that the banking in- very well positioned to gather such cartes de crédit sont en dustry is among the leading sectors information. A bank-administered bonne position pour that can reap the benefits of Big Internet service provides access to récolter de telles don- Data. They emphasised that banks multiple online transactions; any nées. Ainsi, un service were receiving large amounts of uns- data gathered in such activity is pro-

BIG DATA IN FINANCE: ETHICAL CHALLENGES 196 internet administré par cessed and used to establish consu- ping habits. An official note pu- une banque lui donne mer behaviour patterns. This helps blished by the institution commu- accès aux transactions with strategic planning. Credit card nicated that there were options of en ligne. Toutes les issuers have the right to license combining customer data, creating données ainsi obtenues sont utilisée pour third-party access to data in order reports and sharing them with ex- dégager des profils de to extract any desired values. Howe- ternal organizations. The bank also consommation. ver, such third parties are increa- revealed the type of customer data L’une des grandes singly shifting their focus to data it holds, at the same time respecting banques britanniques, analysis. The consultants of one of customer privacy. Such data does avec 13 millions de such analytical business analyse 65 not only contain the details of com- clients, fait du com- billion transactions completed by pleted purchases paid by a wired merce de données un 1.5 billion credit card users in 210 transfer or credit card, but also cus- élément important de sa stratégie. Dans une countries to investigate consumer tomers’ profiles containing images, note émanant de l’ins- trends. Any information obtained in records of telephone conversations, titution, il est question this way is sold on. For example, it or browsing patterns in the bank’s de combiner les don- was observed that customers buying main website. The bank argues that nées client pour obtenir petrol for their vehicles at around its new strategy is fully in line with des rapports intéres- 4:00pm are very likely to spend bet- the law and that no customer’s per- sants pour des tiers. ween 35 and 50 USD at the grocer’s sonal data will be disclosed outside La banque a, par la or in a restaurant during the hour the bank without the customer’s même occasion, spécifié l’information qu’elle following the transaction. Marke- approval. The bank’s partners will détenait et la façon dont ters can use this knowledge to issue be provided information, such as elle entendait protéger discount vouchers for a nearby su- which customers frequent shopping la sphère privée. Les permarket, thus pushing up its af- centres at which times, and how and données ne se limitent ternoon sales. As intermediaries in what they buy. The bank does not pas aux transactions the flow of information, credit card exclude the transfer of the informa- réalisées payées en issuers gather the most data and cation both to commercial partners ligne ou par transfert, and to the government. The newly mais contiennent des pitalise significantly more highly on images, des conversa- its value than other similar institu- adopted policy of data trading was tions téléphoniques et tions. In the future, they might be introduced in 2013. This is the first des profils des visites willing to give up their commission bank in Europe which openly in- du site bancaire. on credit card transactions for the forms its customers that it has been sale of complex analysis, based on gathering and using their data and data provided by credit card users intends to share it with its business (Kearns, 2011). partners, of course, in accordance Un projet bancaire lan- The strategy of one of Britain’s with the law (Samcik, 2013; Sam- cé en Pologne en 2013 largest banks with a customer base cik, 2013b). This begs the question offre un programme of almost 13 million also puts much of whether such activities are ethi- promotionnel custo- pressure on data trading. In mid- cal. misé de transactions 2013, the bank representatives in- The Polish market also provides bancaires accessibles formed their customers about the an example of the use of customer via une application intention to sell data on their shop- data by companies involved in a pro-

CHANGING FRONTIERS OF ETHICS IN FINANCE 197 Facebook. ject sponsored by one of the banks. the bank declares that it strictly abi- La banque n’est pas The scale of the data interchange is des by the regulation that prohibits loquace sur la col- less impressive as the bank declares the use of data gathered under the lecte et le traitement that the data is shared only within programme for other companies’ des données: dans sa spécification transparaît the framework of the project, which marketing purposes. Additional toutefois le recours au was launched in 2013. The project protection of personal data is pro- Big Data et le transfert offers a programme of specially cus- vided via a confidentiality agree- des données clients aux tomized promotions available in the ment covering the arrangements tiers. bank transaction service and via a with a specific partner during the Son activité principale Facebook application. The bank campaign. The bank explains that consiste à proposer aux does not talk much about collecting the programme follows the same clients des programmes rules as any other traditional ban- discount adaptés aux and processing the data: its regula- préférences person- tion highlights the project specifi- king procedure, and that banking nelles telles qu’elles cations which reveal the use of Big law regulates the use of customer ressortent des données Data and the transfer of customer data very precisely. When submit- sur les comportements data to bank’s partners. Its main acting their application, the customer d’achat. tivity is confined to providing cus- agrees to the use of part of their data Ainsi, la banque se tomers with personalized discount to analyse their creditworthiness. prépare à l’utilisation programmes reflecting their prefe- However, the offer will be made du Big Data à une plus large échelle. L’accès à rences and exploiting information only to those customers who have son programme d’offres about customers’ buying habits. given their consent. The programme passe par une applica- The recipients of the discounts are is a novelty in the European market. tion Facebook, ce qui targeted based on a group analysis, The bank informs its customer who permet à la banque and data on individual customers is buys fuel at a BP station that they de collecter d’autres not shared with any partners offe- can expect a discount from a rival données sur l’usager. ring discounts. The information fuel provider in the near future. Quand il passe par Facebook, l’utilisateur shared concerns the buying beha- Big Data is thus used to combine exprime son accord viours of a specific group of a par- the interest of product and service pour le traitement et ticular size, so that the partner can providers and customers who make l’analyse des données. A estimate the benefits of running the their purchases and generate addi- partir de ces informa- promotion. However, this is likely tional profit for the bank. It should tions complémentaires, to be true of potential partners also be noted that the bank is pre- il sera encore plus facile only. The regulation of the bank in- paring to use Big Data solutions on à la banque de créer des cludes a provision to the effect that a larger scale: it offers access to the profils encore plus fins. when agreeing to participate in the programme via a dedicated Face- programme, the customer agrees to book application, which means that share information about a transac- it can collect yet more data about its tion with the bank’s partner. Such customers. When using the appli- La direction d’une des information remains a bank secret. cation, the customer agrees to their grandes banques polo- After that, the partner, whose offer Facebook data being accessed and naises espère pouvoir was accepted by the customer, can analysed. Having such additional attirer dans un avenir calculate their benefit. Despite this, data at hand, the bank will be in

BIG DATA IN FINANCE: ETHICAL CHALLENGES 198 proche une nouvelle a position to create even more de- staff will operate an IT tool capable clientèle grâce à une tailed customer profiles (Samcik of returning very detailed data on offre hypothécaire com- 2013c; Jeznach, 2013). any customer in no more than just pétitive, mais avant tout seconds: monthly transactions, sur- grâce à l’exploitation Detailed data analysis: a plus, the number of credit card tran- de l’information sur les strategy of the ‘big guns’ clients potentiels. sactions, purchasing habits, or other En 2013, la banque One of Poland’s largest and most expenses. What Big Data will cer- avait 7.1 millions de stable banks plans to catch up with tainly be used for is diminishing the clients. Aujourd’hui the competition and is undergoing cost of borrowing risk to about 20% cette banque voit while increasing the sale of services dans le Big Data une a considerable revision of its future tendance de fond du policies. It intends to target custo- (Samcik, 2013d). développement du mers via all possible channels. In the secteur bancaire. near future, the management hopes Facebook information to attract clientèle by competitive as a loan guarantor mortgage rates and deposits, but A new phenomenon in the finan- Le recours au Big first of all, by taking advantage of cial sector is shadow banks (quasi- Data extrait du monde the information received about po- banks), small financial businesses digital, par des petites tential customers. The bank hopes that are beginning to use Big Data institutions du sha- to secure its financial position in the and customer information obtained dow banking, est un coming years by using Big Data and from the digital world. Their initial phénomène nouveau. combining all customer information capital seldom exceeds PLN 5,000. Leur capital initial held by the bank to tailor and offer est dérisoire (1500 These businesses use data from social USD). Pour apprécier products that the customer most networks in order to assess customer la solvabilité du client, probably needs at a given time. The credibility. Their main business ob- ils utilisent les données bank stores extensive customer in- jective is to offer instant loans on- des médias sociaux. Ces formation in its own database and, line and it takes no longer than ten institutions entendent at this stage, it is focusing on making minutes to decide whether to offer a offrir des prêts ins- use of it. In 2013, the bank’s custo- tantanés en ligne. La loan or not. The borrower’s solvency décision de crédit est mer base totalled 7.1 million. Today, is tested by an automatic programme prise en moins de 10 the bank considers Big Data one of that has access to more than 8,000 minutes. La solvabilité the key trends in the development pieces of customer information. This est appréciée automa- of the banking sector. Proper use of data is extracted from popular sites, tiquement par un data can drive up sales dramatically. such as Facebook, Twitter, Linke- programme qui explore Their elaborate CRM system is only din, or Goldenline. The borrower’s plus de 8000 éléments d’informations sur le a herald of the large-scale use of Big “friends” are also examined, with débiteur. Ces données Data in banking. In its new policy, special regard paid to their social ont extraites des sites the bank assumes that all its custo- position and financial standing. comme Facebook, mers will ultimately use at least one This is enabled by granting tempo- Twitter, Linkedin, ou of its products, such as a loan, depo- rary access to the customer’s accou- Goldenline. sit, settlement account, investment nt, which the customer authorizes fund or one of the insurances. The when submitting the application.

CHANGING FRONTIERS OF ETHICS IN FINANCE 199 These institutions even inform the cly that his institution is the first in customer that their extensive net- the industry to make Big Data one of working will raise their borrowing the pillars of its 2013 strategy (TVN capacity. The application is very easy CNBC, 2013). He revealed that they to complete and its submission takes were working on a Big Data project no more than a couple of minutes. combining internal data and exter- The principle data required consists nal data originating in various World of the customer’s state identity card Wide Web-related channels. The number, mobile phone number, e- bank intends to merge the banking Un des vice-présidents mail address, and some information data with that obtained from social de la banque a annoncé networking sites, which reflects a publiquement que son about his/her life. Most probably, the customer’s online footprint, and data institution était la pre- system also checks the customer’s mière dans la branche online shopping habits in order to from telecommunications compa- à combiner les données verify creditworthiness. The offer is nies. Once the customer consents to internes avec celles intended for young people without having their data analysed, the bank provenant des sources promises such benefits as lower in- any borrowing history and for those externes du web. La terest rates due to more accurate who need immediate access to cash banque a l’intention de risk assessment. Prospectively, once and who cannot wait for the “tradi- fusionner ces données an appropriate solution is designed, avec celles provenant tional” procedure which takes up to it will be implementable in other des sites sociaux et les several days. These establishments sectors and industries. The models données de télécommu- are advertised as reputable foreign will be extended by other data as it nication. players, observing any personal data Selon toute vraisem- is likely that the access path will be blance, une fois qu’une protection requirements. How such similar. organisations operate despite their solution technique aura After the interview with the VP été trouvée, elle sera initial lack of capital (sometimes not and his outline of the strategy and utilisée dans d’autres more than PLN 5,000) is baffling plans involving Big Data, the Inter- secteurs et industries. (Samcik, 2013e). We cannot expect net forums erupted. Haters imme- Après cette interview et that these organisations adhere to l’esquisse de la stratégie diately appeared critical about the any standard of ethical conduct. d’exploitation du Big idea: “A perfect illustration of what Data, les forums se sont we know as total surveillance” (Lu- mis en émois avec une Hot atmosphere surrounding cek, 2013). There were also attempts forte prédominance to rebut the critics: “Folks, what is d’avis défavorables. data analysis all the fuss about? On Facebook, TNamed one of the most inno- you agree to share everything or al- vative banks in the world and re- most everything” (Realista, 2013). cognized in 2013 in the prestigious Or, “I can’t understand all this fuss. Infosys Finacle Global Banking In- If you post personal information on- novation Awards, BAI decided for line, you must be aware that others the second time in a row to invest in will also have access to it” (Maciek, Big Data solutions (BAI, 2013). One 2013). This heated debate proves of the bank’s VPs announced publi- how sensitive the subject is. This is

BIG DATA IN FINANCE: ETHICAL CHALLENGES 200 also seen in recent scandals relating social networks to tailor the product to insufficient data control on the In- to a customer’s needs is outrageous. ternet. Facebook is going through a More than one-third were not able crisis, and its users have often revol- express their view and had mixed Le projet de l’industrie ted against the exploitation of their feelings. Only 13.92% of the res- bancaire est de désagré- ger encore plus l’infor- data. Other large-scale examples are pondents agree that the analysis of mation sur sa clientèle. the Snowden affair and the PRISM customer data originating in social Cette intention est clai- spying scandal. networks in order to design financial rement affichée dans la products and services is a good idea plupart des conférences New practices in finance if the customers can somehow bene- tenues depuis 2011. Les and public trust fit from that. cas rapportés ici ne sont que des exemples de ce The financial industry is plan- The scale of the nouveau phénomène. ning to further break down customer Les banques autour data. This intent has been frequently phenomenon de la planète mettent reiterated in banking conferences In order to illustrate the scale of en place des stratégies since 2011. The cases mentioned data exploitation, we need to have utilisant le Big Data. above are but a few examples illus- a closer look at the user’s online Tout cela est légal, trating the nature of this new phe- activity. The digital shadow covers mais il est important de savoir à quel point le nomenon. Banks around the world every trace of our digital presence. In public en est conscient. are implementing strategies invol- 2007, IDC developed the concept of En effet, pour que la ving the use of Big Data. This is all digital shadow as a footprint left by banque puisse tirer legal, yet it is interesting to consider the user on the Internet which accu- tout le bénéfice du Big the opinion and the degree of public rately reflected their everyday habits Data, il faut encore que awareness of the process. In order (IDC 2007 pp. 7-8). This shadow is le consommateur soit for the banking sector to reap the full swelling faster and faster each year, d’accord avec cette uti- benefits of Big Data, it is necessary usually without our knowledge. Our lisation des données. to secure customers’ consent to data digital shadow is made up of infor- sharing. Controversial as it may be, mation that can be considered public most of the population is unaware of but also contains data that we would the scale of the analysis and dissemi- rather remained private (Gantz, Re- Notre ombre digitale est nation of their data. insel, 2011). composée des données A survey carried out for this pa- Studies have shown that only qui sont publiques, mais aussi de celles que per among 145 Internet users aged about half of the digital footprint nous préférons garder 18-50 indicates that the public are refers to individual activities, e.g. dans la sphère privée. generally against Big Data analysis taking pictures, sending e-mails, or Des études ont montré by banking institutions. Surprisin- making online calls. The other half que seulement la moitié gly, the results were very similar of what is called the digital shade notre empreinte across the entire age group. Half of dow refers to information about digitale est faite des those surveyed (50.79%) responded the person’s name, financial record, photos, des e-mails et that the banks should not moni- names extracted from their mailing des conversations en tor customers, and maintained that lists, web browsing history or images ligne. L’autre moitié de using customer data obtained from taken by CCTV cameras in airports

CHANGING FRONTIERS OF ETHICS IN FINANCE 201 notre ombre digitale est and city centres. The digital shadow their name. In a sense, cookies define faite de données per- has grown bigger than the digital in- who we are without linking it to our sonnelles telles que le formation that can now be actively real-world identity. There is a very nom, les données finan- and personally transformed (IDC, thin line between taking out a mort- cières, les noms dans 2007). gage and the search data that we en- les listes de mailing, l’histoire des accès web The digital footprint is analysed ter into a browser when looking for et les images prises by a number of companies, including an apartment in the nearby district. dans les aéroports, etc. in the financial industry, so that ad- During a real-time online auction, vertising can be perfectly tailored to cookies win the game just a few milli- the needs of the potential customer. seconds after the completed purcha- The advert is expressly placed at eye se. Anyone can know who the person level, and any data gathered is added is, the only difference being that he Aujourd’hui tout un or she has a name and number assig- chacun vit une double to the archive of the person browsing ned. Many companies collect data in vie. Dans le monde the website. There is no information réel, notre identité est about a data exchange centre. All order to sell it to other institutions. validée par le numéro such data allows advertisers to cus- Such data sets can be combined into de passeport, du permis tomise their message, and the digi- a full and detailed digital image. The de conduire, par le tal feedback they get helps them see Wall Street Journal published a study nom et le prénom, etc. if the strategy actually works. To a demonstrating that the Internet has Dans le monde virtuel, greater or lesser extent, this process become a place where the only anon- chacun opère au travers takes place at every website viewing. ymous piece of data is the person’s des marqueurs appelés real name (Madrigal, 2012). “biscuits” (cookies) qui (Madrigal, 2012). décrivent les habitudes If it is possible for a financial ins- sur le net et qui créent Control over own data titution to track our habits online, it son identité. An accidentally created online would be foolish to assume that we Si une institution profile can transform into something remain anonymous when using mo- financière peut tracer broader than originally intended by bile phones or televisions. Harmo- nos habitudes en ligne, the user. The bad news is that people nising off-line data with online data dans le cas des techno- (e.g. purchasing behaviours or the logies comme la TV ou rarely supervise which of their perso- price of our apartment) is particu- le téléphone mobile, nal data is collected and sold. In con- il est faux de dire que temporary times, every person lives larly noteworthy. Only the person’s nous restons anonymes. a double life. In the real world, they name and surname continue to be L’utilisateur en ligne have their identity validated by the anonymous: for example, in the di- d’un compte bancaire personal number (PESEL ), passport gital world, John Smith is referred to peut être facilement and driving licence number, first and as 1625455. The reminder of his in- identifié par l’adresse last name, etc. In the digital world, formation in the virtual world is real. IP de son ordinateur; everybody operates through specific Banks have access to such informa- une fois cette indenti- tion revealing Smith’s habits, favouri- fication réalisée, toute markers known as “cookies” descri- te things, favourite places and much l’activité en ligne peut bing their browsing habits and these être tracée. create identity (Madrigal, 2012). more (Madrigal, 2012). The financial world has a unique opportunity to Cookies allow data collectors to combine the real-world and online track a person without even knowing

BIG DATA IN FINANCE: ETHICAL CHALLENGES 202 Nous sommes tous data. An online bank account user can activity but also by the different tools témoins de la révolu- be easily identified by the IP address and organisations processing their tion virtuelle. Internet of his or her computer upon login; data. The time of online anonymity est la plus grande once identified, their entire online is now over. We are on the verge of a source de l’information activity can be successfully tracked. new era in which everybody has their libre, elle nourrit le Big Data. Toutefois rien Various apps used in social networks own digital profile which precisely n’est gratuit. Le prix à offer banks an ideal opportunity to reflects their behaviours. Self-moni- payer pour l’utilisation collect and analyse customer’s perso- toring of this profile is key if users de cette information est nal data; and the customer has con- wish to safeguard their own personal très élevé: c’est notre sented to it, often unknowingly when data. Privacy is of an essential value sphère privée. Une fois signing some bank’s regulation. It is for most people; research has repea- en ligne, les données very rare that a customer will read tedly demonstrated that the public commencent leur vie and understand such a standardised does not have sufficient control over propre. Les facteurs de and brief regulation. Most simply “ac- the information it generates. Therefo- risque, mais aussi de profit augmentent en cept terms and conditions” without re, to providing adequate protection conséquence. reading them. Given that new tech- of privacy in the online world is cru- nologies are anything but helpful in cial. Bien que les usagers protecting privacy, it is essential that Both the research carried out for d’internet reconnaissent privacy is safeguarded as much as in his study and the results published l’immense progrès qu’il the real world. The ethical standards by Eurobarometer depict a user who, constitue, ils com- surrounding financial institutions’ although recognizing the immense mencent à se préoccu- exploitation of digital data should be per de leurs données et benefits of the progress of the Inter- clearly set out. This would delineate veulent protéger leur net, begins to express concern about sphère privée. Selon a boundary which banks could never their data and wishes to protect their une étude de l’UE, 70% overstep. privacy. According to a study con- des Européens ont peur ducted in the EU, 70% of Europeans que leurs données ne New era, new express concerns over data abuse. conduisent à des abus. challenges They fear that different organisa- Alors que 74% des tions may share this data with other Européens pense que We are all witnessing a virtual re- institutions without their consent. la publication des don- volution. The Internet is the largest nées personnelles fait source of free information that builds Many Internet users, especially the partie de vie moderne, up Big Data resources. However, younger generation, are not aware of 72% des utilisateurs nothing is for free. The price that we privacy policies when signing up to d’internet craignent que pay for the use of this information is social networks. When browsing the ce dernier collecte trop extremely high: it is our privacy. Data Internet, the public is also unaware de données privées. Ils that goes online takes on a life of its that the data on their search results ont l’impression de ne ow. Consequently, the profit and risk can be used by online advertisers. To pas pouvoir contrôler control that, the privacy policy pur- autant qu’ils le vou- factor increases. In the times of Big sued by website administrators must draient cette informa- Data, every user leaves their online tion. tracks when browsing the web: it is be laid down in the form of a clear called “a digital shadow.” Such a sha- and simple message. While 74% of dow is not only created by the user’s Europeans believe that the disclosure

CHANGING FRONTIERS OF ETHICS IN FINANCE 203 of personal information is becoming data is not an issue (it started back an inextricable feature of modern life, in the 1970s); the challenge is to as many as 72% of Internet users fear grasp the opportunities arising from that they provide too much private the analysis of this data and, con- information. They feel that they are sequently, to protect privacy. Until not able to control this information now, mankind has unconsciously ge- as much as they would like (Euro- nerated enormous amounts of data. pean Commission, 2011, pp. 1-3). Along with the advancement of tech- This state of affairs does not only nology, there are new opportunities provoke anxiety among the public, to reap the benefits of the Internet, Le comportement but also erodes confidence in Inter- allowing us to draw specific and detai- éthique est impor- net services, consequently preventing led conclusions based on the massive tant pour inspirer la companies from fully benefiting from collection of processed data. Ethical confiance publique the opportunities afforded by Big conduct is essential in inspiring pu- et pour surmonter la réticence relative à Data analysis. In 2010, the European blic confidence and overcoming the l’analyse des données. Commission presented their strategy reluctance and concerns arising from Le Big Data ouvre to modify the relevant rules. In Ja- data analysis. In a contemporary de nouvelles pers- nuary 2012, they proposed a full re- world, information is king. Financial pectives, il peut être form (European Commission, 2012). institutions who are involved in the utile et constituer une Drawing up relevant provisions progress of Big Data solutions can percée dans l’évolution. continues, and the technological pro- obtain a very detailed picture of any Toutefois, pour cela, (probably unwitting) internet user, la société doit avoir le gress is unstoppable, thus creating thanks to the tracks they leave onli- sentiment de contrôler more and better opportunities, but ces processus. Dans un bringing with them greater risks. In ne. Big Data opens up new possibi- contexte de crainte, de order to maximize benefits and dimi- lities, can be a tool to serve people méconnaissance des nish risks, it is necessary to regulate and could become another evolu- droits et en essayant any unregulated matters as soon as tionary breakthrough. However, in de naviguer à l’aide possible, to promote ethical business order for this to happen the society de règles vagues, les and to reduce the abuse of the exis- should have a sense of control over institutions financières ting legal gaps. processes. When people are fearful, peuvent se heurter unaware of their rights and trying to à une résistance du navigate through a realm of vaguely public. Ethics as the key to success defined rules, financial institutions will meet with public resistance. We A big challenge faced by the world should reflect on the lengths these of finance will be to inform the public organisations will go to in order to of the use of the increasing volume obtain the most relevant information of information. Since the Internet’s and use it for their own gain. Data birth, there has been a continual ac- sharing is not the major problem cumulation of data. This practice is and the majority of the population not a novelty – it has kept pace with exposed to the Internet agree to that the development of the Internet. Cu- – it is the way in which this data is rrently, the production and storage of

BIG DATA IN FINANCE: ETHICAL CHALLENGES 204 used and manipulated by banks and analysis and processing, so that the Nous devrions réfléchir other institutions. Without the assu- users are fully aware of the existing davantage jusqu’où rance of adequate conditions of data processes and can decide to take any ces organisations sont utilization, Internet users will resist action that they deem appropriate. In prêtes à aller pour obte- customised information rather than the current situation in which the law nir l’information la plus pertinente et l’utiliser benefit from it. In order to exploit fails to provide such a framework, it dans leur propre intérêt the opportunities that Big Data analy- is imperative that financial institu- sis affords, it is necessary to ensure tions act reasonably and ethically in adequate legislation that covers data order not to erode public trust. •

References BAI (2013). BAI - Finacle Global European Comission (2012). Banking Innovation Awards 2013 Fi- Data protection reform: Frequently nalists Announced. Retrieved from asked questions. Retrieved from http://www.bai.org/globalinnova- http://europa.eu/rapid/press-release_ tions/index MEMO-12-41_en.htm?locale=fr Barclays (2013). Summary of IBM (2012). Analytics: The real- changes to our terms and conditions. world use of big data How innovative Retrieved from http://www.barclays. enterprises extract value from uncer- co.uk/ImportantInformation/Term- tain data. Retrieved from http://www- sandconditionsforPersonalcusto- 03.ibm.com/systems/hu/resources/ mers/P1242558103284 the_real_word_use_of_big_data Birst (2012). The Big Data Op- IDC (2007). The Diverse and Ex- portunity: Instrumenting Your Bu- ploding Digital Universe: An Updated siness for Competitive Advantage. Forecast of Worldwide Information Retrieved from http://tdwi.org/whi- Growth Through 2011. Retrieved tepapers/2012/11/the-big-data-op- from http://www.emc.com/collateral/ portunity-instrumenting-your-busi- analyst-reports/diverse-exploding- ness-for-competitive-advantage.aspx digital-universe.pdf BRE Bank (2013a). Regulamin Jeznach, K. (2013). Czy w epo- Promocji mOkazje w serwisie tran- ce Big Data klient banku moze czuc sakcyjnym mBanku. Retrieved from sie spokojny? Retrieved from http:// http://www.mbank.pl/download/ www.bankier.pl/wiadomosc/Czy-w- mokazje/regulamin-mOkazje-ST.pdf epoce-Big-Data-klient-banku-moze- czuc-sie-spokojny-2888087.html BRE Bank (2013b). Regulamin Promocji mOkazje na portalu Face- Kearns, G. (2011) The Ideas Eco- book. Retrieved from https://mokazje. nomy: Information. Retrieved from mbank.pl/_files/regulamin.pdf http://www.economist.com/events- conferences/americas/informa- European Comission (2011). Atti- tion-2011 tudes on Data Protection and Electronic Identity in the European Union. Retrie- Lucek (2013). Big Data, czyli ved from http://ec.europa.eu/public_ czego nie powiedział wiceprezes Alio- opinion/archives/ebs/ebs_359_en.pdf ra. Retrieved from http://prnews.

CHANGING FRONTIERS OF ETHICS IN FINANCE 205 pl/wiadomosci/big-data-czyli-cze- Samcik, M. (2013b). Big Data w go-nie-powiedzia-wiceprezes-alio- akcji. Bank informuje klientów: “be- ra-2764580.html dziemy handlowali waszymi danymi”. Retrieved from http://samcik.blox. Maciek (2013). Big Data, czyli pl/2013/06/Zaczelo-sie-Bank-poinfor- czego nie powiedział wiceprezes Alio- mowal-klientow-bedziemy.html ra. Retrieved from http://prnews. pl/wiadomosci/big-data-czyli-cze- Samcik, M. (2013c). mOkazje: go-nie-powiedzia-wiceprezes-alio- samo dobro, czy... dobry pomysł, by ra-2764580.html klient chodził na krótkiej smyczy? Retrieved from http://samcik.blox. Madrigal, A. (2012). I’m Being Fo- pl/2013/04/mOkazje-samo-dobro- llowed: How Google—and 104 Other czy-pomysl-by-klient-chodzil.html Companies—Are Tracking Me on the Web. Retrieved from http://www. Samcik, M. (2013d). Marzenia theatlantic.com/technology/archi- o bardzo Big Data, czyli... PKO BP ve/12/02/im-being-followed-how- strategicznie bierze sie za grillowanie. google-and-104-other-companies- Retrieved from http://samcik.blox. are-tracking-me-on-the-web/253758 pl/2013/04/Bardzo-bardzo-Big-Data- czyli-PKO-BP-strategicznie.html Manyika, et al. (2011). Big data: The next frontier for innovation, compe- Samcik, M. (2013e) Nowy gracz tition, and productivity. Retrieved from kusi: chcesz tansza pozyczke? Udostep- http://www.mckinsey.com/insights/ nij swój profil w Facebooku. Retrieved business_technology/big_data_the_ from http://samcik.blox.pl/2013/05/ next_frontier_for_innovation Nowy-gracz-kusi-chcesz-tansza-pozyczke-Udostepnij.html Merv, A. (2011). Big Data: It’s going mainstream, and it’s your next The Economist (2013). Ideas Eco- opportunity. Retrieved from http:// nomy: Finding Value in Big Data. Re- www.teradatamagazine.com/v11n01/ trieved from http://www.oracle.com/ Features/Big-Data us/technologies/big-data/finding-value-in-big-data-1991047.pdf Realista (2013). Big Data, czyli czego nie powiedział wiceprezes Alio- TVN CNBC (2013). Zmiany w ra. Retrieved from http://prnews. Zarzadzie Alior Banku. Retrieved from pl/wiadomosci/big-data-czyli-cze- http://www.tvncnbc.pl/zmiany-w- go-nie-powiedzia-wiceprezes-alio- zarzadzie-alior-banku,306356.html ra-2764580.html Vasset, D. (2012). Worldwi- Samcik, M. (2013). Barclays de Big Data Technology and Servi- przyznaje: „Jesienia zaczniemy sprze- ces 2012-2015 Forecast. Retrieved dawac dane o klientach”. Retrieved from http://download.microsoft. from http://wyborcza.biz/biznes/1, com/download/7/B/8/7B8AC938- 100896,14166424,Barclays_przyz- 2928-4B65-B1B3-0B523DDFCDC7/ naje___Jesienia_zaczniemy_sprze- IDC%20Report- Worldwide%20 dawac.html#ixzz2dZnNX5rE Big%20Data%20Technology%20 and%20Services.pdf

BIG DATA IN FINANCE: ETHICAL CHALLENGES 206 207 TThe Blockchain Revolution

Ethics & Trust in Finance Global edition 2016-2017

Finalist

Witold Gromala Is is a revolt? No, your Majesty, it solid objects that, unlike humans and Poland is a revolution. their ideas, are predictable and easy to Compliance & Ethics An exceptionally quiet and warm inspect. Advisor, Euroclear*, night – thought Louis seated in front Even though the night was calm Kraków of an old oak table covered with and very warm, anxiety hovered in dozens of gold coins. Recently, he had the air. Something was supposed not had much time to sit in silence to happen, something was lurking and immerse himself in studying his in the darkness waiting patiently to favourite objects: coins. It would be reveal its face. much easier to be a simple banker, he Then, the heavily-decorated sighed. The silence in the chamber doors flew open with a tumultuous was disturbed for a moment. His bang. The silver moon shone on the complaint was finally absorbed by red, frightened face of the figure the Persian carpet that lay proudly that had sneaked, unauthorized, on the old floor. Obviously, there into Louis’s private kingdom: “My were thoughts and worries running Lord…the Bastille demolished” – through the monarch’s head but he said the figure, who turned out to be * The views expressed did not pay much attention to them. the Duke of Rochefoucauld. herein are those of Problems are born out of thinking – he “C’est une révolte?”1 - Louis the author and do not thought. He could not understand necessarily reflect those people – those strange creatures 1 s this a revolt? No, Sire, it is a revolution – of the Organization he is the famous words that King Louis XVI and the affiliated to. were a real mystery to him. The world Duke of Rochefoucauld exchanged just after turns too fast – let’s focus on coins, the people of Paris took the Bastille.

THE BLOCKCHAIN REVOLUTION 208 asked – he was tired of those people manipulated and can only be and their ridiculous demands. Rebels sequentially updated. It contains a are just part of the way things are – record of all transactions that have he thought - I will not think about it ever been completed on it, creating Blockchain est-il une now, I will think about it tomorrow. a never-ending historical trail révolte mineure ou “Non, Sire, c’est une révolution” (Mougayar, 2016). s’agit-il d’une Grande – the Duke answered and silence The technology is based on a chain Révolution qui va followed… of ‘blocks’ where each block groups remodeler le monde together individual transactions once que nous connais- An unusual way to start an they have been validated. Each block sons ? Dans ce dernier intellectual discourse on blockchain, cas, est-ce qu’il y aura one could say. Two-hundred and is added to the chain through the un impact éthique ? twenty-seven years and 92 days after process of “mining” and, once added, Une telle révolution the famous fortress of Bastille was the transactions within the block are sera-t-elle éthique dans demolished I could not resist the considered valid. Since new blocks son essence même ? temptation to refer to that famous are confirmed based on the previous Quelles sont les préoc- conversation between Louis XVI block’s information, the more blocks cupations en termes de and the Duke of Rochefoucauld. that have been added to an existing respect de la réglemen- block, the more a transaction within tation et d’éthique que The analogy seemed compelling. suscite l’adoption de la Given that, we might ask ourselves: that block has received confirmation. nouvelle technologie ? Is blockchain a minor revolt or is In order to keep the ledger consistent, it a new Great Revolution set to any newly created block is broadcast reshape the world as we know it? across the network for everyone If the latter is the case, will there to see. be any ethical impact? Will such a Each successive block contains revolution be ethical in its essence? Le concept de chaîne a unique fingerprint (“hash”) of the What are the compliance and ethical de blocs est similaire à previous code, thus cryptography celui de base de don- concerns around the adoption of the (via hash codes) secures nées – il enregistre en technology? Whatever the answers the authentication of the transaction permanence les tran- to those questions, we should not source and eliminates the need for a sactions d’une façon underestimate the wind of change central intermediary (Mougayar, qui ne peut être effacée in the way that Louis XVI once did. 2015). Addresses and signatures ultérieurement ou ma- What we now might perceive as an are created with the use of private/ nipulée mais qui peut evolution, or as a mere revolt, might public key generation. They can only uniquement être mise à turn out to be a storm, a revolution jour séquentiellement. be produced by a private key holder redefining finance and/or ethics. La technologie est and be verified by anyone seeing basée sur une chaîne a public key, therefore only the de blocs dans laquelle How does blockchain private key holder is able to complete chaque bloc regroupe work? a transaction successfully. “It’s a bit l’ensemble des tran- The concept of blockchain is similar like your home address. You can sactions individuelles to that of a database – it permanently publish your home address publicly, une fois qu’elles ont été validées. Chaque bloc records transactions in a manner but that doesn’t give any information that cannot be later deleted or about what your home looks like on

CHANGING FRONTIERS OF ETHICS IN FINANCE 209 est ajouté à la chaîne à the inside. You’ll need your private the financial services industry. travers le processus de key to enter your private home, and Potentially, it could leave its « minage » qui permet since you have claimed that address fingerprint on almost all layers of de valider les transac- as yours, no one else can claim the the market, starting with capital tions à l’intérieur du same address as theirs.” (Mougayar, bloc. Afin de garantir la raising, through trading, clearing cohérence du registre, 2015). and settlement, ending with record- tout bloc nouvelle- keeping. ment créé est diffusé Wind of change This is already happening. sur tout le réseau de Blockchain technology NASDAQ – using Linq – enabled the façon à ce que chacun is definitely making headlines first-ever blockchain-documented puisse le voir. Chaque in newspapers covering many sectors: bloc successif contient private securities issuance (Nasdaq, une empreinte unique IT, music, healthcare, politics, 2015). More recently, in January (« hash ») du code law, and social life, to name just a 2017, SWIFT announced its précédent ; ainsi, few. The feeling of a breakthrough launch of a proof of concept to la cryptographie (à is almost tangible. Conferences, explore whether distributed ledger travers les codes hash) publications, new impressive ideas technology (DLT) can be used by garantit l’authentifica- and dozens of solemn phrases about banks to improve the reconciliation tion de la source de la blockchain are present in almost of their nostro databases in transaction et élimine every field. For those outside the real time, thus optimising their le besoin d’un intermé- diaire central. race, it might look as if blockchain global liquidity. (Ninety banks technology is a secret panacea for the representing more than 75% of world’s problems : hunger, economic SWIFT’s cross-border payment exclusion, environmental and traffic are authorised to participate in human exploitation, government this PoC (SWIFT, 2017)). In January abuse, democracy deficit and so on 2016, the Australian Stock Exchange La tempête de Block- (Meunier, 2017). Is that all? What announced that it was building chain est analysée is there for the financial world, if a blockchain as a replacement de près par les plus anything at all? importants acteurs for its current platform for the financiers et les insti- Those who try to keep up to clearing and settlement of trades tutions financières font date with blockchain news will (CryptoCoinsNews, 2016). des investissements soon realise that the blockchain These are only a few examples, considérable dans l’ex- storm is far from being unnoticed there are more and definitely more ploitation de la techno- by large financial players. UBS, BNP to come. The sector is sensing the logie pour leur propre Paribas, Santander, Société Générale, usage. Blockchain potential and constantly expanding peut potentiellement Euroclear and many other financial its knowledge of this ill-understood avoir un grand impact institutions have made significant technology. According to a Deloitte non seulement sur les investments in order to harness, report, 61% of senior executives secteurs spécialisés de rather than hinder, the technology – surveyed claimed to have broad l’industrie financière to use it for financial purposes or expert knowledge of DLT, 42% mais sur l’ensemble des (IBM, 2015). At the same time, believed it will disrupt their industry marchés. Une percée blockchain has the potential to and 55% of them said they will lose semble imminente, severely impact wide swathes of competitiveness if they don’t adopt

THE BLOCKCHAIN REVOLUTION 210 elle se produit déjà. it (Deloitte, 2017). The blockchain criminals involved in illicit activities Le secteur financier storm is so broad that some expect (pornography, money laundering, perçoit le potentiel et 2017 to be blockchain’s make or cyber-attacks, piracy etc.). It turned approfondit constam- break year. The time has come, they out to be a way of conducting a brand ment sa connaissance st de cette technologie argue for the numerous proofs-of- new type of 21 century war: a war mal comprise. Cepen- concept to finally be implemented of disinformation. We now lead two dant, au-delà de la (Piscini, 2017). lives, the physical one and the one compréhension de la This is all fair and good. where our virtual equivalent leaves technologie elle-même, But, beyond understanding the its trace online. This trace can be ne devrions-nous pas followed. The information might be aussi nous intéresser technology itself, should be not also understand the potential compliance collected for a number of purposes aux défis potentiels en (both political and commercial) and termes de réglementa- and ethical challenges it raises? tion et d’éthique qu’elle we might not have any idea that it soulève ? The Internet of Value is happening. This Internet is the Internet of Information, information It began with the Internet and it that is spread across the Web, was good. Great expectations were uncontrolled by data subjects. It vested in the technology that, it was definitely has some value but is not hoped, would cure many social and value itself. The technology that is La technologie a sus- economic ills. We realised quickly sometimes referred to as the Second cité de grands espoirs that, even though the Internet Era of the Internet: distributed car elle était censée turned out to be a great means of remédier à de nom- ledger technology (DLT) or its sub- communication, it not only failed breux problèmes éco- category, blockchain (terms often nomiques et sociaux. to eradicate serious global problems, used interchangeably), is supposed Cependant, nous nous but significantly contributed to to address the aforementioned issues sommes rapidement the development of other highly – it is said to transform the Internet rendu compte que, undesirable phenomena. of Information into the Internet of bien qu’internet se It was meant to enable the social Value (Tapscott, A., 2016). soit avéré un excellent moyen de commu- and economic inclusion of billions nication, il n’a non of people, but that remained a pipe Emergence of the seulement pas permis dream. The Internet had a great technology d’éradiquer de graves impact on all aspects of life – it The most fundamental problem problèmes mondiaux has changed our perception of the with the Internet of Information mais il a contribué de economy and finance – yet the is connected to the issue of so- manière considérable technology did not make financial au développement called “double-spending”. If one d’autres phénomènes intermediaries evaporate. Instead, it posts a photo on the Web or sends hautement indési- was consumed by them and utilised it to someone, one is not deprived of rables. for their own purposes (e.g. Internet the ownership of it. Once a photo is banking). posted on the Internet anyone can The Internet triggered a lot of download it – the same photo can be problems around privacy rights. It sent an infinite number of times. The also became a weapon in the hands of question is, how we can we get back to

CHANGING FRONTIERS OF ETHICS IN FINANCE 211 Internet a créé beau- the old good days, where the physical cryptocurrency is being sent to a new coup de problèmes transfer of assets (such as photos or address. All network participants can autour des droits à la CDs) meant that one relinquished verify that transactions are legitimate vie privée. Il est aussi ownership. In this case, that would since addresses associated with devenu une arme pour les criminels impliqués be the ownership of a digital asset. unspent bitcoins can be identified dans des activités illi- This issue was identified primarily in a stored ledger or validated by cites et s’est avéré être in relation to digital money. If one the entire network. That ledger (a un moyen de mener un is supposed to send digital money set of accounts) is itself a database tout nouveau genre de via the network, both the intended spread across multiple sites (a guerre au 21e siècle : recipient and remaining web users shared database) – and it is called les guerres de désinfor- need to be sure he/she actually owns blockchain. The bitcoin blockchain mation. La technologie the money sent (Nielsen, 2013). is operated by a decentralised du registre distribué (DLT) ou sa sous- The concept of blockchain is a authority not a centralized authority catégorie blockchain solution to that problem. It follows as in the case of government–issued (termes souvent uti- the idea first proposed in 2009 currencies. The participants transact lisés de façon inter- in a white paper by the mysterious with each other directly without the changeable) est parfois Satoshi Nakamoto (a programmer involvement of any intermediary. vue comme la seconde or a group of programmers), whose Physical bitcoins do not exist – ère d’internet. Elle est true identity has never been revealed. they exist only virtually as balances censée répondre aux associated with public and private préoccupations sus- Nakamoto’s idea constitutes mentionnées et ainsi an underlying scheme for Bitcoin keys (Koeppl & Kronick, 2017). transformer l’internet – a cryptocurrency and a payment Bitcoin’s early history is de l’information en system based on DLT. The currency shrouded in controversies (Bitstamp l’internet de la valeur. itself – Bitcoin – takes the form of – $5 million loss, Silk Route – an address that is a sequence of $200 million of anonymous online bits that can be stored in a “wallet” drug sales using bitcoins, Hong (a computer programme). Unlike Kong’s Mycoin and a fraud of at Le problème le plus government-issued money that least $21.8 million after the bitcoin fondamental avec can be inflated at will, the supply trading platform suddenly collapsed l’internet de l’informa- of Bitcoin is mathematically linked (Cryptocity, 2015)). Exchange tion est lié au problème to twenty one million bitcoins and heists, stolen wallets, mysterious dit de la « double that can never be changed. A bitcoin bankruptcies and missing CEOs dépense ». Si une per- holder is anonymous unless the eroded the image of the technology sonne doit envoyer de l’argent numérique via Bitcoin address can be associated with and quickly many ethical concerns le réseau, le destina- a wallet and a wallet with a person. arose. The question emerged – is a taire visé et les autres Bitcoin transactions take place on technology that is surrounded by internautes doivent the bitcoin network that is open scandals regarding its illegal and être sûrs qu’il/elle to everyone (unrestricted distributed unethical use in its early stages able est effectivement en ledger). In order to perform to address the ethical issues it was possession de l’argent a transaction, a bitcoin owner sends aimed to eliminate? Is the medicine envoyé. Le concept de a message along with a signature more dangerous than the disease chaîne de blocs est une over the network specifying that itself?

THE BLOCKCHAIN REVOLUTION 212 solution à ce problème. Negative publicity and conceptual back the control over their lives Tous les participants confusion laid the ground for people might be possible now as DLT could au réseau peuvent to begin to refer to the underlying help to reinvent the government vérifier que les tran- technology of bitcoin – blockchain (European Parliament, 2016). sactions sont légitimes étant donné que les – as the real innovation coming Further, two big ethical nightmares adresses associées aux out of the bitcoin phenomenon of the Internet of Information bitcoins non dépensés (Allcoin, 2017). It has been realised might be finally addressed. Firstly, peuvent être identifiées that even though bitcoin might blockchain could enable citizens dans un registre ou not revolutionise the world, its to own and manage their data and validées par l’ensemble underlying technology can. protect privacy. In this regard, data du réseau. would be treated as an asset class Ethical application and be given back to data subjects. of DLT Secondly, the technology has the Distributed ledger technology potential to finally enable an author Les débuts de l’histoire might be an impressive catalyst for a to command fair compensation du bitcoin sont contro- whole range of applications that will for creative work and to protect versés. La question promote ethics or address unethical their intellectual property rights suivante s’est posée : activities both in the financial sector (Tapscott, D., 2016). Imagine a song est-ce qu’une techno- that has a smart contract attached logie, dont les débuts and beyond. This technology could to it and manages itself. Each time sont marqués par des enable the inclusion of billions of scandales relatifs à people into the economy, especially the song is used for a commercial des usages illégaux et those who, for whatever reason, purpose, viewed or downloaded as contraires à l’éthique, don’t have a bank account (e.g. a ring tone, it executes a contract est capable de résoudre widespread use of mobile phones for thanks to protocols encoded in it. les problèmes éthiques payments in Africa partially replacing This is not fiction, this is already qu’elle était censée the need for having a bank account). happening (Imogen Heap – a British éliminer ? Le remède singer has already put her music est-il plus dangereux The blockchain might create a true que le mail lui -même ? sharing economy by providing on a blockchain (Mycelia, 2017)). La publicité négative et lending rooms (participants lending As the blockchain technology la confusion concep- and borrowing among themselves removes the problem of double- tuelle ont conduit les without any middlemen) that could spending, digital assets such as gens à considérer le help address the problem of inequality music can now be traded on the blockchain qu’utilise le and unfair distribution of wealth. The secondary market as old CDs used to bitcoin, comme la véri- significant cost reduction (potential be – without the risk of being copied table innovation issue an infinite number of times. du phénomène bitcoin. to reduce infrastructure cost by up to En effet, on s’est rendu $ 20 billion a year (IBM, 2015)) may Another possible application compte que s’il n’était once and for all end the remittance is record-keeping. It has been pas certain que le rip-off (transaction costs ranging estimated that approximately 70% of bitcoin révolutionne le from 0% to 3%). The forgotten people worldwide who hold a piece monde, la technologie idealistic dreams of the direct of land do not have a valid title to it sous-jacente, était bien democracy where voters supervise (Tapscott, A., 2016). This is a serious capable de le faire. their representatives and are given economic blocking factor. Those

CHANGING FRONTIERS OF ETHICS IN FINANCE 213 La technologie DLT “squatters” cannot borrow money to form provenance and verify pourrait être un against their invalid titles, which authenticity (Everledger, 2017). catalyseur impression- slows down the economy as a whole. All the aforementioned potential nant pour toute une Blockchain might solve this issue applications of DLT might enable série d’applications qui contribueront à thanks to immutable records that or at least improve transparency, promouvoir l’éthique cannot be tampered with by any ethical trade, and contribute to a ou à résoudre des central government or individual. healthy economy based on ethical problèmes liés à des Under the new technology, there foundations. activités contraires could be a full record of ownership à l’éthique dans le starting with the point in time when Ethical Revolution? secteur financier et an asset was “issued” to the network. au-delà. La technolo- William Mougayar in his 2016 This could finally enable fair trade gie pourrait permettre book: The business blockchain: l’inclusion de milliards as there is an impact on the supply promise, practice, and application of de personnes dans chain. Each blockchain user would the next internet technology states l’économie, en parti- have the possibility to verify whether that blockchain: “Is making us culier ceux qui, pour a given product was produced in rethink the old ways of creating une raison quelconque, ethical conditions, whether workers transactions, storing data, and n’ont pas de compte were fairly compensated for their moving assets, and that’s only bancaire. Blockchain- work and who will be a beneficial pourrait créer une the beginning. Blockchain cannot be owner of proceeds from a transaction véritable économie du described just as a revolution. It is a partage et contribuer à (making sure they don’t support tsunami-like phenomenon, slowly résoudre le problème individuals or governments violating advancing and gradually enveloping de l’inégalité et de la human rights, laws, destroying the everything along its way by the force répartition inéquitable environment). Furthermore, easier of its progression… Blockchains des richesses. En outre, traceability of funds might constitute are enormous catalysts for change deux grands cauche- a serious obstacle for criminal that affect governance, ways of life, mars éthiques de l’in- activities such as fraud or money ternet de l’information traditional corporate models, society pourraient finalement laundering. and global institutions” (p. XXI). This être éliminés. Premiè- All indicated ethical applications change entails many ethical issues rement, Blockchain- of blockchain are not abstract that should be addressed or at least pourrait permettre aux concepts, some of them are already discussed before the technology citoyens de détenir et operational such as Everledger is fully adopted. Is blockchain a de gérer leurs données – a global, digital ledger that revolution? It might be the case tout en protégeant leur vie privée. Deuxième- tracks and protects valuable though that is yet to be seen. ment, la technologie assets (e.g. diamonds) throughout We might further ask ourselves peut potentiellement their lifetime journey. An asset’s whether this potential revolution permettre enfin à un defining characteristics, history, is ethical. We might even broaden auteur de recevoir and ownership are collected the scope of the question and ask une rémunération to create a permanent record whether any revolution – especially équitable pour son on the blockchain. This digital a technological one – has ethics travail créatif et de thumbprint is then used by various built into its DNA. We should not protéger ses droits de stakeholders across a supply chain forget that each revolution has also

THE BLOCKCHAIN REVOLUTION 214 propriété intellectuelle. an unethical face – the face of those and the buy-in needed to establish Une autre application who have been left behind, the face cooperation at the scale required. possible est la tenue of those who will not embrace the On the other hand, if no ethical de registres. Selon les technology and so will miss the framework is created, a system estimations, environ innovation train, the face of winners designed to counteract power 70% des personnes dans le monde qui and losers. imbalances can be used to generate possèdent une parcelle Ethics stands behind the values them. This way “blockchain can de terre n’ont pas de for which blockchain technology support a social system that is, in titre valable. was created: depriving centrally- fact, much worse than what we have own intermediaries of control over today, one in which power abuses individuals’ lives. In its essence, will become more prevalent and a lot the values behind blockchain harder to address” (Bulkin, 2016). are not that much different from The revolution will certainly do De telles applications those fought for during the Great away with some financial institutions éthiques de Block- French Revolution: Liberté-Égalité- in the as we understand them today. chainne sont pas des Fraternité. A revolution, however, The blockchain tsunami might concepts abstraits, can have a will of its own. It can live leave behind a brand new world certaines d’entre elles its life in a total contradiction to and of finance – it might be like a fire étant déjà opération- separation from morally beautiful consuming everything on its path nelles. Toutes les applications potentielles virtues that were supposed to – it might leave only ash or be the susmentionnées de la underpin it. Blockchain was designed new beginning – the fresh rich soil technologie du registre to enable the economic inclusion of for plants to blossom. We might as distribué (DLT) those who are economically weak well end up seeing “all the vices of pourraient permettre and it is supposed to be the sword the Old World peering from the new ou au moins amélio- pointed at institutions that for ages garments;[singing] a new song, but rer la transparence, le benefited from the fact that they it [will end] ever in the old refrain: commerce équitable et provided trust to the market. This Bread, meat, gold, and blood!” contribuer à une éco- 2 nomie saine fondée sur weapon as any weapon, however, can (Krasiński, 1835) . des bases éthiques. easily be misused. Rather than the predicted inclusion, we might Trojan horse? witness the exclusion of those who In April 2016 at Metro Expo do not understand the technology the Vice President of Sberbank and are left behind. (Andrey Sharov), Russia’s biggest Blockchain est-elle Blockchain has the potential bank by assets, opined that the une révolution ? Cela to be a great force for societal advent and spread of blockchain pourrait être le cas, transformation. It might fix some technology will see banks disappear quoique cela reste serious problems in modern society: by 2026 (CryptoCoinsNews, 2016a). à voir. Nous pour- atrocities, rigged elections, decision- It appears to be a great paradox. The rions, en outre, nous making stalemates, governance crisis industry whose entire existence is demander si l’éthique (Bulkin, 2016). On one hand, the est inscrite dans son 2 “The Undivine Comedy”: the Count to economy based on DLT can offer ADN. L’éthique sous- Pancras – reflection on revolutionists beha- unprecedented levels of efficiency viour.

CHANGING FRONTIERS OF ETHICS IN FINANCE 215 tend les valeurs pour jeopardised by the adoption of the providers – such as the notary lesquelles la chaîne de technology is, at the same time, function – as the involvement blocs a été créée : pri- investing heavily in its development. of regulated entities will still be ver les intermédiaires This does not relate purely to retail required at least in the current centraux de tout regulatory landscape (ECB, 2016). contrôle sur la vie des banking. The industry that is said individus. Les valeurs to be greatly impacted is post-trade This, however, does not apply to derrière Blockchain ne securities clearing and settlement reporting obligations as blockchain sont essentiellement (a set of services where the buyer technology could facilitate the pas très différentes and the seller compare trade details, collection, consolidation, and de celles défendues approve the transaction, change sharing of data for reporting, risk pendant la Grande records of ownership and arrange management, and supervisory Révolution française : purposes. With DLT one could easily Liberté-Egalité-Frater- for the transfer of securities and cash). imagine the world where regulators nité. Une révolution, In April 2016 the European Central cependant, peut avoir Bank issued an occasional paper have real-time access to all relevant une volonté propre. in which it stated that DLT has the records. Nous ne devrions pas potential to speed up the settlement oublier que chaque and clearing of financial assets Spirit of Laws révolution a également (bonds, equities, etc.), eliminating Retail banking, post-trade services un visage non éthique the liquidity and credit risk. It has – le visage des laissés and record-keeping are only a sample pour compte, le visage been concluded that almost all post- of financial services impacted by the de ceux qui n’adopte- trade functions will be impacted by possible adoption of the blockchain ront pas la technologie, the adoption of the technology: a) technology. What is the source of this le visage des gagnants custody – due to smart contracts paradox? Is the technology a Trojan et des perdants. and self-executing algorithms that horse or is the blockchain revolution La banque de détail, will update accounts automatically; simply like Saturn: it devours its les services post-tran- b) settlement – as trading and own children (G. Büchner)? The sactionnels et la tenue said paradox brings with it serious de registres sont des clearing will occur instantaneously exemples de services (trading platforms to be connected conflicts of interests – it is inadvisable financiers sur lesquels to distributed ledgers); c) clearing to expect a professional to support l’adoption éventuelle was said to still be required for some the development of the technology de cette technologie derivative transactions, however that might push him off the cliff. The de Blockchain a un netting and margin calls will become financial institutions face an ethical impact. L’industrie automatic; d) safe-keeping will be dilemma here. They should be aware dont l’existence même facilitated by recording of ownership of this and act very cautiously. est menacée par l’adop- Distorting the technology to keep tion de la technologie in distributed ledgers; e) ancillary investit en même banking services are also to be a dominant position in the market temps massivement impacted as, for instance, the need would mean eroding its ethical roots. dans son développe- for collateral will be dramatically The fact that blockchain ment. Comment expli- reduced and its availability on the technology faces serious governance, quer ce paradoxe ? La market will increase. Nevertheless, regulatory and legal issues is no technologie est-elle un some functions will still need to be surprise. In January 2017 ESMA, cheval de Troie ou la performed by post-trade services in its report pertaining to DLT

THE BLOCKCHAIN REVOLUTION 216 révolution de Block- and securities market, stated that: proxy voting, DAOs3), constitutional chain est-elle simple- “at this stage, [it] believes that it law (e-voting), banking law (both ment comme Saturne : is premature to fully appreciate private and public), patent law – all elle dévore ses propres the changes that the technology those and possibly many others are enfants ? Ce paradoxe s’accompagne could bring and the regulatory open to blockchain’s assault. de graves conflits response that may be needed, The law in its essence is d’intérêts – il n’est pas given that the technology is still derivative vis-à-vis the reality. It is recommandé d’attendre evolving and practical applications being created after certain processes, d’un professionnel de are limited both in number occurrences, phenomenon emerged soutenir le développe- and scope”(ESMA, 2017). It is – it is not created in abstracto. This ment de la technologie worth noting that regulators qui pourrait le pousser is where ethics might come into and legislators all over the world en bas du précipice. play. The technology is hard to Les institutions finan- are starting to recognise the impact capture by legislation, it sneaks, it cières sont confrontées that DLT is supposed to have on winds like a wild river and when you à un dilemme éthique the regulatory and legal landscape. think you have already seized it, it ici. Elles devraient être Laws, recommendations, opinions, turns out to have flooded the brand conscientes de cela et interpretations are issued almost each new area you have not expected agir avec beaucoup de day in all parts of the word. These it to occupy. The unregulated prudence. Déformer relate mainly to digital currency la technologie pour space is huge. Is this space where but are expected to change in the conserver une position things that are not prohibited, dominante sur le near future (Hawaii’s Blockchain actually perpetuating a problem? marché signifierait une Exploration Bill (Cryptogolds, 2017), Are activities that are not explicitly érosion de ses fonde- Poland’s Financial Ombudsman against the letter of law ethical in ments éthiques. calling for Bitcoin Exchange the eyes of the public? The ethics Regulation (PolskieRadio.pl, 2017), of blockchain appears to be that the BitLicense rules by NYSDFS (Morgan hidden spirit of the law has not yet Lewis, 2015) – these are only a few arrived. However, this does not mean examples). it is not already applicable. A set of The impact that DLT might have ethical norms might be of great value Le fait que la technolo- on the legal system is colossal. As for legal systems based on Roman gie de Blockchain soit the technology storms all aspects Law, especially in continental Europe confrontée à de sérieux of life it will besiege all fields of where legal norms are extracted from problèmes de gouver- law and change them. Intellectual legal texts: this is where ethics has the nance, de réglementa- tion et juridiques n’est property law (fair compensation final word. The lack of harmonisation pas une surprise. Les for the intellectual property), and standardisation is blockchain’s régulateurs et législa- property law (land registers), biggest challenge. The financial teurs du monde entier inheritance law (smart contracts), industry should make an effort to commencent à recon- data protection law, criminal law create common business rules and naître l’impact que la (AML, commerce crime, fraud), sound governance arrangements technologie du registre administrative law (record-keeping), distribué (DLT) est 3 DAO – decentralized autonomous organi- contract law (smart contracts), censée avoir sur le zation – an automated company operated by securities law, corporate law (IPOs, hard-coded rules enforced on a blockchain.

CHANGING FRONTIERS OF ETHICS IN FINANCE 217 paysage réglementaire based on ethics, even with the over the scalability of the technology et juridique. absence of laws and regulations (can it be replicated on a wider La technologie me se governing the technology. scale?) and over its interoperability laisse pas facilement with existing systems (Delivorias, circonscrire par la Ethical Blockchain? 2016). Due to the public nature of législation, en consé- quence un immense It is time to pose the a ledger and permanent recording, espace non régulé crucial question: is DLT ethical some personal data protection issues subsiste. Est-ce que cet in its essence? The answer appears to might arise, one of them being the espace n’est pas à la be obvious, a technology cannot be right to be forgotten. Furthermore, source du problème ? labelled as being ethical or unethical there is a potential risk of fraud Les activités, qui ne – it is only a tool and the tool is only as private/public keys, when stolen, sont pas ouvertement might be used fraudulently to record contraires à la lettre as ethical as the people who use fictitious transactions. de la loi, sont-elles it. Some claim blockchain could éthiques aux yeux du have prevented the DNS’s denial of A well-known social fact public ? L’industrie service attack (ConsenSys, 2016), is that people are much more financière devrait Soros leaks (CoinDesk, 2017), the likely to commit violence against s’efforcer de créer des Wells Fargo scam (Cointelegraph, victims they can’t see. Blockchain règles communes et 2016) or Lehman Brothers collapse is an environment where anonymity des accords de gou- is prevalent and physical presence vernance sains, basés (Finance Magnates, 2016), others sur l’éthique, même en would rather see the technology as cannot be felt. This might lead to a l’absence de lois et de the new Manhattan Project. We have whole range of unethical behaviour réglementations régis- yet to see who is right. However, at such as child pornography, weapons sant la technologie. this very early stage, some concerns trade, ransom viruses or attacks need to be raised. on the freedom of speech (Bulkin, DLT might consume an 2016). This behaviour might unsustainable amount of energy, be encouraged by the freedom which is mainly a problem with to use value without restrictions unrestricted distributed ledgers by centralised political powers. The Si les problèmes relatifs such as the bitcoin blockchain (and technology might make transactions au comportement po- the computing power required virtually impossible to trace or tentiellement contraire for validating transactions). The control, which can motivate people à l’éthique ne sont pas technology might become a job to abandon essential ethical norms – traités suffisamment killer; it might be vulnerable to particularly if there is little or no risk tôt, la technologie of being found out. du registre distribué attacks as the protocols are all based (DLT) pourrait devenir on the same methodology; it might If concerns regarding un espace idéal pour carry operational risks (software potentially unethical behaviour le déploiement d’abus can have bugs). The consensus are not addressed early enough, généralisés. Comment on changes to the network/codes DLT might become a perfect space résoudre ce problème ? might be difficult to achieve and the for widespread abuse. How can we L’une des réponses management of those codes might solve this issue? One of the possible possibles passe par les give rise to potential conflicts of answers is through the tools offered outils offerts par la interest. There is a question mark by the technology itself. The unified

THE BLOCKCHAIN REVOLUTION 218 technologie elle-même. set of ethical principles/rules might gold initiative). Segmentation Un ensemble unifié be created and voluntarily adopted appears to be inevitable with some de principes/règles by organisations that operate on a kind of a governing body in the heart éthiques pourrait être blockchain (Bulkin, 2016). Those of a blockchain network (a restricted créé et volontairement principles could possibly take the adopté par les organi- ledger) at least at the first stage of the sations qui opèrent sur form of smart contracts, embedded blockchain storm. There is a great une chaîne de blocs. into the network. If this were to risk that the DLT revolution might Ces principes pour- happen, ethical rules would be devour its own children, therefore raient éventuellement broadcast across blockchains and we financial institutions should tackle prendre la forme de would witness the unprecedented the ethical aspects of this revolution contrats intelligents, spread of ethics across the world. carefully – otherwise, they might intégrés dans le réseau. The blockchain revolution would unintentionally contribute to their Si cela se produisait, convert itself into the revolution of les règles éthiques own collapse as Louis XVI once did. ethics. seraient propagées à * * * travers les chaînes de The wind of change is blocs et nous assiste- coming. However, the explosion It was a sunny day in January rions à une diffusion of enthusiasm might soon need to 1793. Louis was standing sans précédent de be tempered. Is the technology a surrounded by the people of Paris. l’éthique à travers le new Great Revolution? Personally, He looked, surprised, at the shining monde. La révolution I would say that it is, bearing in blade that was supposed to end his, de Blockchain se trans- formerait en révolution mind all obstacles following from a monarch’s, life. It was familiar to de l’éthique. the adoption of DLT. We could him. What an irony – Louis thought legitimately assume there will not – I helped to construct it…4 • be one master blockchain but rather an invasion of separate blockchains 4 Louis XVI was guillotined on the 21st of January 1793. Legend says the king impro- gradually flooding different sectors ved the project of a guillotine submitted by (e.g. Euroclear & Paxos bankchain A. Louis (Cisek, 2006).

CHANGING FRONTIERS OF ETHICS IN FINANCE 219 References Allcoin (2017). What’s in a Cryptocity (2015). 5 Bitcoin Name? From Bitcoin to Blockchain to Scandals You Need To Know. Retrieved Distributed Ledgers. Retrieved from from https://cryptocity.wordpress. https://www.allcoin.com/Articles/ com/2015/05/23/5-bitcoin-scandals- NoticeDetail/268/ you-need-to-know/ Boucher, P. (2017). How CryptoCoinsNews (2016). blockchain technology could change Australian Stock Exchange our lives. Retrieved from http:// Confirms Upcoming Blockchain www.europarl.europa.eu/RegData/ For Settlements. Retrieved from etudes/IDAN/2017/581948/EPRS_ https://www.cryptocoinsnews. IDA(2017)581948_EN.pdf com/australian-stock-exchange- Bulkin, A. (2016). Elephant in confirms-upcoming-blockchain-for- the room: ethical blockchains and the settlements/ conundrum of governance. Retrieved from https://blog.coinfund.io/ CryptoCoinsNews (2016a). elephant-in-the-room-ethical- Blockchain Tech Will Make Banks blockchains-and-the-conundrum- Disappear in 10 Years, Says VP of of-governance-a11d0f9c4c56#. Russia’s Biggest Bank. Retrieved from wrtdjpeed http://www.cryptocoinsnews.com/ Cisek, A.M. (2006). Kłamstwo blockchain-tech-will-make-banks- Bastylii, Gdańsk, FINNA, 6-11 disappear-10-years-says-vp-russias- CoinDesk (2017). Deutsche Bank biggest-bank/ Analyst: Blockchain Could Have Cryptogolds (2017). Hawaii’s Prevented Soros Leaks. Retrieved from Blockchain Exploration Bill is Moving http://www.coindesk.com/deutsche- Forward. Retrieved from http://www. bank-analyst-blockchain-could-have- coindesk.com/hawaiis-blockchain- prevented-soros-investment-leaks/ exploration-bill-moving-forward/ Cointelegraph (2016). Blockchain Delivorias, A. (2016). Distributed Could Have Prevented The Wells ledger technology and financial Fargo Scam. Retrieved from https:// markets. Retrieved from http:// cointelegraph.com/news/blockchain- www.europarl.europa.eu/RegData/ could-have-prevented-the-wells- fargo-scam etudes/BRIE/2016/593565/EPRS_ BRI(2016)593565_EN.pdf ConsenSys (2016). How the Blockchain Could Have Prevented the Deloitte (2017). Deloitte Survey: DNS’ Denial of Service Attack. Retrieved Blockchain Reaches Beyond Financial from https://media.consensys.net/ Services With Some Industries Moving how-the-blockchain-could-have- Faster. Retrieved from https://www2. prevented-the-dns-denial-of-service- deloitte.com/hr/en/pages/press/ attack-6e2d3f7930f6#.z7ptdmbci articles/blockchain-2017.html

THE BLOCKCHAIN REVOLUTION 220 EBA (2016). Opinion of the http://www.europarl.europa.eu/ European Banking Authority on the RegData/etudes/ATAG/2016/581918/ EU Commission’s proposal to bring EPRS_ATA(2016)581918_EN.pdf Virtual Currencies into the scope of Everledger (2017). Welcome to the Directive (EU) 2015/849 (4AMLD) digital vault of the future. Retrieved EBA-Op-2016-07. Retrieved from from https://www.everledger.io/ https://www.eba.europa.eu/ documents/10180/1547217/EBA+Op Finance Magnates (2016). inion+on+the+Commission%E2%80 CFTC Commissioner: Blockchain %99s+proposal+to+bring+virtual+cu Could’ve Prevented Run on Lehman rrency+entities+into+the+scope+of+4 Brothers. Retrieved from http:// AMLD www.financemagnates.com/ cryptocurrency/news/cftc- ECB (2016). Distributed ledger commissioner-blockchain-prevented- technologies in securities post-trading run-lehman-brothers/ – Revolution or evolution? Retrieved from: https://www.ecb.europa.eu/ FINRA (2017). Distributed Ledger pub/pdf/scpops/ecbop172.en.pdf Technology: Implications of Blockchain for the Securities Industry. Retrieved ENISA (2016). Distributed from https://www.finra.org/sites/ Ledger Technology & Cybersecurity. default/files/FINRA_Blockchain_ Improving information security in the Report.pdf financial sector. Retrieved from https:// www.enisa.europa.eu/publications/ FlowBTC (2015). How the blockchain-security Blockchain could have prevented the biggest corruption case in Brazil’s ESMA (2017). The Distributed history. Retrieved from http://flowbtc. Ledger Technology Applied to Securities net/research/CarWash_This.pdf Markets ESMA50-1121423017-285. Retrieved from https://www.esma. IBM (2015). Making Blockchain europa.eu/sites/default/files/library/ Real for Business. Retrieved dlt_report_-_esma50-1121423017- from https://x9.org/wp-content/ 285.pdf uploads/2016/02/Blockchain_FSS. pptx European Parliament (2016). REPORT on virtual currencies JCK (2016). What Is (2016/2007(INI)). Retrieved from Blockchain—and How Does It http://www.europarl.europa.eu/ Apply to Diamonds? Retrieved from sides/getDoc.do?pubRef=-//EP// http://www.jckonline.com/blogs/ NONSGML+REPORT+A8-2016- cutting-remarks/2016/10/21/what- 0168+0+DOC+PDF+V0//EN blockchain-and-how-does-it-apply- diamonds European Parliament (2016a). What if blockchain technology Knowledge@Wharton (2017). revolutionised voting. Retrieved from Is Blockchain the Next Great Hope

CHANGING FRONTIERS OF ETHICS IN FINANCE 221 — or Hype? Retrieved from http:// Mougayar, W. (2016). The knowledge.wharton.upenn.edu/ Business Blockchain: Promise, Practice, article/blockchain-next-great-hope- and Application of the Next Internet hype/ Technology. Hoboken, New Jersey: John Wiley & Sons, XXI-6 Koeppl, T. & Kronick, J. (2017). Blockchain Technology – What’s Mougayar, W. (2015). in Store for Canada’s Economy and Understanding the blockchain. Financial Markets? Retrieved from Retrieved from https://www.oreilly. https://www.cdhowe.org/sites/ com/ideas/understanding-the- default/files/attachments/research_ blockchain papers/mixed/Commentary_468_0. Mycelia (2017). Imogen Heap: pdf Decentralising the music industry with Lewis, A. (2015). A gentle blockchain. Retrieved from http:// introduction to digital tokens. myceliaformusic.org/2016/05/14/ Retrieved from https://bitsonblocks. imogen-heap-decentralising-the- net/2015/09/28/a-gentle- music-industry-with-blockchain/ introduction-to-digital-tokens/ Nasdaq (2015). Nasdaq Linq Meunier, S. (2017). Do You Believe Enables First-Ever Private Securities in Blockchain Magic? Retrieved from Issuance Documented With Blockchain http://www.coindesk.com/believe- Technology. Retrieved from http:// blockchain-magic/ ir.nasdaq.com/releasedetail. cfm?releaseid=948326 Morgan Lewis (2015). NYDFS Releases Final Rules for Licensing Nielsen, M. (2013). How the Bitcoin Virtual Currency Businesses in New protocol actually works. Retrieved York. Retrieved from https://www. from http://www.michaelnielsen. morganlewis.com/pubs/nydfs- org/ddi/how-the-bitcoin-protocol- releases-final-rules-for-licensing- actually-works/ virtual-currency-businesses-in-new- Piscini, E. (2017). Why 2017 is york Blockchain’s Make or Break Year. Morgan Stanley (2016). Global Retrieved from http://www.coindesk. Insight: Blockchain in Banking: com/why-2017-is-blockchains-make- Disruptive Threat or Tool? Retrieved or-break-year/ from http://www.the-blockchain. PolskieRadio.pl (2017). com/docs/Morgan-Stanley- Rzecznik Finansowy apeluje blockchain-report.pdf o uregulowanie finansowych Mougayar, W. (2016). The technologii. Retrieved from http:// Blockchain is the new Google. www.polskieradio.pl/78/1227/ Retrieved from https://techcrunch. Artykul/1727516,Rzecznik- com/2016/05/11/the-blockchain-is- Finansowy-apeluje-o-uregulowanie- the-new-google/ finansowych-technologii

THE BLOCKCHAIN REVOLUTION 222 SWIFT (2017). SWIFT explores Taylor, S. (2015). Barclays blockchain as part of its global Blockchain: understanding the payments innovation initiative. potential. Retrieved from https://www. Retrieved from https://www.swift. barclayscorporate.com/content/dam/ com/news-events/press-releases/ corppublic/corporate/Documents/ swift-explores-blockchain-as-part- insight/blockchain_understanding_ of-its-global-payments-innovation- the_potential.pdf initiative Walker, M. (1875). The undivine Tapscott, A. (2016). Blockchain comedy, and other poems. by the Revolution, Talks at Google. Retrieved anonymous poet of Poland, Count from https://talksat.withgoogle.com/ Sigismund Krasinski. Translated, Cook. talk/blockchain-revolution Philadelphia: J. B. LippincottNSLATED, Tapscott, D. (2016). How the COOK.PHILADELPHIA: J. B. blockchain is changing money and LIPPINCOTT & CO., 79-80, business – TED Ideas worth spreading. (Original text: Nieboska Komedia, Retrieved from https://www.ted. Krasiński, Z. published in 1835) com/talks/don_tapscott_how_the_ blockchain_is_changing_money_ and_business#t-502553

CHANGING FRONTIERS OF ETHICS IN FINANCE 223 BB lockchain Technology for Reputation Scoring of Financial Actors

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Finalist

Brett Scott There is currently no clear a public reputational scoring system South Africa method of publicly and transparently for financial professionals, or finan- Consultant and displaying the conduct of financial cial firms, based on the underlying author, Finance professionals. Individual ‘rogue tra- technology used by the Bitcoin cryp- Innovation Lab*, ders’ might be recognisable through tocurrency system. Implementing London the media, and regulatory directo- such a system will create a new di- ries – such as the Financial Services sincentive for financial professionals Register of the Financial Conduct to engage in unethical practice, and Authority (FCA) – provide some in- furthermore, could encourage a ran- formation, but it remains difficult for ge of positive behaviours. members of the public to assess the First introduced in 2009, Bitcoin record of any particular professional. has emerged into popular conscious- Reputation is highly important ness over the last few years. It has within the closed networks of finan- been the cause of both excitement cial sector professionals. Many care and controversy, but it has undenia- about how they appear to their peers bly opened up the innovation lands- and prospective employers. The lack cape to some hitherto unimagined * The views expressed of external public recording of repu- herein are those of possibilities. In particular, the un- the author and do not tation markers, however, sets up a derlying blockchain ledger it is based necessarily reflect those dynamic in which financial insiders on has the potential to be adapted to of the Organization he is feel accountable to other insiders, affiliated to. create global systems for recording but not to the broader world. data in a highly participatory, public To alter this dynamic, I propose and transparent way.

BLOCKCHAIN TECHNOLOGY FOR REPUTATION SCORING OF FINANCIAL ACTORS 224 Il n’existe pas à ce This technology is very new, and 1. An account number at a bank, jour de méthode pour the purpose of this proposal is to and apprécier de manière sketch out possible routes to imple- 2. A way of proving that they con- claire et transparente la menting a pilot blockchain reputa- conduite des profes- trol that account number. For exam- tion scheme. This proposal sets out sionnels de la finance. ple, they have a PIN code the broad concept and points to a Pour pallier cela, je 3. The bank, in turn, has a data number of different ways of imple- propose une notation record of how much money is attri- réputationnelle pour menting the idea technically. The butable to that account number, the- les professionnels ou good news is that banks are actively reby ‘keeping score’ of the person’s les entreprises de la exploring this area, so research and finance basée sur la implementation partners and resou- money on a private internal database technologie “block- rces may be forthcoming. or ledger chain” (chaînage de Below I sketch out four founda- 4. The person can then use an blocs) utilisée par electronic communications system Bitcoin. Cette techno- tions of this project, and then move logie peut être adaptée into describing two possible varieties to identify themselves to their bank pour développer un of a reputational blockchain system. as the authentic account holder, and système global d’enre- Finally, I conclude with an outline can request for the money associated gistrement participatif for next steps with their account number be trans- et transparent de don- ferred to someone else’s account at a nées. La mise en place Foundation 1: The different bank d’un projet pilote en matière réputationnelle original Bitcoin 5. This then spurs the bank to du type “blockchain” cryptocurrency system edit their ledger of accounts – changing the person’s ‘score’ – and to tell pourrait dissuader les The simplest way to describe the professionnels à s’enga- Bitcoin system1 is as follows. It con- the recipient’s bank to do the same. ger dans des pratiques sists of: The process is a little more complex non éthiques et devrait than this, but in effect the money encourager des com- • A decentralised public ledger, ‘moves’ via a series of private ledgers portements positifs. or database, called the ‘blockchain’ being edited • …that people can use to record Likewise, in the Bitcoin system, a transactions between themselves Dans le cas de paie- person has a public address (akin to ments électroniques • …and thereby ‘keep score’ of an account number), and a private interbancaires, la their money – or tokens on the sys- key (akin to a PIN number). They banque garde la trace tem – in a highly public and trans- then use an electronic communica- de notre avoir sur son parent way registre privé qu’elle tions system to identify themselves contrôle pleinement. To understand the Bitcoin sys- to the Bitcoin network of miners, and Pour déplacer cet avoir tem, it is useful to sketch out the request that their tokens – associated vers un autre compte, similarities and differences it has to with their public address – be mo- il faut d’abord s’iden- our normal bank payments system. ved to someone else’s public address. tifier comme proprié- In our normal system, a person has: This then occurs by a change made to taires à l’aide d’un PIN the blockchain ledger. The two par- code, puis demander 1 There is a large literature describing Bitcoin, ties who control the public addresses que l’autre banque but perhaps the best resource is Antonopoulos (2014) can then see these changes, proving

CHANGING FRONTIERS OF ETHICS IN FINANCE 225 soit avertie et qu’elle that the tokens have ‘moved’ from participants to edit that ledger is very accueille la somme one address to the other. important. This has led to a nascent sur son registre. Dans The key difference between the interest in ‘blockchain 2.0’ projects, le système Bitcoin, la or the use of a blockchain ledger to personne a une adresse Bitcoin system and the normal bank record things other than currency publique (comme un payments system is two-fold. Firstly, numéro de compte) et the intermediaries that change the transactions. une clé privée (comme ledger are a decentralised network Early examples of this that emer- le PIN code). Elle peut of people (‘miners’) running special ged include systems like: s’identifier à l’aide du Bitcoin software, rather than banks PIN code et deman- • Namecoin: A decentralised re- der que l’avoir soit running their own private software gistry for website domain names déplacé vers une autre systems. And secondly, the ledger • Proof of Existence: A notary d’adresse. Le transfert they change is public, rather than the system that uses the blockchain to s’effectue grâce à un privately held account ledgers of the record possession of documents at a réseau de “mineurs” normal banking system. particular time qui opère le change- Thus, despite Bitcoin’s media as- ment sur le registre At the cutting edge of the scene public appelé “block- sociation with secrecy, the key fea- are experiments with ‘smart con- chain” que les deux ture of the blockchain technology tracts’, which are small bundles of parties peuvent voir. is highly visible public transparency. code – or ‘scripts’ – that can be recor- C’est donc ce registre This is easily observable on websites ded on a blockchain, and that par- qui garde la trace de like blockchain.info, where one can ticipants can interact with in order manière accessible à see real-time Bitcoin transactions tous de la monnaie. to undertake simple tasks. These can being publicly recorded onto the form the basis for ‘decentralised au- blockchain ledger. For example, one tonomous organisations’, or ‘decen- La particularité du can use the site to find out how much tralised collaborative organisations’3, “blockchain” tient is attributable to public address useful entities that are held in play au fait qu’il passe par ‘1ATMraQwtXcN9b1Jr51cWotfp5e- on a decentralised network of com- un registre public, FGdTjM4’2. puters, rather than controlled by a décentralisé, entretenu single management team. par un réseau et qu’il Foundation 2: The wave offre aux participants Groups like Ethereum, Counter- la possibilité d’édi- of ‘blockchain 2.0’ party and Blockstream are working ter ce registre. Ce The Bitcoin system described on building platforms to allow people dernier se développe above has been subject to many di- or start-ups to implement block- de manière incrémen- fferent types of critique and acclaim. chain-based systems. For example, tale par l’action des Provenance is a start-up attempting participants utilisant One thing most interested parties un même software. Si agree on, though, is that the un- to use the Ethereum system to create toutefois on modifie le derlying concept of a decentralised a highly transparent ledger of global 4 code du programme, public ledger, collectively maintained corporate supply chain data . la nature du registre by a network, and with a means for Much of the interest in ‘block- obtenu change en conséquence. Cette 2 To view that particular address, visit https:// 3 For an good overview of these entities, see possibilité a suscité un blockchain.info/address/1ATMraQwtXcN9b1 Bollier et al. (2015) Jr51cWotfp5eFGdTjM4 4 See website at https://www.provenance.org/

BLOCKCHAIN TECHNOLOGY FOR REPUTATION SCORING OF FINANCIAL ACTORS 226 grand intérêt dans les chain 2.0’, though, concerns poten- ning the possibility of creating bloc- projets “blockchain tial financial services applications. kchain databases storing all manner 2.0” qui se basent sur For example, Michael Mainelli from of diverse data, including reputation un registre block- Long Finance published a December tokens. chain pour enregistrer d’autres données que 2014 research paper called ‘Chain Foundation 3: The les transactions moné- Of A Lifetime: How Blockchain Te- increasing interest in taires. Cette technolo- chnology Might Transform Personal blockchain technologies gie peut être ainsi uti- Insurance’5. Others are looking into lisée pour des services derivatives systems, and crowdfun- The financial industry is showing décentralisés comme ding systems. real curiosity towards cryptocurren- des assurances et pour The technical details of these cies, and also in the underlying bloc- la mise en place pour kchain technology. Here are some allouer des “jetons” schemes can appear complex, but examples: réputationnels. there are two key takeaway points. • UBS has announced plans to Firstly, it is useful to think of a set up a ‘blockchain Innovation Lab’ blockchain as a database that is in- L’industrie financière at Level 39 in Canary Wharf (Wall crementally built up by a network s’intéresse à la techno- Street Journal, 2015a) logie du blockchain. of participating parties who run the Ainsi, UBS a annoncé same software, and that is subject • Barclays have included block- qu’elle projette de to the constraints and rules set by chain insurance start-ups in their Bar- mettre en place ‘Block- the underlying software they run. clays Accelerator (Coindesk, 2015b) chain Innovation Lab’, A blockchain, as the name suggests, • Well known investment banker Barclays soutient des gets built up by blocks of data gra- Blythe Masters (the former head of start-ups qui utilisent dually being ‘chained’ together. JP Morgan’s commodity trading divi- cette technologie, alors sion) has announced plans to explore que RBS, Rabobank, It could almost be imagined as a blockchain systems, stating that they ING et BNY Mellon spreadsheet that is gradually built jouent avec cette idée. by new cells being chained on. A have the potential to build renewed blockchain database continues to be trust in financial institutionsCoin ( - built and maintained so long as the desk, 2015a) A l’heure actuelle, software continues to be run. Thus, • Banks like RBS and others un système public unlike a centralised database held by have been hosting blockchain ‘ha- de notation réputa- a single entity, it continues to stay ckathons’, and Rabobank has been tionnelle adapté aux setting up challenge prizes for ideas activités financières ‘alive’ even if individual participants on blockchain use (Finextra, 2015). fait cruellement défaut. pull out (or go bust, for example). It Il existe des systèmes creates an indelible record, resistant Others like ING have been hiring re- publics comme le to tampering by any individual par- searchers on the topic (ING Careers, Registre de la Financial ty. 2015) Conduct Authority • The bank BNY Mellon is tes- Secondly, if you tweak the code britannique. Il permet ting a blockchain-based token system of the underlying software being run de passer en revue as an internal incentive scheme for by participants, the nature of the l’historique profession- staff members under their corporate nel et disciplinaire des resultant blockchain changes, ope- recognition programme (Wall Street professionnels enregis- 5 Mainelli & von Gunten (2014) Journal, 2015b)

CHANGING FRONTIERS OF ETHICS IN FINANCE 227 trés. Cependant, de tels • Central banks like the Bank of ‘disciplinary history’7, despite being systèmes ont une teinte England have taken an active interest sentenced to several years in prison. bureaucratique, peu de in blockchain innovation (Bank of Furthermore, if you are an indi- visibilité publique et England, 2014) sont, en fin de compte, vidual outside the UK, it is unlikely peu utiles. De plus les We thus have a situation in which that you will readily know the local informations impor- banks and other financial institutions regulator or be aware of the internal tantes leur échappent : are actively exploring the emerging registry systems in place. Each coun- bien que Kweku Ado- blockchain innovation scene, and try has a different version, but large boli, le trader escroc, looking for ways to show their rele- financial firms are de facto global in ait été condamné à vance within it. This presents a sig- their operations. plusieurs années de prison, cette nouvelle nificant opportunity to advance novel There have been private attempts n’apparaît pas dans le blockchain proposals, get banking to create ethical scoring systems for registre de la FCA. partners on board, and secure resour- banks. For examples, Fair Finance ces to investigate pilot projects. Guide, MoveYourMoney UK, and Ethical Consumer have created ‘sco- Nous avons donc Foundation 4: The recard’ systems at different times. besoin d’un système lack reputation These can be useful to put public de notation réputa- scoring systems pressure on banks to maintain ethi- tionnelle plus efficace, cal standards, but are not regularly accessible globalement There are government systems et continuellement mis like the UK Financial Conduct updated and tend to be based on pri- à jour. Je propose donc Authority’s Financial Services Regis- vate research that is hard to maintain de créer une base de ter6 that have a reputational element without consistent resources being données “blockchain” to them. It enables one to search for poured into them. If the groups stop qui pourrait être utili- financial firms and registered finan- producing the research, the record sée pour enregistrer les cial professionals, and to look up in- goes out of date and gradually disap- cas d’inconduite, mais formation such as basic employment pears. aussi des cas d’actions history and disciplinary record. positives de la part des Blockchain-based professionnels de la That said, it has a private, bu- reputation systems finance, ou des entre- reaucratic feel, tucked away on the What is required, therefore, is prises. Il y aurait ainsi FCA website with little publicity and a more effective, globally accessible une trace publique- low usability. Very few financial pro- reputation system that is updated rement accessible de la fessionals will feel that the register is gularly and continues to exist even qualité éthique de leurs something that the public can acti- when individual organisations cea- activités. vely engage with. Furthermore, it is se to operate. Thus I propose using questionable whether it shows rele- blockchain technology to create: Une voie possible serait vant information. Take, for example, 1. A decentralised public ledger, la mise sur pied d’un the high-profile case of rogue trader système de “karma” Kweku Adoboli. His FCA register rein the form of a blockchain database au niveau individuel. cord on 9th April 2015 has no infor- 2. …that people or organisations Dans le système mation recorded under the heading can use to record cases of financial Bitcoin, les participants reçoivent une adresse 6 See register here http://www.fsa.gov.uk/ 7 See Adoboli entry here http://www.fsa.gov. register/home.do uk/register/indivDiscHistory.do?sid=598330

BLOCKCHAIN TECHNOLOGY FOR REPUTATION SCORING OF FINANCIAL ACTORS 228 publique qui permet misconduct or cases of positive ac- a different network of participants d’envoyer et de rece- tions by financial professionals (or running software that gives them di- voir des jetons d’autres firms) fferent rights within the system. For adresses en obéissant example, we might design a system à des règles codées qui 3. …and thereby ‘keep score’ of where: soutiennent le réseau. financial professionals’ (or firms’) Si on change ces codes, ethical record in a highly public and 1. Financial professionals have les règles s’en trouvent transparent way. public addresses, but are only able to modifiées. Il serait If it can be implemented, such a receive tokens ainsi envisageable de ledger could serve as a useful tool to 2. Regulatory and civil society donner des compé- the public, a disincentive to financial bodies have public addresses, but are tences variées à divers participants. Cela professionals to engage in miscon- able to distribute tokens permettrait de mettre duct, and an encourager of positive This could be used to set up a au point un système où behaviours from financial firms and simple ‘karma’ system in which files professionnels de their employees. nancial professionals can accrue la finance pourraient The precise technical details of both positive and negative tokens accumuler sur leurs such a scheme remain undeveloped, to their public addresses from desig- adresses publiques des but the purpose of this proposal is jetons (karmas) posi- nated partners in the network over to set out directions for a feasibility tifs et négatifs qu’ils time. A disciplinary action could get recevraient d’autres study and potential pilot phase. Des- recorded as an influx of ‘negative participants désignés à cribed below are two possible imple- karma’ tokens, whilst a positive ac- l’avance. mentations of the idea. tion could get recorded as an influx Pour y parvenir, of ‘positive karma’ tokens. Below are chaque professionnel Implementation some steps that would be needed to recevrait une adresse concept 1: An individual make this happen. dans le système. Des ‘karma’ system instances telles que Step 1: Blockchain Financial Conduct In the existing Bitcoin system, Authority ou ICAEW participants have public addresses addresses (Chartered Accoun- that can receive and dispatch tokens Firstly, we need to find a way to tants Institute) seraient to other public addresses, using the give public addresses to each pro- habilitées à envoyer coded rules of the system. Through fessional in order to identify them des jetons positifs this process, the participants gradua- in the system. In the case of the UK, de “reconnaissance lly create a public blockchain record. professionnelle” quand this will ideally occur when the pro- la personne passe les The nature of the blockchain and fessional qualifies for registry as an examens correspon- the rules for submission onto that ‘approved person’ on the Financial dants. Les mêmes blockchain are defined by the soft- Conduct Authority register, which enverraient des jetons ware, independently run by the net- allows them to perform ‘controlled négatifs (karma néga- work of participants. If, however, we functions’ such as dealing directly tifs) en cas d’incon- alter the code, we can change the ru- with customers. Currently, UK fi- duite professionnelle, les in various ways. We can maintain nancial workers are only placed on de ventes abusives ou the concept of a decentralised led- the FCA register when they pass cer- de manipulation de tain professional exams that show marchés. Afin d’encou- ger incrementally built up through chains of data blocks, whilst having they are capable of working respon-

CHANGING FRONTIERS OF ETHICS IN FINANCE 229 rager la responsabilité sibly and independently. For lower coding of the system – to distribute sociale des entreprises, level controlled functions, this oc- ‘negative karma’ tokens to the public des organisations curs within about a year of starting in addresses of professionals who enga- non-gouvernementales the industry. ge in financial misconduct such as telles que Oxfam pour- misselling, unauthorised trading or raient être habilitées à Imagine a scenario then, in which market manipulation. There might envoyer des jetons po- a financial professional is designated sitifs quand des actions with a public blockchain address that be different categories of negative positives ont lieu. Tous identifies them by name as soon as karma tokens, distributable by diffe- ces jetons seraient they are registered with the FCA8. rent authorities. visibles publiquement et permettraient donc Step 2: Sending Step 4: Sending ‘positive aux professionnels de ‘professional karma’ tokens mettre en avant leurs recognition’ tokens actions en faveur de la Ideally, the system is designed A body like the FCA might be responsabilité sociale to incentivise corporate social res- des entreprises. given special powers within the sys- ponsibility actions on the part of fi- tem to control a different class of nancial professionals. In order to do public address that is able to send this, a network of civil society groups Pour mettre en appli- ‘professional recognition’ tokens to – such as environmental sustainabi- cation un tel système the addresses of financial professio- lity NGOs or human rights groups – plein de finesse, des nals who have passed certain tests or are encouraged to join the network. instruments pro- exams. Thus, as a financial profes- They are given special powers via the grammables comme sional qualifies for inclusion on the coding of the system to distribute Ethereum pourrait être FCA register, and is designated with ‘positive karma’ tokens from their pu- utiles. Ils permettent la a public address, they might also get certification différen- blic addresses to the public addresses tiée des partenaires an initial batch of professional recog- of professionals who undertake some du système ce qui leur nition tokens sent to their address, form of positive task, for example vo- donne des droits et des publicly symbolising their competen- lunteer work. possibilités d’utiliser ce. As they progress in their career One might even conceivably sub- différents types de and earn new qualifications, they can divide these positive tokens into ca- jetons. accrue more of these, perhaps from tegories like ‘sustainability tokens’, bodies like The Institute of Chartered issued by groups like Friends of the Accountants in England and Wales Earth, or tokens for youth mento- L’apparition d’un (ICAEW). flux de “karma” en ring, issued by groups like ReachOut. provenance des divers Step 3: Sending disci- These positive tokens can accrue, acteurs sur les adresses plinary ‘negative karma’ enabling a financial professional to des professionnels de tokens showcase their corporate social res- la finance les encou- Authorities like the FCA could ponsibility actions. Furthermore, it ragerait à cultiver leur enables a professional with a poor re- bonne image publique also be given special powers – via the cord to ‘redeem’ themselves, or seek en recherchant des “karma” positifs. Cela 8 As a technical point, customisable block- salvation from previous negative ac- présente toutefois le chain addresses have already been pioneered tions by working up such points. risque de la corruption by services like VanityGen. See http://bitcoin- vanitygen.com/

BLOCKCHAIN TECHNOLOGY FOR REPUTATION SCORING OF FINANCIAL ACTORS 230 du système. Un profes- The technicalities me is the ability to ‘redeem’ oneself sionnel pourrait ainsi by seeking positive karma tokens être tenté d’acheter des The concept sketched above that might ‘offset’ the negative ones. “karma” positifs pour would require more advanced coding People make mistakes, and while a compenser des enre- and design than is currently found public record of misconduct might be gistrements négatifs. in the Bitcoin system. In the Bitcoin valuable, it is also vital that the public Ce risque pourrait être system, addresses can only receive a contenu, si l’attribu- record is not irredeemably marked single type of token, and can both re- against someone for all time. tion de jetons positifs ceive and send. To implement a more exigeait des signatures nuanced system like this, a more ad- The problem that emerges from multiples dans l’organi- this, however, is the risk of corrup- sation concernée. Cela vanced programmable system like 9 tion in the system. A financial profes- pourrait aussi limiter Ethereum might be used, in which smart digital certificates might be is- sional might bribe or attempt to buy le “marché noir” des positive karma tokens to offset a ne- “karmas” positifs. sued to different players in the system, giving them different rights and gative record. Indeed, a general pro- abilities. blem in most points-based reputation Le schéma proposé ici For example, imagine a type of systems is that people can learn how est obligatoire, mais coded instruction within the system to ‘game’ them. Furthermore, such il serait peut-être plus saying: [If participant has sustainabi- systems can sometimes be open to facile de démarrer avec lity digital certificate, then give rights sabotage of reputation. Consider for des projets pilotes to participant to attribute another ad- example, EBay reviews, where sellers sur une base volon- dress with sustainability tokens.]. might pay people to give them good taire. Une institution reviews, and might even conceivably financière pourrait The possible results, attempt to sabotage the ratings of ainsi mettre sur pied competing sellers. un système blockchain and problems To some extent this can be avoi- en partenariat avec The result of this would be ded by partnering only with establis- un certain nombre the creation of streams of inco- d’acteurs de la société hed, stable and respected civil society ming ‘karma’ tokens into a financial partners – such as Oxfam – but there civile, ou bien les professional’s address from different plus grande banques may also be ways of building safe- organisations over time. This in turn britanniques (Big 5) guards into the design of the system would build up a public picture that pourraient initier un itself. For example, multi-party sig- interested parties can browse if they tel projet entre elles. nature (‘multi-sig’) systems might be so wish. This gives encouragement to used, in which a series of different the professional to cultivate a good people within an organisation are Une autre alternative public image by seeking to accrue required to approve an allotment of serait d’utiliser ce positive karma and professional re- système pour enregis- karma tokens to a financial professio- cognition points. On the other hand, nal. This could prevent conflict-of- trer le comportement the threat of public display of mis- d’une entreprise plutôt interest situations, such as a junior conduct will help discourage negati- employee of an organisation with que des professionnels ve behaviours. individuels. Nous token-granting rights unilaterally pourrions créer un An important feature of this sche- deciding to give tokens to a former système dans lequel les university friend who now works at banques, par exemple 9 See Wood (2014) for further technical details a bank. of the Ethereum system

CHANGING FRONTIERS OF ETHICS IN FINANCE 231 Goldman Sachs, Mandatory schemes duct of whole firms rather than single auraient une adresse financial professionals. It could use publique. Le FCA vs. voluntary schemes a similar structure to the individual enverrait les jetons In the proposal sketched above, scheme described above, but instead négatifs quand l’entre- it is mandatory for FCA registered fi- of individual financial professionals prise est sanctionnée, nancial professionals to join the sys- having public addresses on the sys- mais les collaborateurs tem. Nevertheless, while it would be tem, firms will have addresses. individuels de Gold- ideal to get regulatory bodies like the man Sachs seraient FCA (or the U.S. Securities and Ex- aussi incités à entre- Implementation prendre des actions change Commission) on board with concept 2: A firm-level an initiative like this, it may be easier volontaires pour attirer Thus, as a member of the public des jetons positifs. Cer- to pave the way with simpler volun- I may be able to visit the public ad- tains s’offusqueront tary pilot programmes. dress page of Goldman Sachs and be du caractère utilitariste For example, a single financial de cette proposition able to see streams of positive and ne- institution might independently de- gative karma points coming in from – qui permettrait aux cide to implement a voluntary bloc- entreprises de gagner different members of the network. kchain ‘karma’ system in partnership de bons points pour For example, the SEC may fine compenser les mauvais with select civil society groups, and use it as part of employee assessment. the firm for market misconduct and – mais elle correspond send them a large quantity of nega- à la manière dont les Employees can attempt to accrue po- tive disciplinary tokens. But, on the entreprises opèrent. sitive karma points by actively enga- Elles mobilisent ging in the firm’s CSR programme. other hand, individual Goldman Sa- d’importantes res- The firm can display this record pu- chs employees may be undertaking sources dans les rela- blicly as a part of a commitment to positive volunteering programmes, tions publiques pour transparency. so smaller streams of positive tokens neutraliser la publicité can be viewed offsetting the negative négative des scandales. More ambitious could be a volun- ones. tary effort on the part of the ‘Big 5’ Peut-être un système One might take exception to the de karma-jetons UK banks to implement a joint pilot utilitarian moral framework set up, pourrait-il forcer les project, alongside a network of civil grandes entreprises à society stakeholders. the idea that a firm can ‘earn’ positi- montrer concrètement ve moral points that somehow offset There are tricky issues that may or override negative moral points. In leur impact positif plu- conceivably arise when trying to in- tôt que d’utiliser leur reality, though, this is how the public clude all registered financial profes- pouvoir médiatique discourse around financial institu- pour bluffer à ce sujet. sionals within a public reputation tions often takes shape anyway. Firms system. While some may welcome put large resources into showcasing the opportunity to build up a public their positive social and environmen- Il y a plusieurs raisons record of ‘good karma’, others may tal image in order to neutralise the pour lesquelles la protest about issues like perceived negative public image attracted by méthode blockchain privacy infringement. scandals and cases of market abuse. pourrait avoir du One possible alternative option succès. Les entreprises Perhaps, setting up a decentra- may be to set up a blockchain repu- financières ont une lised system of karmic tokens will vraie difficulté à main- tation system that records the con- force large firms to concretely show

BLOCKCHAIN TECHNOLOGY FOR REPUTATION SCORING OF FINANCIAL ACTORS 232 tenir la confiance du their positive impact – in the form turn feel grateful for the opportunity public. En utilisant une of incoming positive tokens – rather to build a new form of portable repu- technologie de pointe than using their media and public re- tation, and enjoy the emergent sense open source qui lations clout to bluff about it. of accountability to parties beyond promeut la démocra- a faceless central regulator. It could tisation, elles seraient Why these schemes form the basis for interesting new mo- en mesure de casser could prove successful leur image élitiste et des of political engagement between fermée. En mettant Blockchain reputation systems civil society groups and the finan- sur pied une base de offer fascinating potential to build a cial sector, giving NGOs and others données participative transnational database of real time fi- a proactive role in encouraging good avec le concours d’un nancial institution and financial pro- behaviour, rather than a reactive one réseau d’organisations fessional reputation, crowdsourced in attacking bad behaviour. de la société civile et de via a global network of civil society Finally, the system could just régulateurs, on pour- groups, regulators and other parties. seem more fun than others we have rait changer la manière Such systems could conceivably even dont est perçue la in place right now, which is great for surveillance financière. morph into a type of national or glo- public engagement. Teenagers will Sa perception devien- bal voting system on the most ethical not get excited about bland regula- drait plus inclusive, et banks and funds. tory websites, but a ‘crypto-karmic même amusante pour Financial services firms currently blockchain system’ based on leading le public qui a souvent have a real issues with maintaining edge technology could stir up a great l’impression d’en être public trust, and partaking in such deal of interest, and be a spur to lear- exclu. Les profession- a scheme would shows that they are ning about the financial sector and its nels de la finance ont committed to re-engaging with the role in society. ici une opportunité de public in a compelling way. By using It must be recognised that the act proposer une nouvelle an emergent cutting-edge technolo- of publicly recording basic reputation approche de la réputa- gy of democratisation that is based tion mobile, alors que is not going to solve the deeper pro- la société civile rece- on open source principles, they can blems of financial misconduct. The vrait un rôle proactif break down the closed, elitist image problem of poor financial ethics of- d’encouragement des normally associated with them. ten cannot be reduced to ‘good versus bons comportements. It would also mark a departure bad’ deeds on the part of individuals. from traditional systems of disciplinary action, in which professionals Recognising the Toutefois, il faut aussi are pushed to feel accountable to limitations noter les limitations their bosses and regulators, but not Rather, the issues are often struc- d’un tel schéma. L’in- to the broader public. Setting up an tural, such as hierarchal fragmenta- conduite en matière interactive system that requires the tion of responsibility within firms de finance, n’est pas toujours réductible participation of a diverse range of creating disconnected moral va- à la distinction entre stakeholders will change the ‘feel’ of cuums in which financial professio- le bien et le mal au financial conduct monitoring, ma- nals do not feel directly responsible niveau des actions king it more inclusive and engaging for the outcomes of actions they take individuelles. Durant to members of civil society who often part in. la crise de 2008, des feel shut out from such processes. Such a dynamic can be seen in grands dégâts ont été Financial professionals may in the case of the 2008 financial crisis.

CHANGING FRONTIERS OF ETHICS IN FINANCE 233 causés parce que des While there were overt cases of fraud, network participants are incentivised employés individuels much of the damage occurred due to to maintain the public ledger in ex- des banques ne se sen- individual bank employees not fee- change for fees and ‘block rewards’. taient pas personnelle- ling that they were individually res- In the case of an alternative block- ment responsables des ponsible for the collective havoc that chain system where the tokens do conséquences négatives was being unleashed. A reputation not necessarily have monetary value, pour la collectivité. system for recording personal beha- other funding systems may have to viour can only go so far in challen- be implemented. For example, mo- Pour avancer sur ces ging deeper management issues like ney obtained from financial fines may pistes, une étude de that. conceivably be used to support the faisabilité technique deployment and maintenance of the doit être lancée. Cela Moving forward with system infrastructure. implique l’identifi- a pilot programme cation préalable des Conclusion institutions finan- To move forward, more research cières, des institutions would need to go into the technical This novel blockchain reputa- régulatrices, des feasibility and precise details of this tion scheme could prove popular at représentants clé de system. The basic steps to take are: a time when financial institutions are la société civile et des 1. Identify financial institutions looking to put resources into expe- partenaires informa- and regulatory partners to get on rimenting with blockchain techno- tiques. La question board logy whilst simultaneously needing du financement doit to improve their public image and aussi être abordée. Les 2. Commission a broader and engagement. It captures the spirit of sommes générées par deeper feasibility study the times, and even if it proves to be les amendes financières 3. Identify software partners and technically challenging, the process pourraient être utile- platforms (such as Ethereum, Eris In- ment affectées, entre of building a pilot will throw up va- dustries, and Counterparty) autres, au déploiement luable research questions and expe- et au maintien d’un tel 4. Work on the design, coding rience that can be incorporated into système. and technical implementation of the similar future projects. • system 5. Identify key civil society stake- Ce nouveau projet est holders who may wish to participate en ligne avec l’esprit du temps. Même s’il est in maintaining the network. un défi du point de vue Finally, consideration would have technique, la mise au to be put into the funding of this pro- point d’un projet pilote ject. To some extent, a network like permettra d’acquérir Bitcoin is self-funding because the l’expérience nécessaire tokens it moves around have come pour son évolution to have exchange value. Thus, the future.

BLOCKCHAIN TECHNOLOGY FOR REPUTATION SCORING OF FINANCIAL ACTORS 234 References Antonopoulos, A. (2014). Maste- Finextra (2015). Banks set block- ring Bitcoin: Unlocking Digital Crypto- chain/Internet of Things challenges for currencies. Sebastopol: O’Reilly Media SBC hackathon. Retrieved from http:// www.finextra.com/news/fullstory.asp Bank of England (2014). News Re- x?newsitemid=26930&topic=innovati lease – Quarterly Bulletin pre-release on articles: ‘Innovations in payment tech- ING Careers (2015). Researchers nologies and the emergence of digital Biometrics and Crypto Currency & Va- currencies’ and ‘The economics of di- lue Chains. Retrieved from http://www. gital currencies’’. Retrieved from http:// ing.jobs/Netherlands/Vacancies/Vacan- www.bankofengland.co.uk/publica- cy/Researchers-Biometrics-and-Crypto- tions/Pages/news/2014/116.aspx Currency-Value-Chains-1.htm Bollier, D., de Filippi, P., Dietz, Mainelli, M. & von Gunten, C. J., Shadab, H., Van Valkenberg, P. & (2014). Chain Of A Lifetime: How Xethalis, G. (2015). Distibuted Co- Blockchain Technology Might Trans- llaborative Organisations: Distributed form Personal Insurance. Long Finance. Networks & Regulatory Frameworks. Retrieved from http://www.longfinan- Coin Center Working Paper. Retrieved ce.net/lf-research.html?id=903 from http://bollier.org/sites/default/ files/misc-file-upload/files/Distributed- Wall Street Journal (2015a). UBS to NetworksandtheLaw%20report,%20 Open Blockchain Research Lab in Lon- don. Retrieved from http://blogs.wsj. Swarm-Coin%20Center-Berkman.pdf com/digits/2015/04/02/ubs-to-open- Coindesk (2015a). Former JP Mor- blockchain-research-lab-in-london/ gan Exec Blythe Masters Swaps Wall Wall Street Journal (2015b). BNY Street for Bitcoin. Retrieved from http:// Mellon Explores Bitcoin’s Potential. www.coindesk.com/former-jp-mor- Retrieved from http://blogs.wsj.com/ gan-exec-blythe-masters-swaps-wall- cio/2015/04/05/bny-mellon-explores- street-for-bitcoin/ bitcoins-potential/ Coindesk (2015b). Three Block- Wood, G. (2014). Ethereum: A Se- chain Startups Selected for Barclays Ac- cure Decentralised Generalised Tran- celerator. Retrieved from http://www. saction Ledger. Ethereum Project Yellow coindesk.com/three-blockchain-star- Paper. Retrieved from http://gavwood. tups-selected-for-barclays-accelerator/ com/Paper.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 235 BBringing In the Underbanked

Ethics & Trust in Finance Global edition 2016-2017

Finalist

Tara Annison Current banking provisions leave cannot provide formal identifica- Spain an estimated 2.5 billion (Chaia, Go- tion. Furthermore, segments of the Digital Analyst, land, Schiff, 2010) adults world- populace who are unable to leverage HSBC Banl Plc*, wide without access to a formal technological developments such as London bank account. This means they are online and mobile banking may also deprived of the opportunity to save find themselves isolated from these and to borrow money at the best, rapidly growing credit channels. regulated rates. Whilst 2.2 billion of It is these individuals who are these underserved adults reside in defined as ‘the underbanked’. developing markets such as Africa, Their inability to access traditio- Asia and Latin America (Chaia et nal financial provisions can, in part, al, 2010), there are also 106 million be due to difficulty in providing the adults in North America (Ashoka, official identity verification docu- 2013) and 1.5 million in Britain mentation that is necessary to open (FIC, 2016) without the necessary a bank account. This paper will the- banking provisions. refore explore a number of barriers These individuals may be from that the underbanked face when loo- * The views expressed low income families, with no cre- king to provide identity documents herein are those of dit history. They may have no fixed and the positive impact new techno- the author and do not abode, choosing to live in unconven- logy can play in capturing and sto- necessarily reflect those tional accommodation such a boats ring proof of identification of the Organization she is affiliated to. or caravans, or may be refugees, or The inability to open a traditio- internally displaced people who nal bank account restricts someone’s

BRINGING IN THE UNDERBANKED 236 opportunity to build a credit score, a policy eliminate potential revenue which is necessary if one is to present streams, it challenges the purpose oneself as a reputable and trustwor- of a bank in financially supporting thy borrower. Therefore, many un- diverse segments of the economy. derbanked individuals are deprived As such, this paper will explore the of the opportunity to take out mor- benefits for a financial institution of tgages, access savings products, and extending financing to the under- Bien que l’activité bancaire trouve ses ori- utilise credit provisions from stan- banked, and how emerging techno- gines dans l’octroi de dard financial service providers. logies can be used to capitalise on financements aux pay- Those who want to borrow are for- these benefits while mitigating the sans, puis plus tard aux ced to seek alternative methods of associated risks. hommes d’affaires de finance such as ‘payday loans’. Such “…inclusion is not always about toute l’Italie (Beattie, loans can see an average APR of the poor and ‘invisible’, it’s about 2017), une institution 627.9%1 and fall outside consumer equal opportunities to access various financière cherchait protection schemes such as the FSCS kinds of products and services, to alors et cherche encore aujourd’hui rendre Deposit Guarantee Scheme (FSCS, knowledge, innovation and the abi- accessible à tous des 2017) and do not comply with the lity to make an educated choice.” financement à des wide array of regulations that tradi- (Mesropyan, 2017) prix équitables et de tional financial institutions adhere Given that an estimated 1.1 billion manière responsable. to. The underbanked then become people live without an officially Une institution qui trapped in a cycle whereby they can- recognised identity (ID2020, 2017) limite ses options de not build the necessary credit score many underbanked customers are financement à certaines to access traditional financing. This catégories de la popu- unable to prove either their identity, lation, élimine non paper will discuss how innovative or their creditworthiness, to financial seulement des sources approaches to credit scoring could services firms. de revenus potentiels, benefit the underbanked and help mais aussi remet en them to build a holistic score that is Inability to Provide cause l’objectif d’une accepted by traditional financial ins- Official Identity banque qui consiste titutions. Documentation à soutenir divers secteurs de l’économie. Inhibitors for the To open a UK bank account, it underbanked is necessary to provide two forms of documentation: proof of identity and The personal cost to individuals proof of a current UK address. The who cannot access mainstream fi- following are examples of satisfactory nance is not the only question to documentation: consider of course. The moral and • Full and valid UK or foreign financial implications for an institu- passport tion that limits financing to certain segments of the population should • Full UK or foreign driving also have weight. Not only does such licence • Student ID card 1 On a £200 loan over 3 months (KnowYour- Money, 2017) • UK mortgage statement

CHANGING FRONTIERS OF ETHICS IN FINANCE 237 • Council tax bill Evidently this would cause • TV license or direct debit difficulty for all customers. However, schedule (Barclays A, 2017) for those on low income or with no fixed abode, the ability to attend However, one should note that these appointments may be further providing such documentation hampered by their lack of personal carries difficulties for many of transport, or by inflexible working the underbanked. Firstly, many arrangements. Those in developing identification documents are either nations, where branches are more too costly to obtain or irrelevant for dispersed and access to official those in low income households. For documentation may be even example, those who do not have the more costly, due to government Sans le soutien d’une necessary funds to travel abroad or inefficiencies or corruption, find that institution tradition- own a personal vehicle may not hold the same problems are magnified. All nelle qui fournit un either a passport or driving license. compte bancaire, les of this means that the underbanked personnes « non-ban- Furthermore, proof of student are often unable to open a traditional carisées » sont inca- identification requires the person bank account in order to begin their pables d’accéder à des to be in further education, either at saving and borrowing journey since prestations d’épargne college or university level. However no bank is comfortable with the risk ou de crédit qui per- 18 year-olds from disadvantaged of lending to, or holding the finances mettent de construire backgrounds are nearly 2.5 times of, an ‘unknown’ customer. un historique finan- less likely to enter higher education cier et une cote de solvabilité. Cependant, than their more affluent counterparts Inability to Build afin que ces personnes (OFFA, 2017), and mature students a Credit Rating puissent accéder aux may not be able to access funding This creates a catch-22 situation services bancaires, for a course unless they can commit where borrowing cannot be extended elles doivent fournir to full time study (Shaw, 2010) – as there is no history on which to la preuve qu’elles sont something not possible for those solvables et qu’elles base a credit decision. Those who looking to continue supporting a disposent d’une iden- are unable to open a traditional bank tité vérifiable. family. account from a young age become Where identity documentation locked out of the system and, as is held, there are further difficulties the period of exclusion grows, the in the verification process as the likelihood of their accessing funding majority of banks are unable to verify in the future decreases. accounts outside of their branch Leaving traditional financial network. However, because 1,032 products on one side, the underbanked UK bank branches have been closed may be also disadvantaged by lack of in the last 2 years (Boyce, 2016), access to other routes that contribute prospective customers may be forced to a credit score. These include: to travel many miles to their nearest monthly mobile phone plans, branch and to attend an appointment internet subscriptions, electoral within work hours. roll registration, house moves, and

BRINGING IN THE UNDERBANKED 238 timely bill payments (MAS, 2017). sanctioned countries, but also – more Those from low income families positively – in campaigns to offer may not be able to afford an internet financing to socially-responsible connection, or pay-monthly mobile businesses and for socially desirable contracts. Those with no fixed abode projects. or recent immigrants may have a In doing this, banks must Cela crée un cercle limited record of accommodation formulate their own internal guidance vicieux où le crédit ne and not be on the electoral register. on where these boundaries and peut pas être accordé In addition, those who have found opportunities lie, as well as seeking puisqu’il n’y a aucun difficulty in adopting more online counsel from governments, NGOs, historique sur lequel and digital business channels, as well baser une décision. and lobbyists. However, whilst Ceux qui n’ont pas as mobile banking provisions, may pressure has been exerted on banks accès aux comptes not be able to process payments and to, for example, exit relationships bancaires traditionnels set up facilities such as direct debits, with companies associated with dès leur plus jeune âge thus affecting their ability to manage palm oil production (Paddison, se retrouvent exclus du their funds with regular repayments. 2017), to increase financing to système et, à mesure However it is not only those who SMEs (Qell Group, 2017), to desist que la durée de l’exclu- are unable to build a credit score in dealing with those associated sion augmente, la pro- with the gambling (Wessex, 2011) babilité qu’ils accèdent who are disadvantaged but also those à un financement à who have a low credit score – which and to promote green bond funds l’avenir diminue. impacts not only whether they can (Deutsche Bank, 2015), there has borrow but also how much, and at been limited pressure for banks to what cost. Therefore, those who may increase their appetite for serving the require financing at more affordable underbanked. rates are often prohibited from This is in some part due to the Il est de la respon- accessing it – forcing them to utilise sabilité des banques perceived risk/return value of an insufficient borrowing at a higher d’évaluer la solvabilité underbanked client, in which the et les exigences d’un cost. potential for a low-income earner to emprunteur potentiel not repay borrowing is deemed to be et de décider s’il est Moral Responsibility greater than the possibility of tapping prudent d’avancer les vs Profit Pressure a larger revenue stream, should the fonds. It is the responsibility of banks client be assisted with transitioning to assess the creditworthiness and to the middle-income bracket. requirement of a potential borrower Similarly, since methods of assessing and to decide whether it is prudent to the borrower risk remain limited to advance monies. In such a decision, traditional credit scoring and the one must also consider the moral and collection of a limited number of reputational conditions around the documents, those who fall outside request. This is reflected in the way this scope are unable to demonstrate many banks close the accounts of their true risk profile. Therefore persons linked to nefarious activities they are provided with the default and of businesses that operate in ‘computer says no’ response that is

CHANGING FRONTIERS OF ETHICS IN FINANCE 239 all too familiar to the underbanked. documents and also better facilitate The upshot is that the inability cross-bank collaboration and data to provide identity documentation sharing. and build up a credit score inhibits Biometric Technology the underbanked from utilising – The Basics traditional banking provision. In This is most easily seen in addition, it limits potential revenue common biometric applications streams for institutions that, due such as fingerprint and iris scanners. to slowdowns in global markets, A fingerprint scanner uses infrared increasing regulatory requirements waves to map a person’s unique and competitive pressure from Afin de faciliter l’éva- fingerprint, encrypt the data into luation de la solvabilité the fintechs (financial technology a string of 1’s and 0’s, and then et la vérification sans companies), increasingly find their store the digital representation of encombres de l’identité margins under pressure. Institutions the fingerprint within the device’s des « non-bancarisés », need to strike a balance between memory. When one wishes to les institutions finan- meeting shareholder expectations cières doivent déve- access the phone, this digital record and having too much risk appetite, can be accessed and verified by lopper leurs méthodes and to understand how segments, de collecte de données presenting the required finger onto such as the underbanked, can be et élargir l’éventail des the touchpad. documents acceptés. responsibility served. The above is an example of single- Pour ce faire, elles This paper will explore how the factor authentication, in which pourraient envisager growth of emerging technologies, one attribute must be presented. d’utiliser les techno- and innovative application of digital However there is a growing move logies biométriques services within the wider financial towards multi-factor authentication et de blockchain ecosystem, brings new opportunities afin de favoriser la where multiple attributes must be saisie et le stockage to improve financial inclusion for the presented in order to gain access de ces documents et underbanked whilst mitigating the to an account, device, or product. également faciliter la associated risks. In this, users are prompted to collaboration entre les Biometrics and provide something they know (e.g. a banques et le partage password); something they are/have des données. Blockchain Technology: (e.g. a fingerprint); and something Identity Documentation they do (e.g. typing pattern). This is Capture and Storage an augmentation of the traditional In order to facilitate frictionless password-only account access, identity verification for the which financial institutions required underbanked, financial institutions for their online and early mobile must expand their data collection offering. However, due to a conflict methods and the range of accepted between cybersecurity concerns and documents. To do this, they could customer pressure to streamline look to implement biometric and account access, the majority of banks blockchain technology to aid now offer some level of multi-factor the capture and storage of these authentication.

BRINGING IN THE UNDERBANKED 240 Biometric Solutions That gives the underbanked for Identity Collection quicker, easier access to a bank and Verification account. The advantages of mobile- based identification collection are HSBC (HSBC, 2017) was an especially relevant within developing early pioneer in voice biometrics markets where, of the 2.2 billion L’identification par for telephone bank account access adults without access to traditional smartphone, qui and Lloyds introduced TouchID banking services, an estimated 46% couvrirait 81% des (fingerprint access) to its mobile app of the population own a smartphone adultes au Royaume- in 2016 (Fintech Ranking, 2016) (GSMA, 2016). Given this, the Uni, facilite l’accès des capitalising on the way in which proliferation of mobiles – together personnes « non-ban- fingerprint readers on smartphones with a 93% consumer preference carisées » à un compte had become increasingly common bancaire. Les avantages for biometrics over passwords de l’identification via (Deloitte A, 2016). Whilst the (Ball, 2017) – can help those who application mobile majority of this innovation focusses live in remote areas access financial sont particulièrement on account access for those who have products. adaptés aux marchés existing bank accounts, advances are émergents, où sur les also being made in using biometric The Impact of Biometric 2,2 milliards d’adultes authentication and verification to Technology for the sans accès aux services improve access to financial provision Underbanked bancaires traditionnels, for the underbanked. environ 46% de la Three pioneering projects are: population possède un An example of the cycle of the ID2020 global project, the smartphone (GSMA, small improvements that aims to UK government’s GOV.UK Verify 2016). De ce fait, la remedy the difficulty in branch- initiative, and India’s Aadhaar prolifération des télé- based authentication can be seen project. These aspire to create digital phones mobiles – asso- at challenger bank Monzo, which identities that can be stored on a ciée à une préférence uses facial recognition technology de 93% des consomma- national database and accessed by teurs pour la biométrie within their mobile-only offering corporates and financial institutions par rapport aux mots to on-board all customers. Monzo for identity verification. Aadhaar, de passe – peut aider customers are required to provide a which is a unique personal 12-digit ceux qui vivent dans photo (taken using their mobile) as identity number, has been provided des zones reculées à one piece of identification as well as a to over 99% of all Indian citizens accéder à des produits video ‘selfie’. Their identity is verified (Wikipedia, 2017) and includes financiers. using face matching technology and personal information such as name, an account can be requested and address and birth date but also opened within 7 days. biometric information with 10 This means that, for those able finger scans and an eye scan. This to provide a form of verification data can be used by all citizens as a with a smartphone, which 81% of government supported identification UK adults are (Deloitte B, 2016), document. Similarly, the GOV.UK Monzo removes the obstacle of in- Verify scheme (GDS, 2017) and person branch account opening. ID2020 (ID2020, 2017) projects

CHANGING FRONTIERS OF ETHICS IN FINANCE 241 look to provide a nationally accepted Nakamoto. It underpins the proof of identity to all citizens at zero cryptocurrency bitcoin, an electronic cost to the consumer. peer-to-peer cash system. However These projects would provide the the value of blockchain technology underbanked, whether in a developed has since been recognised outside Les projets de véri- or developing nation, with an identity of this application and is now being fication numérique document that could be accepted by explored by financial institutions fourniraient aux financial institutions. This, paired worldwide, including its potential personnes « non-ban- with advancements in omni-channel to improve provisions for the carisées », qu’elles banking, could provide frictionless underbanked. soient issues des pays access to banking provisions for développés ou en déve- A blockchain is a shared ledger the underbanked. Despite this, one loppement, une pièce that records transactions and should note that for those with no d’identité qui pourrait distributes an updated copy to all fixed abode, further steps may be être acceptée par les participants in the network, in near- required in order to accommodate institutions financières. real time. Transactions are grouped Ceci, combiné avec les their unsettled location. However together in blocks and connected progrès de la banque the digital nature of the project may multi-canal, pourraient more easily lend itself to real-time to previously verified blocks in offrir un accès sans updates through mobile and GPS order to form an immutable chain encombres aux non tracking. that records the entire history of ou mal-bancarisées. transactions – hence the term block- Malgré cela, il convient Blockchain Technology chain (diagram 1). de souligner que pour – The Basics ceux qui n’ont pas de The transactions within each domicilie fixe, d’autres Blockchain technology was block are verified to ensure that étapes peuvent s’avérer conceived in a 2008 whitepaper those who are attempting to send nécessaires afin de proposed by an anonymous funds have the required amount in contourner la difficulté creator using the pen-name Satoshi their accounts. Then, those who liée à la précarité de leur lieu de résidence. Diagram 1: Cependant, la nature numérique du projet fait que celui-ci est plus adapté à des mises à jour en temps réel grâce à des applications mobiles et à la localisation par GPS.

(Image: Tara Annison)

BRINGING IN THE UNDERBANKED 242 help to maintain the blockchain ‘hack’ the blockchain would need to network (called miners), must solve hack every copy of the blockchain in a mathematical problem associated existence. with the particular block in order to be able to add it onto the chain. This Blockchain Solutions helps the network reach consensus to Identity Storage as significant computing effort must Importantly, this verification can be employed by the miners to ensure be completed without the content only valid blocks are added to the of the underlying asset being made blockchain. Once a solution is found, visible to all on the network. This Si la création d’une it is broadcast to the wider network identité numérique is achieved by encrypting the and consensus can be reached. offre de nombreuses information before it is uploaded. opportunités aux After this point, new transactions The decryption keys are shared personnes « non-ban- are added to another block and the between the asset owner e.g. the carisées », elle s’accom- process begins again. individual and a trusted stakeholder pagne d’un risque Crucially, and unlike traditional e.g. a benevolent government. As accru de vol d’identité ledgers employed within the such, access to the underlying par le biais de cyber- content can only be granted should attaques. En tant que financial services industry, there is telle, la technologie no single copy of the ledger – it is both the asset owner and stakeholder de blockchain permet distributed to all participants in the agree. Furthermore, developments in de protéger l’identité network, without the need for a blockchain technology through zero- grâce au recours à un central counter-party. This helps to knowledge proofs (diagram 2) and registre distribué et provide the security of a blockchain confidential transactions can allow immuable, vérifié because there is no single point of for information to be validated in par la cryptographie, failure and anyone attempting to encrypted form, allowing for digital laquelle fournit une seule source de vérité, Diagram 2: sans aucune défail- lance.

(Image: Tara Annison)

CHANGING FRONTIERS OF ETHICS IN FINANCE 243 identity stored on a blockchain to applications such as Whatsapp and be verified by a third party without WeChat have become a dominant revealing the details of the underlying form of communication. Technology En établissant des identity information. companies have taken advantage cotes de solvabilité of the data collected by such pour les personnes Examples of blockchain use for « no-bancarisées », les identity storage include the secure interactions to provide a holistic banques peuvent tirer identity platform Civic (Civic, 2017) personal risk profile. Two companies parti de la modélisa- and an initiative led by SecureKey that utilise such data to provide an tion statistique des Technologies and IBM (IBM, 2017) alternative credit score are Tala and profils de risque qui who have partnered with leading DeMyst Data. intègrent une grande banks in Canada to build the first ever variété d’indicateurs. Holistic Credit Scoring Elles pourraient aussi digital identity network, allowing for potentiellement utiliser the cross-referencing and verification Tala (Tala, 2017) is a mobile la technologie du of identities across banks. That based fintech (financial technology blockchain comme une means that, should someone be company) that provides micro- alternative moins coû- able to provide their digital identity financing in developing markets. It teuse à l’infrastructure to a bank in Canada, it can also be assesses the risk profile of customers existante. On estime shared across all other participants in using their mobile phone profile. By que les applications de the network in a secure, immutable analysing over 10,000 data points blockchain peuvent per customer including regularity faire économiser aux format. For the underbanked, this of calls to family and friends, banques environ $ secure and distributed network 20 milliards par an, alongside initiatives such as Gov. geographical location, finance- à travers des gains UK Verify, provides the opportunity related apps on the device, and size d’efficience dans les to share their digital identity across of support network, financing can « middle- et back institutions. This will reduce be extended to borrowers within office », y compris des costs associated with multiple 2 minutes, after asking only 8 coûts réduits de traite- documentation requests and allow questions (Adams, 2016). Whilst ment des transactions. greater access to an array of financial the app initially saw default rates of Par conséquent, il 50-60%, an augmentation of the risk pourrait devenir finan- products. algorithms later reduced this to less cièrement possible However, whilst these innovations than 10% and has resulted in some d’octroyer des prêts de look to provide a source of digital interesting repayment metrics: microcrédit aux « non- identity for the underbanked, a bancarisés », si les challenge remains around how the • High regular travel patterns banques, aidées par le underbanked can provide assurance are linked to increases in blockchain et d’autres repayment rates of 4% technologies émer- of their creditworthiness to a gentes, opéraient dans financial institution. • Regular contact with the un contexte de coûts same family and friends is moins élevés. Blockchain Solutions correlated with a 6% uptick to Identity Storage in repayment rates As the use of mobile phones • A high number of contacts has increased exponentially, so with whom the client is in interactions on social media and on regular context is associated

BRINGING IN THE UNDERBANKED 244 with a boost in repayment An example of a fintech utilising rates of 9% (Siroya, 2016) micropayments to credit score is For the underbanked this Company Mission Asset Fund. It provides an opportunity to access extended microfinancing to 600 low-income individuals based Les banques jouent financing outside the traditional un rôle pivot dans lending model, at affordable rates, solely on the security provided by l’économie et dans and to build a traditional credit signed promissory notes. Of the 260 les opportunités qui score. For Tala it provides margins borrowers which San Francisco State s’offrent dans la vie comparable to those seen at University studied in a two-year d’un individu. Les traditional institutions – and all from review of the project, the average « non-bancarisées » a segment deemed ‘too risky’ to bank. credit score increased by 168 points auxquelles on donne to reach 603 points (Ashoka, 2013). un accès à des finan- Another company looking to cements auraient une harness mobile data for credit This allows a segment of opportunité d’emprun- scoring is Demyst Data. It aims to the underbanked to access non- ter pour acheter des combine both internal and external traditional financing whilst biens et des services à data sources in order to build the improving their credit score. That coûts plus élevés, tels credit profile of a customer. This boosts the possibility that, should que des véhicules ou they later apply for a financial des formations supplé- includes data from governments, product with a traditional institution, mentaires. Ils auraient from geolocation services and également accès à des from social media platforms, email their request will be accepted. produits d’épargne sûrs and networks. Corporations who However, the incumbents are et à des services ban- leverage the technology have seen currently restricted in their ability caires en ligne. Dans a 20% increase in new customers to offer micro-financing because l’ensemble, les banques with the same risk level and 45% of high overhead costs. These are a offriraient aux « non- fraud reduction (Demyst Data, result of: inefficient back-end credit bancarisées » une 2017). As such, the implementation opportunité d’élever processing, primitive risk models leur degré d’accomplis- of technologies such as this by that require high levels of capital sement et leur niveau financial institutions could allow the to be ring-fenced for those within de stabilité finan- underbanked to demonstrate their the underbanked category, and of cière. Il y a aussi une true risk profile by leveraging the expensive monitoring processes for dimension morale : les plethora of data available, moving account utilisation and repayment décisions de crédit des beyond the oversimplified traditional tracking. However, many institutions banques peuvent avoir credit score. are now exploring blockchain un impact significatif technology as a lower-cost sur la qualité de la vie Micropayments et les opportunités que alternative to existing infrastructure, l’on peut avoir. This is where a short-term, small and as a replacement for heritage (sub $1,000) loan is extended – systems. Existing systems are representing a low capital expense for unable to leverage technological the bank but providing the borrower advancements due to their inflexible with the opportunity to repay funds design and as such cannot take – therefore possibly improving their advantage of innovations. However credit score. implementations of blockchain

CHANGING FRONTIERS OF ETHICS IN FINANCE 245 technology are estimated to save and diverts wages into a special banks an estimated $20billion a year account without immediate access. (Perez, 2015) in middle-to-back This helps to prevent overspending office efficiencies, including reduced through the release of small timely transaction processing costs. payments. Furthermore the use of Therefore it could become financially pre-paid cards such as The Acorns feasible to provide micro-finance Card (Acorn Accounts, 2017) loans to the underbanked, should provides banking services without banks, facilitated by blockchain and the ability to enter into unauthorised other emerging technologies, operate debt and with automatic saving in a lower cost environment. provisions. Les banques qui offrent leurs services aux Morality and Banks that serve the underbanked, «non-bancarisées », Responsibility: utilising technology to mitigate the en utilisant la tech- Opportunity risks associated, will demonstrate nologie pour atténuer a commitment to people as well as les risques, démontre- Capitalisation and to profits. This may help to address ront un engagement Risk Management some of the negative perceptions aussi bien envers les The ability of a bank to lend of financial institutions that have personnes que les responsibly and fairly contributes to been held since the 2008/09 global profits. Cela pourrait contribuer à corriger its reputation, therefore a bank with financial crisis – in part caused by certaines des percep- high default rates, an inability to banks placing greater emphasis on tions négatives des provide access to customer savings, revenue rather than the needs of institutions financières and aggressive sales or repayment borrowers. Addressing the needs qui se sont dévelop- tactics, may be perceived negatively. of the underbanked could help to pées depuis la crise However, a bank that looks to remove the stigma of ‘bad bankers’ financière globale de provide financing to those in need, (Corrigan, 2008). 2008/09 – en partie provide a truly omni-channel service, causée par les banques This is especially important qui se sont concentrées and display a considered but sensible as banks play a pivotal role in the sur les profits plutôt risk appetite, will be understood as economy and in opportunities que sur les besoins des serving its customer base. within an individual’s life. The emprunteurs. That is why institutions should underbanked who are given access to look to capitalise on incoming finance would have an opportunity regulations such as PSD2, which to borrow to pay for higher cost mandate data sharing and closer goods and services, such as vehicles collaboration with fintechs, in order and further education. They would to improve their offering to the also have access to secure savings underbanked. An example of an products and to online banking. app that caters to the underbanked Overall, banks would be providing market and could be assimilated an opportunity for the underbanked within a larger bank offering is to raise their attainment and level Squirrel (Squirrel, 2017), which is of financial stability. There is also a designed for low income households moral dimension to this: the credit

BRINGING IN THE UNDERBANKED 246 decisions that banks make can Furthermore, a holistic approach significantly impact the quality of life to credit scoring can help banks and the opportunities that one may better understand the true risk- have. profile of an underbanked customer By responsibly extending fairly- by capitalising on the vast array priced finance to the underbanked, of personal data collected through financial services firms could mobile and online interactions. give them opportunities to help That would allow financing to be themselves. extended to those in need without compromising an institution’s Conclusion financial stability. Technological improvements Finally, we should consider in biometrics can assist with the fundamental role of financial personal data collection and identity institutions in society and how the verification for the underbanked, erosion of trust, thanks to previous who have restricted access to destructive market activity, has branch-based banking or who do impacted customers. Extending not have traditional, and costly, financing to many of those most in documentation. The implementation need, the underbanked, could assist of blockchain technology can help in improving the reputation and to securely manage this digitally- image of banks. It also provides the created identity and provide the underbanked with an opportunity to opportunity for collaboration and utilise this funding to improve their data sharing between banks. That own personal circumstances. means that different institutions All in all, the technology outlined could augment an identity profile in this paper can help banks capitalise – thereby removing the burden of on this opportunity whilst mitigating verification and authentication from the associated risks. • one bank alone and reducing the perception that the underbanked are ‘unknown’.

CHANGING FRONTIERS OF ETHICS IN FINANCE 247 References Acorn Account (2017). How it Boyce, L. (2016). Bank closure works. Retrieved from https://www. map of the UK: more than 1,000 acornaccount.com/bank-account/ branches have closed in just 2 howitworks.html years - and HSBC has cut more Adams, S. (2016). How Tala than a quarter of its network. This Mobile Is using phone data to is Money, 14 December. Retrieved revolutionize microfinance. from http://www.thisismoney.co.uk/ Forbes, 29 August. Retrieved money/saving/article-4029140/ from https://www.forbes.com/ Mapped-1-000-high-street-bank- sites/forbestreptalks/2016/08/29/ branches-closed-just-two-years- how-tala-mobile-is-using- HSBC-cut-quarter-network.html phone-data-to-revolutionize- Chaia, A. Goland, T. Schiff, microfinance/#3636e5c32a9f R. (2010). Counting the world’s Ashoka (2013). Banking the underbanked. Retrieved from http:// unbanked: a how-to. Forbes, 14 www.mckinsey.com/industries/ June. Retrieved from https://www. financial-services/our-insights/ forbes.com/sites/ashoka/2013/06/14/ counting-the-worlds-unbanked banking-the-unbanked-a-how- to/#7732cdd25727 Corrigan, T. (2008). Financial crisis: bad banker. Now take your Ball, T. (2017). Biometrics punishment. The Telegraph, 10 beat passwords for 93% of UK November. Retrieved from http:// consumers. Computer Business www.telegraph.co.uk/finance/ Review, 13 June. Retrieved from comment/tracycorrigan/3427721/ http://www.cbronline.com/news/ Financial-crisis-Bad-banker.-Now- cybersecurity/protection/biometrics- take-your-punishment.html beat-passwords-93-uk-consumers/ Civic (2017). Secure Identity Barclays A (2017). Identification Platform. Retrieved from https:// for bank Accounts. Retrieved from www.civic.com/secure-identity- http://www.barclays.co.uk/validid platform Barclays B (2017). Logging into online banking. DemystData (2017). Mobilizing Retrieved from http://www. the world’s data to unlock financial barclays.co.uk/Helpsupport/ services. Retrieved from http:// LoggingintoOnlineBanking/ demyst.com/ P1242604492621 Deloitte A (2016). There’s Beattie, A. (2017). The Evolution no place like phone: Consumer of Banking. Retrieved from http:// usage patterns in the era of peak www.investopedia.com/articles/07/ smartphone. Retrieved from https:// banking.asp www.deloitte.co.uk/mobileuk/assets/

BRINGING IN THE UNDERBANKED 248 pdf/Deloitte-Mobile-Consumer- GSMA (2016). The Mobile 2016-There-is-no-place-like-phone. Economy - Africa 2016. Retrieved pdf from https://www.gsma.com/ mobileeconomy/africa/ Deloitte B (2016) SUMMARY - There’s no place like phone: HSBC (2017). HSBC Voice ID Consumer usage patterns in the making telephone banking safer than era of peak smartphone. Retrieved ever. Retrieved from https://www. from https://www.deloitte.co.uk/ hsbc.co.uk/1/2/voice-id mobileuk/ ID2020 (2017). An Alliance Deutsche Bank (2015). Deutsche Committed to Improving Lives Bank supports guidelines for green Through Digital Identity. Retrieved bonds. Retrieved from https://www. from http://id2020.org/ db.com/cr/en/concrete-Deutsche- IBM (2017). Blockchain for Bank-supports-guidelines-for-green- Digital Identity: Build a trusted bonds.htm digital identity network with IBM blockchain. Retrieved from https:// Financial Inclusion www.ibm.com/blockchain/identity/ Commission (2016). The Facts. Retrieved from http://www. Know Your Money (2017). How financialinclusioncommission.org. much do you want to borrow?. uk/facts Retrieved from http://www. knowyourmoney.co.uk/short-term-lo Fintech Ranking (2016). Lloyds ans/?gclid=EAIaIQobChMIyOiRkb6T implements Touch ID. Retrieved 1QIVxpXtCh0wBARCEAAYAiAAEg from http://fintechranking. K5vvD_BwE com/2016/09/16/lloyds-bank- implements-touch-id/ Mesropyan, E. (2017). The Multilateral Concept of Inclusion: FSCS (2017). Your money is Going Beyond the Formal Financial protected in UK banks, building System. Retrieved from https:// societies and credit unions from letstalkpayments.com/multilateral- £1 to £85k. Retrieved from https:// concept-of-inclusion/ protected.fscs.org.uk/?gclid=EAIaIQ Money Advice Service (MAS), obChMIqbDAmceY1QIVgqntCh31N (2017). How to improve your credit gFTEAAYASAAEgIfmvD_BwE score. Retrieved from https://www. Government Digital Services moneyadviceservice.org.uk/en/ (GDS) (2017). Guidance: GOV.UK articles/how-to-improve-your-credit- Verify. Retrieved from https://www. rating gov.uk/government/publications/ NatWest (2017). Card-reader. introducing-govuk-verify/ Retrieved from http://personal. introducing-govuk-verify natwest.com/personal/ways-to-bank/

CHANGING FRONTIERS OF ETHICS IN FINANCE 249 online-banking/do-more-with- Siroya, S. (2016). A smart loan online-banking/card-reader-how-to- for people with no credit history use-your-card-reader.html (yet). Retrieved from https://www. ted.com/talks/shivani_siroya_a_ OFFA (2017). Quick Facts. smart_loan_for_people_with_no_ Retrieved from https://www.offa.org. credit_history_yet uk/press/quick-facts/ Squirrel (2017). Meet Squirrel: Paddinson, L. (2017). HSBC The App That Gets you Better at triggers investigation into palm Saving and Spending in Seconds!. oil company over deforestation Retrieved from https://squirrel.me/ allegations. Retrieved from https:// works www.theguardian.com/sustainable- business/2017/jul/17/hsbc- Tala (2017). Complex investigation-palm-oil-company- Data. Innovative Solutions. deforestation-allegations-noble- Retrieved from http://tala.co/#blo plantations ck-17_2_5_1470266915823_13410 Perez, B.Y. (2015). Santander: Wessex (2011). Banks that stop Blockchain tech Can save banks you using your account for betting. $20billion a year. CoinDesk, 16 June. Retrieved from http://community. Retrieved from https://www.coindesk. betfair.com/general_betting/go/ com/santander-blockchain-tech-can- thread/view/94082/28263669/banks- save-banks-20-billion-a-year/ that-stop-you-using-your-accounts- for-betting#flvWelcomeHeader Qell Group (2017). UK government signs deal with big Wikipedia (2017). Aadhaar. banks to increase SME lending: Retrieved from https://en.wikipedia. Retrieved from https://qell.co.uk/ org/wiki/Aadhaar uk-government-signs-deal-with-big- banks-to-increase-sme-lending/ Shaw, E. (2015). Can You Afford To Go To University As A Mature Student? Retrieved from https:// www.saga.co.uk/magazine/money/ work/careers/can-you-afford-to-be-a- mature-student

BRINGING IN THE UNDERBANKED 250 251 M oving Upwardly: Lessons from MMobile Payments in Kenya

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Special Commandment of the Jury

Josh Glendinning Developing norms central heating, refrigerators, and te- United Kingdom lecommunications (see, for example, Data and Insights In the 1910s, every morning my Gordon, 2012, pp. 4-7). Manager, Financial + great-grandfather would cycle across People in the West have also Professional Services the small manor estate on which been the first to experience the nu- H+K Strategies*, he was employed to turn on the London merous social changes and benefits recently-installed electricity gene- that these technologies can bring, rator which provided power to the such as reductions in rates of di- owners. The house was likely among sease, increases in leisure time, and the earliest in the country and per- improved communications. The haps the world to have a regular patterns of usage and consumption supply of electricity. of new technologies are also esta- Today, it is accepted that every blished here through concomitant house in the United Kingdom and changes in culture and the creation most of the developed world should of new economies. have an electricity supply. The same * The views expressed For the past two centuries, im- herein are those of is true of most other inventions of plementation and adoption of new the author and do not the so-called ‘second industrial revo- technology has generally followed necessarily reflect those lution’ that immensely improved the this pattern. Inventions and deve- of the Organization he is lives of people in the West during affiliated to. lopments are pioneered in rich de- the course of the twentieth century: veloped economies and adopted by indoor plumbing, the internal com- the most affluent, before gradually bustion engine, washing machines, diffusing themselves throughout the

MOBING UPWARDLY: LESSONS FROM MOBILE PAYMENTS IN KENYA 252 rest of society until they become ac- means of creating an ethical financial cepted as a condition of a basic stan- sector fit for the future. Access to fi- dard of welfare and social inclusion. nancial services has improved the Often, it is only then that these te- lives of millions of people in Kenya, chnologies are even considered ripe but more importantly, the service Tout au long de l’his- for implementation elsewhere using has also allowed itself to be shaped toire humaine, le déve- the same frameworks that were de- by these lives. loppement technolo- veloped in the West. The developing As the example of M-PESA will gique et économique a world has had to wait decades for demonstrate, a responsive stance is suivi le même schéma. many of these innovations, and in crucial to the success of a product Les inventions ont été many cases, it is still waiting. initiées dans les écono- that has had a significant positive mies riches et déve- Yet today, more people across social and economic impact, from loppées et adoptées the developing world have access to aiding long-term planning, to foste- par les personnes les a mobile phone than to mains elec- ring enterprise, to enhancing social plus influentes, avant tricity. This remarkable fact has led a cohesion. Disruptive technologies d’atteindre peu à peu le notable deviation from the trend out- such as mobile payments can impro- reste de la société. lined above. More surprisingly, this ve market competitiveness and pro- Aujourd’hui cepen- disruption has occurred in a sector ductivity, while also remedying the dant, des millions historic lack of provision of financial de personnes dans le not popularly associated with inclu- monde en développe- sivity: financial services. Millions of services for poor and marginalised ment ont accès aux people across the developing world groups. services financiers et now have access to financial services Moreover, such new technolo- réalisent des milliards and are conducting billions of tran- gical and social developments call de transactions chaque sactions every year through their upon the financial services industry année à travers leur mobile phones. While the adoption as a whole to re-evaluate itself and téléphone portable. of mobile payments has been rela- take a more responsive attitude to tively sluggish in the West, the de- the needs and desires of changing veloping world, and Africa in parti- societies. The most serious recent ca- cular, have surged ahead in creating lamities and unethical practices in fi- dynamic new economies and ways of nancial services have been perpetra- doing business. ted due to business practices which La montée de la privilege the role of intermediation finance mobile est Commandments above the needs of the end users, so- un cas d’école pour and consequences ciety, and the economy. Too often, l’industrie des services financiers au This essay will argue that the complex instruments and practices XXIe siècle. Comme rise of mobile finance is instructi- have been developed which are de- l’exemple de M-PESA ve for the broader financial services signed to benefit only their creators. au Kenya le démontre, industry in the twenty-first century. In turn, financial institutions la réactivité est cruciale Using the case of M-PESA in Kenya, have responded to these failures pour le succès d’un I will show how financial solutions with numerous moral injunctions produit qui peut avoir un impact significatif attuned and responsive to the needs and charters aimed at remedying the of a society and an economy are the mistakes of the past. Many hours

CHANGING FRONTIERS OF ETHICS IN FINANCE 253 et positif au niveau have been spent devising corpora- Rumours abounded that the head social et économique. te sustainability and responsibility of Equity Bank, one of the largest Les services finan- frameworks based around concepts banks in the country, was using the ciers sont au fond such as integrity, fairness, excellen- “common man’s” money to bankroll une industrie de ce, and respect. While such initia- l’intermédiation et de Kibaki’s campaign and that the insti- l’abstraction, mais pour tives are undoubtedly noble, when tution was close to collapse. agir éthiquement, ils they are removed from their social Sylvesta, a security guard and doivent être conscients context, they become just as abstract shop owner living in a suburb of the de leur rôle dans la – and therefore just as fallible – as capital Nairobi, feared that the insta- satisfaction des besoins the practices they were intended to bility could have a significant finan- très réels des écono- address. mies et des sociétés cial cost for him: dont ils font partie. Financial services is, at heart, an “Guys were telling me to take my industry of intermediation and abs- money out of Equity. They were sure traction, but if it is to act ethically, that it was going down.... Many had it must retain an awareness of its already taken their money out because role of fulfilling the very real needs they were scared. They were keeping of the economies and societies of the cash at home. I was scared to keep which it is part. New technologies, any of the cash at home.... They were emerging economies, and changing fighting and looting all over.” (Mo- behaviours from consumers and bu- rawczynski, 2010, p. 172) sinesses afford an exciting new opportunity to establish and strengthen These concerns have been com- D’après les derniers this more direct relationship. These mon for decades for people living in chiffres de la Banque opportunities may require both re- sub-Saharan Africa and elsewhere Mondiale, moins d’un gulators and traditional financial in the developing world. According quart de la popula- institutions to reconceptualise their to the latest figures from the World tion de la région a un structures and purpose to better ser- Bank, less than a quarter of the po- compte bancaire. Dans pulation of the region has access to les pays tels que le ve the needs of societies in both the Soudan, le Sénégal et developing and the developed world. a bank account (Demirgue-Kunt and la République Démo- I aim to argue that such a change is Klapper, 2012). In countries such as cratique du Congo, not only ethical, but also necessary. Sudan, Senegal and the Democra- les chiffres sont si tic Republic of Congo, levels are so petits qu’ils sont négli- Overstuffed mattresses small as to be negligible. Globally, geables. Globalement, The atmosphere in Kenya in it is estimated that 2.5bn people – on estime que 2. 5 about half the world’s adult popu- milliards de personnes the run-up to the 2007 presidential – environ la moitié de elections was febrile. Opinion polls lation – does not have access to rela population adulte placed incumbent president Mwai gular financial services. For reasons mondiale – n’ont pas Kibaki of the traditionally dominant we will later explore, this situation un accès régulier aux Kikuyu ethnic group, behind cha- should be rued both as an ethical fai- services financiers. llenger Raila Odinga who had succe- ling and as a missed economic op- eded in creating a broader coalition portunity. outside of his own Luo ethnic group. Even for people like Sylvesta who

MOBING UPWARDLY: LESSONS FROM MOBILE PAYMENTS IN KENYA 254 do have access to a bank, there is a rrency (McKerney et al, 2002). With serious lack of trust in formal finan- increasing internal and external mi- cial institutions, especially in unsta- gration, families were searching for a ble economic and political climates. way to retain not only social bonds Some savers pay negative interest ra- but practical support mechanisms tes in order to keep their money safe over long and short distances. and accessing funds can be onerous. For the poor, small-scale money In Kenya, there are just 5.5 commer- transfer was either prohibitively ex- M-PESA a été dévelop- cial bank branches and 10 ATMs for pensive or simply unavailable. Mean- pé comme un produit every 100,000 adults, and the situa- while, Kenya’s adoption of mobile fait sur mesure pour tion is far worse for those living in phones had been rapid (see Fig. 1), les besoins non satis- remote rural areas (IMF, 2014). faits de son utilisateur but off-the-shelf payment applica- tout en tenant compte tions were engineered for developed de l’environnement A call to action markets and therefore inappropriate socio-économique According to classic economic for the Kenyan environment. It was existant et des profils theRather than risking his cash un- with this in mind that M-PESA was de comportement. der the proverbial mattress, Sylvesta developed as a product bespoke to Plus des trois quarts took advantage of the M-PESA mobi- the unmet needs of its users, but de la population du also attuned to the existing socio- Kenya ont maintenant le payments service that had been re- accès à un compte cently launched by Vodafone and its economic landscape and patterns of mobile et 80 % en sont Kenyan subsidiary Safaricom. As far behaviour. des utilisateurs actifs. back as 2002, development resear- Compared to traditional financial Des services payants chers had noted the important role institutions, registration for and use similaires ont surgi sur that mobile phones were playing in of M-PESA are relatively simple and de nombreux autres helping families to manage their fi- cheap. Existing customers of Safari- marchés, en Afrique et dans d’autres parties nances over significant distances and com can register for the service with du monde. On estime there were reports of prepaid mobi- a single form of identification and que 255 systèmes de le credit being used as a proxy cu- deposit cash as an ‘e-float’ linked to paiement mobiles existent à présent dans le monde avec 103.4 millions de comptes actifs.

(Source: ITU, 2014)

CHANGING FRONTIERS OF ETHICS IN FINANCE 255 their SIM card. Depositing cash is Moreover, similar payments ser- free, but withdrawals incur a char- vices have sprung up in numerous ge depending on the amount. Funds other markets, both in Africa and can be sent via SMS using the pho- other parts of the world. It is estima- ne number of the intended recipient ted that 255 mobile payment systems for a fee charged to the sender. To now exist worldwide with 103.4m ensure the integrity of the system, active accounts (GSMA, 2015). all funds are held in trust in several Il est important de commercial banks and are inaccessi- More than money souligner l’impact ble to Safaricom save for the interest, Such numbers are certainly im- réel que l’accès à ces some of which is donated to a chari- services financiers peut pressive but it is important to pause table trust. apporter, car il n’est to outline the very real impact that pas forcément évident As the International Finance Cor- access to financial services can bring, pour tous ceux d’entre poration (2010) has noted it was this as this is often not immediately appa- nous qui considèrent ‘unique design of M-PESA and its rent to those of us who take such cet accès comme allant ability to service its target customers’ de soi. access for granted. Perhaps most ob- that has been one of the key factors Pour ceux qui ont viously, storing and transferring mo- quitté leur lieu d’ori- behind its staggering success. More ney through a financial intermediary gine pour aller travail- than three-quarters of the Kenyan is safer than the immediate alterna- ler dans les villes, le population now have access to a motive – handling hard currency. As transfert de fonds est bile money account, of which 80% Morawczynski (2011, pp. 117-146) un important moyen are active users (Financial Inclusion de conserver les liens has shown, the terrible violence and Insights, 2014). The amounts trans- fear provoked by the 2007 Kenyan familiaux et sociaux. ferred on a monthly basis are already L’accès aux services presidential election in fact gave rise financiers permet far outstripping card payments and to propitious circumstances for the aussi aux personnes are set to surpass EFTs and cheques development of mobile money. de se prémunir face à soon (see Fig. 2). un avenir incertain, M-PESA’s initial marketing spécialement ceux qui strategy focused squarely on the mènent une vie pré- transference of remittances, with a caire et/ou qui ont des rather direct tagline that encouraged revenus irréguliers. people to ‘send money home’. The company also employed an extensive network of agents across Kenya to encourage take-up of the service and facilitate withdrawals for rural customers. For those who have left their hometowns to work in the city, transferring funds is an important means by which familial and social (Source: Central Bank of Kenya, 2014) bonds can be retained. Meanwhile, monies from family living in the city

MOBING UPWARDLY: LESSONS FROM MOBILE PAYMENTS IN KENYA 256 can make up a significant proportion Savings can also help to enhance of the income of people in rural areas control and independence. As Dupas and can play a key role in enabling and Robinson (2009) have shown, longer term decision-making such there is significant demand for for- as capital investment in cash crops mal savings instruments among wo- and equipment. From a macroeco- men in Kenya. This suggests that nomic perspective, remittances pro- their informal methods of saving, vide the security for investment in such as cash, are often ineffective the efficient allocation of labour by due, for example, to demands from enabling people to move to higher- spouses and other family members. Furthermore, the ability to paying jobs in distant locations (see easily check balances and payments Jack and Suri, 2009). M-PESA reflète et enables independent budgeting and One of the most notable benefits renforce les réseaux planning. As one Kenyan woman sociaux informels of access to financial services is the said of her husband: “He thinks I am existants qui sont ability to guard against uncertainty, texting...but really, I am checking cruciaux pour la especially for those with precarious my bank balance” (Morawczynski, gestion financière dans livelihoods and/or irregular incomes 2011, p. 137) les pays pauvres. De in potentially unstable societies. As même que le service Listen and learn a été développé à early as January 2009, surveys found travers une interaction that three-quarters of M-PESA users The flexibility of the M-PESA symbiotique entre les had used the service as a savings system and the fact that it is so in- besoins non satisfaits, instrument, often in conjunction tertwined with communications also les comportements with other mechanisms (FSD Kenya, enhances the function of networks existants et le projet, 2009). of economy and society, such as the son développement pooling of risk. M-PESA can help to ultérieur a également The ability to save provides a va- formalise and enhance existing en- été modelé par la façon luable method by which people can dogenous local microfinance organi- dont il a été utilisé par mitigate the effects of unexpected les clients. sations and networks, such as Rota- shocks whether in the form of falls ting Savings and Credit Associations in income, political unrest, or health (ROSCAs) and Savings and Credit emergencies. Such facilities also pre- Association (ASCAs). These organi- vent actions being taken that have sations have existed in Kenya for a longer term consequences, such as number of years as means of pooling the liquidation of valuable physical risk and resources, but M-PESA has assets during an emergency. A 2013 helped to improve their flexibility, study in Kenya showed that simply bolster their strength, and increase providing a safe place for savings in- their scale. creased health savings by two-thirds The organic evolution of infor- with the potential for a marked im- mal uses of M-PESA has been mi- provement in health outcomes (Du- rrored by a gradual expansion of pas and Robinson, 2013). formal services on offer through the

CHANGING FRONTIERS OF ETHICS IN FINANCE 257 platform. In expanding its marketing array of inter-personal transactions strategy Safaricom began to enrol a that Kenyans undertake and which diverse list of partners to expand the are endemic to their financial lives. range of services that could be offe- These transactions can be unders- red through the platform. This inclu- tood as embedded in social relation- des traditional financial institutions, ships.” The flexible structure offered such as banks, MFIs and insurance by M-PESA both mirrors and stren- firms, but also companies working in gthens the existing informal social utilities, media, and retail, as well as networks that are crucial to financial the charitable sector. The system is management in poor countries. Just now being used for everything from as the service was developed through paying electricity bills to sending a symbiotic interplay between unmet charitable funds to health clinics for need, existing behaviour and design, its subsequent development has also L’amélioration de vital surgical procedures. l’accès aux services The ability to access these ser- been shaped by the ways in which it financiers est bienve- vices has not only opened them up has been utilised by its users. nue pour sa capacité to more users, but has also helped d’offrir de nouvelles improve the services on offer. For A partial solution possibilités, une meil- example, by enhancing access to leure sécurité, et plus OWhat then, can we learn from de liberté aux habitants insurance products, such as health the example of M-PESA in Kenya? As du monde en dévelop- insurance, M-PESA has enabled in- we have seen, improving access to fi- pement. surers to shift to monthly premiums nancial services should be welcomed Les paiements mobiles thereby making cover more affor- for its ability to provide new oppor- peuvent jouer un rôle dable (Smith et al, 2010). In 2012, tunities, better security, and more important, même s’il Safaricom finally launched a savings freedoms to people in the developing n’est que partiel, pour and loan product called M-SHWARI world. The potential benefits for aider les gens à se in partnership with the Commercial prendre en charge. other developing countries are enor- Bank of Kenya. Again, we see the mous and, as already noted, similar ways that people naturally utilise mobile payments services are now their newfound access to technology available to millions outside of Ken- systems leading the way in the deve- ya. It is also easy to forget that 60 mi- lopment of new services by private llion adults are ‘unbanked’ in develo- companies. ped countries where lack of access to While the initial intended scope financial services can be an especially of M-PESA may have been limited, significant barrier to economic and its rapid expansion has been accom- social inclusion (Chaia et al, 2009). panied by an evolving ecosystem However, it is not my intention of usage, encompassing changes in to overstate the significance that both economic and social patterns of mobile payments may have for the behaviour. As Johnson, Brown and developing world, nor to portray it Fouillet (2012, p. vi) have noted, M- as a panacea. To put the counterar- PESA’s “extensive use reveals the vast gument crudely, mobile payments

MOBING UPWARDLY: LESSONS FROM MOBILE PAYMENTS IN KENYA 258 are of limited use to people without by an ethical desire to improve the money. Indeed, there are salutary les- lives of the poor. In this sense, the so- sons in caution to be taken from the cial and economic benefits presently overenthusiastic embrace of microfi- being derived from M-PESA could be nance in development policy and the considered mere byproducts, or to subsequent backlash against it du- use the economists’ phrase, ‘positive ring the 1990s and 2000s. Too many externalities’, of a simple hard-nosed irresponsible actors were allowed business decision. to join the market at the expense of However, I wish to argue for a the intended beneficiaries, leading to version of ethics that is not based credit bubbles and extortionate inter- abstract reasoning. An ethical finan- est rates (see, for example, Kazmin, cial services industry is not one that 2010). Nevertheless, it seems fair to donates to charity, but one that pro- Une industrie de say that on the balance of the eviden- duces positive outcomes that benefit services financiers ce so far, mobile payments can play societies. The development of M- éthiques ne doit pas an important if partial role in im- PESA is ethical precisely because it faire de la charité, mais proving the lives of poor people and was born not of adherence to a set of doit générer des effets enabling them to help themselves. abstract principles, but from a genui- bénéfiques pour la nely direct and reflexive relationship société. Le développe- A case of virtue with Kenyan society. Moreover, as ment de M-PESA est and vice? we have seen, without this relation- éthique précisément ship M-PESA could not have enjoyed For the purposes of this essay car il n’est pas né de nearly the same degree of success. l’application aveugle though, we must address a further de principes abstraits, question: how is the provision of In the past, such concerns and ar- mais d’une interac- mobile finance ethical, and what can guments might have been easily dis- tion simple directe et financial services learn from it? To missed, but changing societies and réfléchie avec la société turn to the former question, if we new technologies will soon make kenyanne. were to consider mobile payments them impossible to ignore. Mobile Quoiqu’il en soit, sans ‘ethical’ in the narrow sense of an payments, allied with other develop- cette relation, M-PESA action which ought to be done, there ments, such as peer-to-peer lending n’aurait pas pu profiter is a danger that such an assessment and cryptocurrencies, are part of a d’un tel succès. is crudely universalised. This would broader trend which will be highly be to argue that we should ‘beat our disruptive to the deeply ingrained swords into ploughshares’ as the Bi- models of financial services. It won’t ble puts it, or more concretely, that have escaped the attention of readers all financial institutions should di- that the company behind M-PESA is vert their investment towards mobi- not a financial organisation but a te- le payments and other technologies lecommunications provider. In fact, that will benefit the poor. there is little direct involvement of Conversely, it would certainly be traditional financial institutions in fair to argue that the decision of Safa- the service, except to provide servi- ricom to invest in M-PESA as a prices through the platform and to gua- vate company was not driven solely rantee the money on it.

CHANGING FRONTIERS OF ETHICS IN FINANCE 259 Unexpected that financial services plays in an increasingly globalised society and developments economy. Such a reassessment is and unforeseen both vital and necessary. Unlike consequences nearly every other area of developed As M-PESA shows, providing economies, there has been little or new ways for people and businesses no improvement in productivity in to transact with one another finan- the financial sector for over a cen- cially can generate new and unfo- tury (Phillipon, 2014). The challen- reseen behaviours, economies, and ge for the financial services industry cultures. In both the developed and is to create business models and be- developing world, consumers and haviours that are ready and able to Le cas de M-PESA businesses are likely to utilise and confront these issues as they arise. montre que les manipulate the new opportunities For both established institutions consommateurs et les and individuals working in financial entreprises peuvent afforded by changing technology in utiliser et manipuler diverse and unexpected ways. We services, there will be an inevitable les nouvelles possi- can already see signs of emerging temptation to see new trends as a bilités offertes par la trends, from new behaviours on ‘so- threat and therefore to react defen- technologie changeante cial money’ apps such as Venmo, to sively. For regulators too, there will de façons diverses et borrowing and lending between or- be an understandable focus on the inattendues. dinary businesses and individuals on risks, such as the increased poten- Ces technologies et peer-to-peer platforms, to changing tial for money laundering and fraud. les comportements procedures within corporations with Indeed, one of the reasons for the vont imposer une direct access to SWIFT payment net- slower uptake of M-PESA in other réévaluation continue works. developing countries has been due de la fonction que to hesitance from existing financial les services finan- Indeed, it has even been argued institutions and regulators. These ciers occupent dans that M-PESA e-floats can be consi- une société et une dered a parallel currency, partially concerns are undoubtedly legitima- économie en voie de removed from the traditional frac- te, but an excessive focus on them globalisation. Une telle tional reserve banking framework will merely lead to ossification and remise en question est (Kaminska, 2012). Over the coming insularity. non seulement vitale, years, new technology is likely to mais nécessaire. Ready for change pose even more fundamental questions to orthodox structures within At its heart, financial services is financial services and, in turn, new based on abstraction and interme- ethical issues will arise. diation, whether in the efficient allo- It would be foolhardy to try to cation of capital or the pooling of predict the precise constellations economic resources. Too often in the that will be formed by these inci- past, these have become an end in pient trends even a few years hence. themselves in the behaviour of both Nonetheless, it can be said with cer- individuals and institutions, leading tainty that they will compel an on- to unscrupulous and unethical beha- going reassessment of the function viour. Yet the appropriate response

MOBING UPWARDLY: LESSONS FROM MOBILE PAYMENTS IN KENYA 260 to excessively abstract practices is akin to personal virtuosity or sin. It not to produce equally abstract vais not simply the means by which we lues frameworks or charters. Such divine how to ‘do the right thing’, measures are at best impotent, and L’éthique est profondé- whether in abstract scenarios or real ment enchâssée dans at worst, prone to misinterpretation life. Undoubtedly, formalised rules réseaux et systèmes and corruption. les and procedures have their place de la vie économique M-PESA has succeeded in impro- within any organisation, but if we et sociale y compris ving people’s lives, because it wasn’t are to encourage ethical behaviour les services financiers. guided by high-minded principles C’est seulement à from both organisations and indivi- travers les interactions but by listening to and learning from duals, we must not be beholden to avec les autres au sein Kenyan society. With new techno- abstract standards. Such a concep- d’une communauté ou logy, financial institutions have an tion merely breeds ethical and inte- de la société que nous even greater opportunity to open llectual immaturity by cutting off the pouvons nous rendre themselves up to learning from so- possibility of learning from a rapidly compte de la réalité ciety. Innovative services which are changing world. éthique dans son vrai responsive to the needs and beha- sens en évaluant les viours of a society and economy Ethics are deeply and profoundly conséquences de nos embedded within networks and actions. Une industrie can produce positive outcomes for de services finan- those within that society. Further- systems of economic and social life ciers éthique, prête à more, they enhance and improve the and this includes financial services. s’engager au service functioning of society itself. It is in It is only through interactions with de l’avenir doit être these instances that financial services others within a community or a so- ouverte et désireuse de is at its best and the principle applies ciety that we can understand ethics tirer des enseignements de la société. just as much to the largest banking in a very real sense by assessing the institutions in Europe or the US as consequences of our actions. An it does to payments providers in the ethical financial services industry developing world. ready and prepared for the future is Ultimately, we must not take a one that is open and willing to learn narrow and crude view of ethics as from society. •

CHANGING FRONTIERS OF ETHICS IN FINANCE 261 References Central Bank of Kenya (2014). GSMA (2015). 2014 State of the ‘KEPSS/RTGS Statistics’. Retrieved Industry: Mobile Financial Services for from https://www.centralbank.go.ke/ the Unbanked. Retrieved from http:// index.php/nps-modernization/kepss- www.gsma.com/mobilefordevelop- rtgs-statistics ment/wp-content/uploads/2015/03/SO- Chaia, A., et al (2009). Half the TIR_2014.pdf world is unbanked. Financial Access Ini- tiative/McKinsey. Retrieved from http:// International Finance Corpora- mckinseyonsociety.com/downloads/ tion (2010). ‘M-Money Channel Dis- reports/Economic-Development/Half_ tribution Case – Kenya’. Retrieved the_world_is_unbanked.pdf from http://www.ifc.org/wps/wcm/co nnect/4e64a80049585fd9a13ab5195 Demirgue-Kunt, A. and Klapper, L. 83b6d16/tool+6.7.+case+study+-+m- (2012). ‘Measuring Financial Inclusion: pesa+kenya+.pdf The Global Findex Database’. World Bank. Policy Research Working Paper International Monetary Fund 6025, 2012 (2014). ‘Financial Access Survey 2014’. Dupas, P., and Robinson, J. (2009, Retrieved from http://fas.imf.org/De- revised 2012). ‘Savings constraints and fault.aspx microenterprise development: evidence from Kenya’. National Bureau of Econo- ITU (2015). ‘ICT-Eye: Key ICT mic Research. No. w14693 Data & Statistics’. Retrieved from http:// www.itu.int/net4/itu-d/icteye/ Dupas, P. and Robinson, J. (2013). Why Don’t the Poor Save More? Evi- Jack, W. and Suri, T. (2009). ‘The dence from Health Savings Experi- economics of M-PESA’. Massachusetts ments. American Economic Review. 103 Institute of Technology. Retrieved from (4), 1138–1171 http://www.mit.edu/~tavneet/M-PESA. Financial Inclusion Insights (2014). pdf ‘The FII Data Center: Fall 2013 Survey’. Retrieved from http://finclusion.org/da- Johnson, S., Brown, G. K., and Foui- tacenter/data-center/ llet, C. (2012). ‘The search for inclusion in Kenya’s financial landscape: The Rift FSD Kenya (2009). ‘Mobile pay- revealed’. FSD Kenya. Retrieved from ments in Kenya: Findings from a survey http://www.fsdkenya.org/pdf_docu- of M-PESA agents and users’. FSD. Re- ments/12-03-29_Full_FinLandcapes_ trieved from http://www.fsdkenya.org/ report.pdf. pdf_documents/11-02-14_Mobile_pay- ments_in_Kenya.pdf Kaminska, I. (2012). ‘More on Gordon, R. J. (2012). ‘Is US econo- M-Pesa and e-money’, Financial Ti- mic growth over? Faltering innovation mes: FT Alphaville, 20 July 2012. confronts the six headwinds ()’. Natio- Retrieved from http://ftalphaville. nal Bureau of Economic Research. No. ft.com/2012/07/20/1089571/more-on- w18315 m-pesa-and-e-money/

MOBING UPWARDLY: LESSONS FROM MOBILE PAYMENTS IN KENYA 262 Kazmin, Amy (2010). ‘Bangla- Phillipon, T. (2014). ‘Has the U.S. desh joins microfinance backlash’. Finance Industry Become Less Effi- Financial Times, 7 December 2010. cient? On the Theory and Measure- Retrieved from http://www.ft.com/ ment of Financial Intermediation’, cms/s/0/63757d46-0234-11e0-aa40- September 2014. Retrieved from http:// 00144feabdc0.html pages.stern.nyu.edu/~tphilipp/papers/ McKemey, K. et. al (2003). ‘Innova- Finance_Efficiency.pdf tive Demand Models for Telecommuni- cations Services’ Gamos Ltd: Final Te- Smith, A. et al (2010), ‘Kenya mi- chnical Report’. Retrieved from http:// croinsurance landscape’.The Centre www.telafrica.org/pdfs/FinalReport.pdf for Financial Regulation and Inclu- sion. Retrieved from http://cenfri.org/ Morawczynski, O. (2010). ‘Exami- documents/microinsurance/2012/ ning the Adoption, Usage and Outco- Kenya%20microinsurance%20diagnos- mes of Mobile Money Services: The tic.pdf Case of M-PESA in Kenya’. Retrieved from https://www.era.lib.ed.ac.uk/bits- tream/handle/1842/5558/Morawczyns- ki2011.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 263

ill e-Government Reduce WWCorruption in Public Tendering? The South African Case Study

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015 Chiedza Musvosvi Zimbabwe Consultant, KPMG*, Finalist Johannesburg

Tendering: Necessity through a tender process, where con- or Choice? tractors bid for the contract. Procurement is advantageous in The role played by government in that it provides business growth op- establishing and growing a country’s portunities to contractors and service economy is critical. Apart from fiscal providers and allows government to Marlyn Anthony- and monetary policy-making govern- access skills and expertise in order to rajah ments are responsible for funding pro- complete projects in a timely, cost- South Africa jects that create a better business en- Quantitative Analyst, effective manner. As government pro- Barclays Africa Group vironment and a skilled labour force. jects are catalysts for a country’s eco- Limited*, Johannesburg Such projects are aimed at improving nomy, ineffective implementation and infrastructure, maintaining the rule of management of such projects can have law, and providing citizens with ac- adverse effects on the economy and so- cess to quality healthcare, education ciety. Without sufficient employment and housing. All these government and business activity, the government services serve to grow the economy cannot collect the required amount of by creating employment or business revenue to maintain or increase hou- * The views expressed opportunities. These services may be sehold incomes and living standards. herein are those of the provided directly by government or Lower household income in turn authors and do not outsourced to private contractors (he- necessarily reflect those of affects education and health levels – the Organization they are reafter referred to as ‘procurement’). and thus the labour force becomes less affiliated to. Procurement is typically achieved efficient, and the cycle continues.

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 264 Much of the blame for the lack Les prestations du Economic Climate: Tumbling BRICS? of economic growth has been placed gouvernement en on the South African government’s faveur de la croissance South Africa has experienced inability to accomplish its infras- de l’économie peuvent être fournies directe- accelerated economic growth since tructure projects and delivery of ment par le gouverne- attaining democracy in 1994. Prior services on time – and within bud- ment ou sous-traitées to this the economy was in decline get. Due to under-investment in à des entrepreneurs due to sanctions imposed on the electricity production, South Africa privés (ci-après apartheid government (Faulkner is also currently facing an energy “soumission”). La & Loewald, 2008). In spite of this, crisis that threatens to derail the soumission a généra- there have been several challenges economy. Examples of shortco- lement lieu à travers un appel d’offres qui to developing the country’s eco- mings in service delivery include présente l’avantage nomy – most notably in the past de- reported delays in the completion de permettre aux cade. As a developing nation, South of government hospitals and power entrepreneurs et aux Africa’s forecast GDP growth (2.0% stations, and delays in delivering prestataires de services in 2015) pales in comparison to school books. These deficiencies de développer leurs other emerging markets such as Ni- may be due to a combination of skill activités et au gouver- geria (4.2%), Turkey (3.5%), India shortages, limited access to capital, nement d’avoir accès à des compétences et (7.0%) and Indonesia (5.8%) (Pri- and corruption. à de l’expertise pour cewaterhouseCoopers, 2015). “Bribery and corruption has been pouvoir mener à bien The South African economy is the fastest growing economic crime des projets de façon currently in a group known as the category in South Africa since 2011. appropriée et rentable. ‘Fragile Five’, which have seen wi- South African organisations suffer dening current account deficits and significantly more procurement fraud, depreciating exchange rates over human resources fraud, bribery and “Parmi les catégories the last few years (Boxshall, Zim- financial statement fraud than or- de crimes écono- mern, & Kupelian, 2014). ganisations globally ... more than a miques, les pots-de-vin et la corruption ont crû Figure 1 . Emerging market current accounts, with the ‘fragile five’ depicted le plus rapidement en in the grey area Afrique du sud depuis 2011. Les organisations sud-africaines subissent significative- ment plus de fraudes en matière de passa- tion des marchés, en ressources humaines, de pots-de-vin et de fraudes dans les états financiers que toutes les autres organisations… Plus d’un (Source: PwC Global Economy Watch (March 2014)

CHANGING FRONTIERS OF ETHICS IN FINANCE 265 quart des répondants quarter of South African respondents such as preferential employment and sud-africains ont dit reported that their organisations had procurement. Black equity stakes que leurs organisations been asked to pay a bribe in the last have increased from just under 1% avaient dû payer un 24 months. In addition, one fifth of in 1994 to 7-8% in 1999 (Edigheji, pot-de-vin dans les derniers 24 mois. De South African respondents believe 1999). A 2014 study suggests that plus, un cinquième they lost a business opportunity be- most South African business mana- pense qu’ils ont perdu cause a competitor had paid a bribe.” gers, regardless of race, agree that un marché car un PwC Global Economic Crime Sur- BEE is aimed at broadening the eco- concurrent avait payé vey (February 2014) || (p.4). nomic base of the country; however, un pot-de-vin.” - PwC many disapprove of the manner in Corruption has become a recu- Global Economic which the policies are being imple- Crime Survey (Februa- rring theme in daily news headli- mented (Rensburg & Roodt, 2005). ry 2014). nes and appears to be rampant. If Critics of BEE argue that the empha- left unchecked, levels of corruption sis on race and social background re- will continue to rise and economic sults in trivialisation of the necessary growth will continue to decline. Ac- skills, qualifications and experience cordingly, this paper analyses the required to perform competently in En 1994, le gouverne- reasons behind unethical behaviour a job or project. In particular, go- ment sud-africain a mis and suggests solutions for addres- vernment departments place great en route le Black Eco- sing the issue of corruption in the emphasis on BEE initiatives – some- nomic Empowerment government tender process. The times to the detriment of progress on (‘BEE’). Ce programme discussion proceeds as follows: sec- d’empowerment (mon- high-impact projects that are crucial tée en puissance) – qui tions 2 and 3 identify issues in the for social progress and economic met l’accent sur l’ori- current tendering process; section 4 growth. In fact, the emphasis on race gine raciale et sociale – analyses reasons for unethical beha- while downplaying other important a conduit à l’échec des viour; section 5 proposes a solution; criteria, coupled with the failure to sanctions à l’encontre section 6 provides a framework for penalise unethical behaviour, have des comportements implementing the proposed solu- non éthiques et a mené led to increasing levels of corruption à des niveaux crois- tion; and section 7 presents a con- and nepotism in government tender sants de corruption clusion. processes. et de népotisme dans Current State of Affairs There are numerous instances les processus d’appel of individuals becoming wealthier d’offres du gouver- After attaining democracy in through corruption of tender proces- nement. Il existe de 1994, the South African government nombreux exemples ses, based on personal relationships de personnes qui se implemented an economic transfor- or connections with powerful gover- sont enrichies grâce mation programme known as Black nment officials. Frequently, newly à la corruption dans Economic Empowerment (hereafter ‘empowered’ companies are created les appels d’offres, ‘BEE’) – to redress economic dispa- for the sole purpose of qualifying for basée sur les relations rities created by the apartheid regi- government tenders – even though personnelles et les rap- me. BEE aims to bestow economic such companies have no operating ports avec de puissants privileges to previously disadvanta- history and no credentials. In Sep- fonctionnaires. ged racial groups through initiatives tember 2014, a statement released

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 266 by the Department of Public Works grades was ZAR246 million – some revealed that over 100 fraud and co- 8.4 times the budgeted cost. Much rruption cases involving over ZAR34 of the cost escalation was reported to billion were being investigated. One have happened as a result of uncon- case involved the signing of a three- trolled scope creep on the upgrade La Constitution de la year contract to redesign a provin- (Madonsela, 2014). république d’Afrique cial government website at a cost du Sud prévoit que of ZAR40 million. The website ap- Tendering Stage lorsqu’un organe peared to have been created using a The tendering stage begins with de l’État passe une US$40 WordPress theme and became a public invitation to tender: appli- soumission pour des the most expensive website ever built cants are required to submit docu- biens et services, il in South Africa. News reports stated doit le faire en accord ments to a bid committee, which that even the websites of financial avec les principes will then evaluate and assign scores institutions, which need protection d’impartialité, d’équité, based on price, functionality and of sensitive data transmissions, cost de transparence, de BEE objectives. The bid is awarded compétitivité et de much less – around ZAR12 million. to the highest scorer. It is during this rentabilité. Au cours de The winner of the provincial websi- l’appel d’offres, les vio- te bid reportedly held tenders with a stage that ethics play an important lations de ces principes number of provincial departments, role, if fairness and the advantages peuvent se produire à and “was awarded the tender even of competition are to be achieved. différentes étapes. though two other companies submit- However, this stage is the most liable ted significantly lower bids” (Mail & to manipulation and the abuse of po- Guardian, 2013). litical power (PricewaterhouseCoo- pers, 2014). Violations at this stage Where Things may include manipulation of scores, Une défaillance dans la Go Wrong political interference, exertion of planification du budget influence, and undeclared conflicts peut entraîner une aug- Pre-tender Stage of interest – amongst other things. mentation des coûts, Such infractions have far-reaching une mauvaise utilisa- This stage involves planning, consequences: failure to fulfil the tion des ressources, des strategising, budgeting and provi- produits, des services ding a clear statement of objectives contract, hindrance of entrepreneu- ou des compétences. and required outcomes. Failure to rial growth, and claims of bias or fa- En plus, des spécifi- do so can lead to increased costs, vouritism where a conflict of interest cations dans l’offre misuse of resources and an unsui- exists. peuvent être biaisées dans le but d’augmen- table product, service and/or skills. Media reports disclosed that an ter les chances d’un des In addition, bid specifications may investigation by Gobodo – a foren- concurrents en parti- be biased with the goal of increa- sic accounting firm – found that the culier de remporter le sing the odds of a specific bidder construction of a mental hospital was marché. winning. In 2009, a series of secu- awarded to Vista Park Developers rity upgrades for the South African against the Department of Roads and President’s private homestead were Public Works’ (hereafter ‘DRPW’) approved. The total cost of the up- recommendation to award it to

CHANGING FRONTIERS OF ETHICS IN FINANCE 267 the highest-scoring bidder (Evans, even where it is obvious that perso- L’étape de l’appel 2012). It was also highlighted that nal interests supersede the public d’offres est la plus Vista Park Developers was well con- interest. For example, the Auditor exposée à la mani- nected with senior politicians. The General of South Africa reports that pulation et aux abus de la part du pouvoir Gobodo report asserted that Vista three-quarters of government ten- politique. À ce stade, Park Developers did not have all the ders in the Eastern Cape are awarded les violations peuvent required bid documents. Moreover, to companies owned by government inclure la manipula- the bid committee’s decision could officials and their families (Flower- tion des notations, not be justified as other key docu- day, Rama, & Boucher, 2012). Lack l’interférence politique, ments were found to be missing. of objectivity in the tender process l’abus d’influence et les The estimated construction cost leads to diminished faith in the fair- conflits d’intérêts non increased from ZAR290 million to ness of the process; contractors will déclarés. L’importance étendue de ces conflits ZAR1.8 billion, with a seven-year avoid submitting bids if they are a donné naissance au delay in completion of the hospital. rejected for arbitrary or unclear re- terme sud-africain Even when it became apparent that asons – resulting in fewer bidders, d’“offrepreneur” qui Vista Park Developers was in breach less competition and higher prices désigne au sens large of contract in 2007, and unable to (OECD Policy Briefs, 2008). un individu dont les deliver on time and within budget, affaires prospèrent DRPW officials failed to act. The Post-tender Stage uniquement sur la base DRPW finally cancelled the contract d’offres remportées During this stage, contracts and grâce à l’influence in 2009. service level agreements (hereafter politique. As demonstrated in the exam- ‘SLAs’) are signed by all parties, the ple above, a conflict of interest ari- scope of work is confirmed, and the ses when a bidder has a personal or purchase order (or service order) is Les domaines cou- business relationship with a state issued. Throughout the course of rants de non-respect the contract there should be regular pendant l’étape post official who has influence over the appel d’offres incluent bidding process or any other aspect supervision of work performance to : l’adaptation des of the contract. The widespread pre- ensure compliance with SLAs, and contrats de services valence of such conflicts has given penalties or termination notices is- afin de favoriser cer- rise to the South African term ‘ten- sued, if necessary. Changes to the tains fournisseurs, une derpreneur’. The word is broadly scope of work or the budget should supervision inadéquate understood to describe an individual go through the approval process des mandataires et le whose business thrives solely becau- specified in the contract. Common paiement de factures fictives. À cela s’ajoute se of tenders won through political areas of non-compliance during the le fait que des spéci- influence. South African law genera- post-tender stage include tailoring of fications incomplètes lly prohibits members of public bo- SLAs to benefit suppliers, inadequate des résultats demandés dies from performing remunerative supervision of contractors, and pay- créent des difficultés work or holding private interests in ment of fictitious invoices. In addi- pour évaluer objecti- a contract with that body – but ex- tion, poor specification of required vement la performance ceptions are authorised in certain outcomes may cause difficulties in consécutive à la réali- instances. It is clear that unethical post-implementation performance sation. authorities may approve exceptions, evaluation.

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 268 The diagram below, based on with such conduct, are glaringly ob- a 2014 PwC survey conducted in vious. In fact, of the many cases of South Africa, shows the percentage fraud and corruption reported, the of survey respondents who believed majority of perpetrators do not su- that a particular step in the procure- ffer any consequences and are not ment process is susceptible to fraud brought to book. The lack of conse- (PricewaterhouseCoopers, 2014). quences, coupled with the potential for large gains, exacerbate unethical Causes of Unethical behaviour. A 2012 report on finan- Behaviour cial misconduct by the law firm Ed- It is clear that the underlying ward Nathan Sonnenbergs (hereaf- Le gain personnel ou cause of procurement policy vio- ter ‘ENS’), states that (Allwright): financier est le moteur lations, throughout the tendering “The most troublesome finding is irrésistible du mauvais process, is unethical conduct. A that there appeared to be no meanin- comportement éthique. 2010 study (Ermongkonchai, 2010) gful consequence to financial miscon- Dans une perspective found that the single most compe- duct. Although 88% of officials were utilitariste de risque et rendement, la fraude à lling driver of ethical misconduct is found guilty of misconduct in the ca- l’appel d’offres présente personal or financial gain. Periphe- ses, the most common sanction for fi- un faible niveau de ral themes from the study include nancial misconduct was a final written risque et une perspec- social norms, process loopholes, warning (43%). Only 19% of officials tive de gain très élevé. and pressure for performance. Ad- found guilty of financial misconduct On estime que le coût mittedly, there are loopholes in po- were discharged from the public ser- des fraudes financières licies governing public procurement vice. The majority of perpetrators re- en Afrique du Sud a dépassé 1 milliard and contracting – due to some ex- main in their positions and often con- de ZAR en 2012. La ceptions that have been allowed for tinue to commit financial misconduct. découverte la plus as part of the rules. However, the The losses from the finalized cases of inquiétante est que ce sheer scale of unethical conduct and financial misconduct totalled ZAR346 type de comportement the huge financial gains associated million, and only 13% of this amount ne semble pas avoir de conséquences signifi- Figure 2 . Prevalence of Procurement Fraud by Process Stage catives.

(Source: PwC Global Economic Crime Survey (February 2014))

CHANGING FRONTIERS OF ETHICS IN FINANCE 269 was recovered from officials (ZAR44 Such biases reflect the psycholo- million) whilst 87% remained lost to gy of the decision-maker and affect the public service (ZAR302 million).” the ability to make rational deci- – ENS report (2012) || (p.3). sions. They often lead to suboptimal From a risk and reward utility decision-making through satisficing perspective, there appears to be low – that is, accepting a solution that risk – but very high return asso- only just meets the objectives and ciated with tender fraud. The ENS is considered to be good enough. report further states that financial Combining behavioural biases with misconduct was estimated to ex- the expected gain from misconduct, ceed ZAR1 billion in 2012. This is it is easy to see that an unethical La théorie des jeux comparable to playing the lottery in individual will weigh up personal appliquée aux situa- which a small risk is taken, with the financial gain against the universe tions de corruption possibility of large gains. The diffe- of possible suboptimal decisions. montre que lorsqu’une rence, however, is that the probabi- Where the risk of consequence is firme concourt pour lity of a large gain from playing the low, an unethical decision-maker un appel d’offres en will satisfice, while attempting to présence de fonction- lottery is almost zero – whereas the maximise personal gain. naires corrompus, la chance of a high gain from commit- stratégie dominante, ting tender fraud is almost surely A Game Theory indépendamment du certain. fait que l’autre entre- Explanation prise soit corrompue From a behavioural perspective, ou innocente, serait any of the following behavioural Game theory models of corrup- qu’elle verse des pots- biases may be applicable to indivi- tion give us some insights into the de-vin. Quand il existe duals involved with tender fraud: economics of corruption. A paper un dilemme du pri- by John MacRae (McRae, 1982) • optimism bias and illusion of sonnier, les entreprises shows that when firms are com- control: individuals may feel that fi- et les fonctionnaires peting for a tender in the presence ont intérêt à coopé- nancial gain is guaranteed and that of a corrupt official, the dominant rer en excluant de la there will be no consequences; strategy, regardless of whether the compétition les autres • regret aversion: individuals entreprises. other firms are also bribing or inno- may observe their colleagues be- cent, might be for the firm to bri- nefitting from unethical behaviour be. The same paper also shows that and attempt to benefit themselves when a prisoner’s dilemma exists, it before the status quo changes; is propitious for firms and officials • role fulfilment: conforming to to cooperate by excluding other the expectations of other decision firms from competing altogether. makers; and Reference is made to MacRae’s • framing bias: altering the repre- paper and inspiration taken from sentation of the risks or rewards so its mathematical notations in order as to make the decision appear to be to better understand what initiates beneficial. corrupt strategies. The theory is

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 270 applied below to the simplified case firms A and B of two competing firms bidding for Payoff to Firm B Firm B a tender and faced with the decision A, Payoff corrupt non-co- to bribe or not to bribe. to B rrupt The following is assumed : Firm A pP-pF, p'P-pFF, • Firms A and B have the same corrupt pP-pFF (1-p')P probability, p, of winning the ten- Firm A (1-p')P, pP , pP der, p=50%; non-co- p'P-pFF • The price for the winning firm rrupt is P, for instance P=$100; • p’ is the probability of winning Applying the assumptions on the contract, if firm A (respectively the values gives: Le dilemme du prison- B) is bribing and firm B (respecti- nier se pose si le gain vely A) is innocent; Table 2: Example payoffs for attendu est plus impor- firms A and B tant que le montant de • p’ is defined asp’=p+a(1-p) ; l’amende que l’entre- • a reflects the ability and pro- Payoff to Firm B Firm B prise devrait payer si pensity of the corrupt official to in- A, Payoff corrupt non-co- elle était sanctionnée fluence the decision, and0 ≤a ≤1; to B rrupt pour autant qu’elle ait effectivement payé des • p’’ is the probability of the in- Firm A 40, 40 65, 25 pots-de vin. Les leviers nocent firm winning the contract, if corrupt disponibles pour frei- the other firm is bribing, and is gi- Firm A 25, 65 50, 50 ner la corruption sont ven by p’’=1-p’. non-coles suivants : réduire la rrupt capacité d’un fonc- • There is a fine, F, if a firm tionnaire corrompu à gets caught bribing. For instance The Prisoner’s influencer la décision, F=$200; Dilemma augmenter les amendes • There is a probability p1 of et la probabilité d’être The payoff matrix above shows attrapé. getting caught if both firms are corrupt, and p2 if the other firm is in- that being corrupt is a dominant nocent. For simplicity, it is assumed strategy for both firms – resulting in that p1=p2=pF, and thus pF=5%. a prisoner’s dilemma. Bribing is the Here we take a=0.5, meaning best strategy for both firms, wha- that the official can ensure a corrupt tever the other firm does. If firm B firm gets the project with 75% con- decides to be innocent, A would do fidence p’ ( =0.75), but cannot gua- well to bribe – gaining an expected rantee it completely. Putting it all $65 instead of $50. If B decided to together yields the following possi- be corrupt, A could stand to win ble outcomes: only an expected $25, while it could improve the payoff $40 by also deci- Table 1: Possible payoffs for ding to bribe.

CHANGING FRONTIERS OF ETHICS IN FINANCE 271 Going back to the first payoff the moral principles that govern a matrix, we can see that bribing is person’s behaviour – that is, his/her a dominant strategy when the fo- ethical code. Morals can be in direct llowing conditions are met: conflict with the rational choice of pP-p_F F>(1-p^’ )P (1) dominant strategy, thus leading to cognitive dissonance. Cognitive p^’ P-p_F F>pP (2) dissonance is defined as the men- The first condition implies that tal stress or discomfort experienced it is more profitable to be corrupt by an individual who holds two or when the competing firm is not, more conflicting ideas. In some ca- Les systèmes techno- while the second condition implies ses, cognitive dissonance can over- logiques d’information that it is more profitable for both et de communication come rational behaviour, and vice firms to be corrupt, than not. concernant les services versa. proposés par l’État ont Condition (2) is more constra- Due to the unpredictable outco- réduit avec succès le ining here and suggests that there mes associated with cognitive dis- contact entre les fonc- exists a prisoners’ dilemma, when: tionnaires corrompus sonance, it is difficult to design a et les citoyens et ont aP>p_F F(1-p) (3) solution that curbs corruption by augmenté la transpa- That is, the expected payoff gi- influencing a person’s moral code. rence et la responsa- ven that a firm succeeds in bribing A more efficient approach would be bilité. Les avancées de the official and winning the con- to consider a solution that centres l’e-gouvernement ont tract, should be greater than the ex- on increasing penalties, increasing beaucoup d’avantages the probability of being caught, and tels que la gestion pected fine given that the violating efficace des fonds firm is caught. decreasing the individual’s ability publics, la diminution Equation (3) shows that the to influence decisions. The use of de la corruption des levers that can be used to curb co- information and communication fonctionnaires et une rruption, as a dominant strategy, technology systems for delivering confiance croissante are: government services has successfu- dans le gouvernement. lly achieved these objectives. Such De nombreux pays ont • Reducing a, the propensity of systems, referred to as e-governan- confirmé avoir réalisé the official to individually award ce, have been deployed across many des progrès après la tendering decisions. This could be mise en œuvre des countries.. achieved by, inter alia, better re- mesures d’e-gouvernement. cruitment, improved working con- The Case for ditions, better scrutiny, and better e-Governments salaries, as was the case in Singapo- re (Quah, 2001); The emergence of e-governance in the last few years has had a po- • Increasing the fine,F ; and/or sitive impact on corruption in many • Increasing the probability of countries – albeit with varying le- F getting caught, p . vels of success. The mechanisms The tendency of the official to through which e-government works influence a decision is linked to are straightforward: e-governments

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 272 reduce contact between corrupt offi- records. Before the system, the ave- cials and citizens and increase trans- rage land transfer required Rs100 in parency and accountability (Ander- bribes, while the electronic system sen, 2008). E-government reforms only requires a fee of Rs2 (Bertot, have many benefits such as effective Jaeger, & Grimes, 2010). management of public funds, reduc- • An impressive and well-known tion in bribery of government offi- example of the potential of e-gover- cials, and increased confidence in nments is the Seoul Metropolitan Même si la mise en government. Many countries have Government’s Online Procedures œuvre actuelle de reported realising such benefits – Enhancement for civil applications soumission publique post-implementation of an e-gover- (OPEN) system – which was laun- en ligne a favorisé la nment application: transparence dans ched in 1999, with multiple distinct le processus d’appel • In Chile, the ChileCompra e- anti-corruption measures embedded d’offres, cette trans- procurement system has been used into the functions of the system. The parence ne va pas to allow government officials and ci- OPEN system was implemented to forcément déboucher tizens to compare the costs of bids to reduce the number of places that sur la responsabilité ou and services purchased by the gover- government officials and citizens sur l’objectivité. Il en nment. The prices of more than 500 interacted directly. It effectively re- résulte que les appli- outsourced services from over 6,000 duced channels through which citi- cations de l’e-gouvernement ne réussissent providers are included in the system zens were forced by government offi- pas forcément à limiter (Shim & Eom, 2008). The system cials, who processed applications, to les comportements non saves approximately US$150 million pay “express fees” in order for their éthiques. La thèse sou- annually by preventing price fixing applications to be processed. The tenue dans ce papier or inflation by corrupt officials and project was lauded as a success by est que les applications contractors (Bertot, Jaeger, & Gri- the public, with 68% of the residents de l’e-gouvernement mes, 2010). of Seoul crediting OPEN with noti- devraient conduire à ceably reducing government corrup- des prises de déci- • The Bhoomi electronic land re- sion automatiques au cord system in Karnataka, India, was tion in its first five years of operation niveau de l’adminis- estimated to have saved 7 million (Bertot, Jaeger, & Grimes, 2010). tration publique. Nous farmers 1.32 million working days Improving proposons un système in waiting time and Rs806 million adaptatif qui analyse in bribes to local officials in its first e-Governance les offres et facilite la few years of operation. The Bhoomi sélection du sou- As with any tool, the user and missionnaire le plus system was designed to maintain outcomes required should dictate approprié. records of rights, tenancy and culti- who should use the application, how vation – which are crucial for trans- it should be used, and the extent to ferring or inheriting land and obtai- which any current process will be al- ning loans. By computerising these tered as a result of deploying the tool. records, farmers were able to bypass While anecdotal evidence has shown officials who often demanded bribes that current e-procurement imple- in exchange for any services related mentations have promoted transpa- to the access and updating of these rency in the tendering process, this

CHANGING FRONTIERS OF ETHICS IN FINANCE 273 is not enough as it does not address 6. allows the human a restricted the potential abuse of power later on time to veto before automatic execu- in the process. In some countries, tion, or increased transparency may not ne- Une plate-forme 7. executes automatically, then Internet accessible au cessarily lead to accountability or necessarily informs the human, or objectivity. The reasons for this may public comprenant les 8. informs him/her after execu- be threefold. Firstly, e-governments formulaires d’appel tion only if he/she asks, or d’offres améliorerait la may have web-based platforms that transparence et la res- are not accessible to all members of 9. informs him/her after execu- ponsabilité. Un module the public due to poor broadband tion, if it, the computer, decides to automatisé de notation infrastructure – thus impacting on do so. permettrait de créer the level of transparency that can be 10. The computer decides une liste restreinte des everything and acts autonomously, candidats avec le meil- achieved. Secondly, citizens may not leur score, garantissant have the capacity to act on available ignoring the human. l’objectivité. Un comité information which impacts on their We propose that the current level pour les appels d’offres ability to hold government accoun- of automation should be advanced constitué de simples table. Thirdly, while some e-govern- from stage two to stage five automa- citoyens tirés au hasard ment systems offer a complete set of tion. This would entail the design of se réunirait pour se alternative actions, there are insuffi- an adaptive system that scores bids prononcer sur la liste cient controls to ensure that the best restreinte et choisir le according to a pre-defined set of gagnant, évitant ainsi alternative is selected. Given these criteria, examines the bidders’ pre- l’abus d’influence et de possible shortcomings, data-driven vious performance (if applicable), pouvoir. e-government applications may not and creates a shortlist of the best have the desired effect on unethical candidates. All decision-making data conduct. would be stored and made publicly The thesis of this paper is that available to ensure transparency and e-government applications should to improve accountability. be extended to automated decision- The idea of placing trust in a Le succès d’une making in public administration. computer to make the right deci- économie dépend de Sheridan established a scale of stages sions may be unnerving. However, la capacité du gou- of automation of e-government im- automation has been successfully vernement à créer un plementation (Sheridan, 1992). implemented in many other areas environnement propice of business. One example is that of aux entreprises et à 1. The computer offers no assis- l’emploi. La croissance tance, the human must do it all. American banks which make use of économique dans les 2. The computer offers a comple- the automated Fair Isaac Corpora- pays en développement te set of action alternatives, and tion (“FICO”) credit score in con- est souvent biaisée à junction with automated underwri- 3. narrows the selection down to cause de la corrupting systems to approve or decline a few, or tion. Ainsi, les faibles credit applications (Herron, 2013). risques et le grand 4. suggests one, and With many countries around the potentiel de gains 5. executes that suggestion if the world now implementing e-govern- associés à la corruption human approves, or ment systems, it is certainly plausi-

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 274 favorisent le compor- ble that these kinds of systems will dential the likelihood of bid-rigging tement non éthique. be advanced to make decisions in the through price fixing will be reduced. Si l’on veut assurer la near future. transparence, l’objecti- 2. An automated scoring module that scores tender applications vité et l’efficacité, il est Ensuring Objectivity indispensable de limi- based on, but not limited to, the fo- ter l’influence humaine through Automation and llowing criteria: dans le processus de the Use of Technology • Applicant’s credentials, perfor- prise de décision. L’e- The use of technology can elimi- mance on previous projects, align- gouvernement trace le chemin que certains nate the strategic incentives and be- ment to current transformation poli- gouvernements choi- havioural biases that lead to unethi- cies, and competitiveness of pricing. sissent de suivre. Une cal decision making. There are three • Additional benefit to society plus grande automati- factors which technology can impro- that the applicant may provide that sation est une solution ve: could justify extra cost, e.g. environ- qui évite qu’un seul mentally friendly initiatives, share individu ou organisme • Transparency and accountabi- puisse exercer une lity. schemes, job creation, and commu- influence absolue sur • Objective scoring of applica- nity service initiatives. le processus d’adjudi- tions. • The scoring module will be de- cation. La corruption • Inappropriate influence and the signed to create a shortlist of appli- pourrait donc être trai- cants who achieved high scores. In tée avec efficacité et les abuse of power. the event that an applicant has outs- bénéfices socio-écono- We propose: miques être maximisés. cored others by a significant mar- 1. A web-based platform on gin, the system will propose that the which tender applications can be applicant be awarded the tender. If lodged and reviewed. The platform the scores are close, the system will will provide users and the public compile a shortlist for adjudication. with the following information: • In order to promote competi- • All live tenders. tion and distribution of wealth, the • Details of all applications recei- system should highlight instances in ved – i.e. bid documents, legal state- which the bidder has won multiple ments and disclosures. tenders. • Any conflicts of interest iden- • Random selection of bid com- tified. mittee. The system will have a database of preselected adjudicators • Score criteria. who can be called upon to form a • Previous tenders awarded and committee. The committee will be performance and delivery reports. made up of a random selection of a While a high level of transparen- combination of private- and public- cy will be a feature of the system, sector stakeholders with the neces- applicants will only be identified sary expertise. The committee will by bidder numbers. By keeping the be tasked with approving the win- identities of the applicants confi- ning bidder or will need to assess

CHANGING FRONTIERS OF ETHICS IN FINANCE 275 the shortlist of applicants and then Economic growth in developing award the tender. Committee mem- countries is often derailed because bers will be informed via email that of corruption. More specifically, the they have been appointed, but will low risks and large potential rewards have no knowledge of the identity associated with corruption precipi- of other committee members. Com- tate unethical conduct. In order to mittee members will not be required ensure transparency, objectivity and to deliberate with one another and efficiency, it is necessary to limit in most instances will be required to human influence in the decision- make an independent decision. All making process. The emergence of decisions will be logged through the e-governance demonstrates that this system, and several iterations of ad- is the path that some governments judication may be necessary to reach are choosing to follow. Further au- a final decision. tomation is proposed such that no single individual or body can exert Conclusion absolute influence over the procure- The success of an economy hin- ment process. In this way, corrup- ges on a government’s ability to tion can be dealt with effectively create an environment that is con- and socio-economic benefits can be ducive to business and employment. maximised. •

References Allwright, P. (n.d.). The real state Chan, J. K., & Lee, M. K. (2003). of the nation. Edward Nathan Son- SME E-Procurement Adoption in nenbergs. Hong Kong - The Roles of Power, Trust and Value. Proceedings of the Andersen, T. (2008). E-govern- 36th Hawaii International Conference ment as an anti-corruption tool. Co- , (pp. 1-10). penhagen: Department of Econo- on System Sciences mics, University of Copenhagen. Dixit, A., & Nalebuff, B. (n.d.). Bertot, J. C., Jaeger, P. T., & Prisoners’ Dilemma. Retrieved from Grimes, J. M. (2010). Using ICTs Library of Economics and Liberty: to create a culture of transparency: http://www.econlib.org/library/Enc/ E-government and social media as PrisonersDilemma.html openness and anti-corruption tools Edigheji, O. E. (1999). Rethinking for societies. Government Information Black Economic Empowerment in the Quarterly, 27, 264-271. Post-Apartheid South Africa. Mulders- drift: Trade and Industrial Policy Se- Boxshall, R., Zimmern, W., & cretariat. Kupelian, B. (2014). Emerging markets: caught in a taper tantrum? Re- Ermongkonchai, P. (2010). Un- trieved from PwC: http://www.pwc. derstanding reasons for employee com/en_GX/gx/issues/economy/glo- unethical conduct in Thai organiza- bal-economy-watch/assets/pdfs/glo- tions: A qualitative inquiry. Contem- bal-economy-watch-march-2014.pdf porary Management Research, 6(2).

WILL E-GOVERNMENT REDUCE CORRUPTION IN PUBLIC TENDERING? 276 Evans, S. (2012). Warped tender OECD Policy Briefs. (2008). delays building of Kimberley psychia- Fighting Cartels in Public Procurement. tric hospital for years. Retrieved from Organisation for Economic Co-opera- Mail & Guardian: http://mg.co.za/ tion and Development. article/2012-12-14-00-warped-tender- delays-kimberley-psychiatric-hospi- PricewaterhouseCoopers. (2014). tal-for-years Confronting the changing face of economic crime. Retrieved from PwC: http:// Faulkner, D., & Loewald, C. www.pwc.co.za/en_ZA/za/assets/pdf/ (2008). Policy Change and Economic global-economic-crime-survey-2014. Growth: A Case Study of South Africa. pdf National Treasury of the Republic of South Africa. PricewaterhouseCoopers. (2015). Global Economy Watch: Economic Pro- Flowerday, S. V., Rama, S., & Bou- jections. Retrieved from PwC: http:// cher, D. (2012). Information Confi- www.pwc.com/gx/en/issues/eco- dentiality and the Chinese Wall Mo- nomy/global-economy-watch/projec- del in Government Tender Fraud. tions.jhtml Information and Computer Security Ar- chitecture (University of Pretoria). East Quah, J. S. (2001). Combating London: University of Fort Hare. Corruption in Singapore: What Can Be Learned? Combatting Corruption in Hausmann, R., Pritchett, L., & Singapore, 9(1), 29-35. Rodrik, D. (2005). Growth Accele- rations. Journal of Economic Growth, Rensburg, K. J., & Roodt, G. 10(4), 303-329. (2005). The Perceptions of Employ- ment Equity Aand Black Economic Herron, J. (2013). How FICO be- Empowerment as Predictors of Or- came ‘the’ credit score. Retrieved from ganisation-Related Committment. SA Bankrate: http://www.bankrate.com/ Journal of Human Resource Manage- finance/credit/fico-the-credit-score. ment, 3(3), 49-60. aspx Sheridan, T. B. (1992). Telerobo- Madonsela, A. T. (2014). Secure tics, Automation, and Human Super- in Comfort. Public Protector of South visory Control. Cambridge, MA: MIT Africa. Press. Mail & Guardian. (2013). Free Tucker, C. (2013). Public procu- State: We paid R40m, not R140m, rement in South Africa: overview. Re- for our website. Retrieved from trieved from Bowman Gilfillan: http:// Mail & Guardian: http://mg.co. www.bowman.co.za/FileBrowser/Ar- za/article/2013-03-04-free-state- ticleDocuments/Public-Procurement- government-pay-alleged-r140- in-South-Africa.pdf million-for-tendered-website McRae, J. (1982). Underdeve- lopment and the Economics of Co- rruption: A Game Theory Approach. World Development, 10(8), 677-687.

CHANGING FRONTIERS OF ETHICS IN FINANCE 277

Part III

Ethics, Regulation and Culture 278 279

orporate market CCresponsibility: ethical regulation for orderly financial markets

Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013

First Prize ex-aequo

Rafael ARP ‘What I’m saying to you is, yes, 2008, it has become more common Gomes I’ve found a flaw. I don’t know how to hear that greed is ‘irresponsible’. Portugal significant or permanent it is. But The British prime minister told the Risk Consulting, I’ve been very distressed by that United Nations in September 2008 Accenture*, London fact’ that the world had lived through an ‘age of irresponsibility’ in financial markets (Brown, 2008), and five Alan Greenspan, Chairman of the months later, the American presi- US Federal Reserve, 2008 dent heralded a ‘new era of respon- Discovering Corporate sibility’, writing: Market Responsibility ‘This crisis is neither the result of a normal turn of the business cycle Since the 1980s, we have fre- nor an accident of history. We arri- quently heard the message ‘greed is ved at this point as a result of an good’, with the rationale that greed era of profound irresponsibility that drives efficient markets, which in engulfed both private and public turn drive economic growth.1 This institutions from some of our lar- * The views expressed particular message has in recent gest companies’ executive suites to herein are those of years lost its ironic charm. Since the the seats of power in Washington, the author and do not onset of the financial crisis in 2007- D.C. For decades, too many on Wall necessarily reflect those Street threw caution to the wind, of the Organization he is 1 A celebrated quote by the character Gordon affiliated to. Gekko in the film Wall Street (1987), see http:// chased profits with blind optimism www.youtube.com/watch?v=ONXpaBQnBvE and little regard for serious risks—

CORPORATE MARKET RESPONSIBILITY 280 and with even less regard for the pu- correcting. Stability is an outcome blic good ... of normal business activity, with Appréciée auparavant, The time has come to usher in a support from regulators. Thus, in la cupidité est depuis Milton Friedman’s famous words la crise financière new era — a new era of responsibi- (1970), ‘the social responsibility de 2007 considérée lity in which we act not only to save comme un comporte- and create new jobs, but also to lay of business is to maximize profits’. ment «irresponsable». a new foundation of growth upon Friedman’s statement was a respon- which we can renew the promise of se to the concept of corporate social America’ (Obama, 2009, p. 1). responsibility (CSR), which holds that firms should ensure they have a These messages represent a de- positive impact on society. But CSR parture from conventional thinking theorists agree with economists re- about the economy and the virtues garding the market. The CSR litera- of self-interest, and this paper enga- ture distinguishes between a firm’s ges with them.2 It outlines a theory social responsibilities (towards about companies’ responsibilities the non-market domain) and their for financial and economic stability. economic responsibilities. In CSR Three recent controversies suggest En 2009, Barack Oba- theory, ‘economic responsibility’ that operating efficiently and within ma a déclaré qu’il était is to produce goods efficiently and temps d’entrer dans the letter of the law does not suffi- legally, as economists would put it une nouvelle ère de ce to ensure economic progress, or (Carroll, 1979, 1991; Mitchell, 1998; responsabilités, source satisfy market actors and regulators. de nouvelles bases de Schwartz & Carroll, 2003; Wartich These episodes are focus of this pa- & Cochran, 1985; Wood, 1991). If croissance. per: Citigroup’s infamous Dr Evil Le texte qui suit pré- our episodes suggest that financial sente une théorie sur trade, the rise to prominence of so- firms are expected to go beyond le- les responsabilités des vereign wealth funds, and the post- gal, competitive profit maximization organismes financiers credit-crunch regulatory debate. In in conducting their business, this en matière de stabilité each case, corporate responsibilities represents a departure from conven- économique et finan- towards the wider financial system tional thinking. cière. were invoked. As a contribution to the post-cre- More corporate dit-crunch rethink, this paper analy- responsibilities? ses these controversies and proposes the concept of corporate market res- How are companies responsi- ponsibility (CMR) to explain them. ble for orderly financial markets? Let us begin with Citigroup. In economic theory the question is redundant, since markets are self- The ‘Dr Evil’ trade

2 I would like to thank Dr Wendy Chapple and At 10.28 a.m. on Monday 2 Au- Professor Jeremy Moon of the International gust 2004, four traders at Citigroup’s Centre for Corporate Social Responsibility at European government bond trading the University of Nottingham Business School for their guidance and support during this desk activated a proprietary software research. program they called ‘Dr Evil’ to sell

CHANGING FRONTIERS OF ETHICS IN FINANCE 281 a large number of bonds very quic- date. The bank had not contrave- kly. Twenty seconds later, unsure ned any laws, but the FSA held that whether the trades had succeeded, it had ‘executed a trading strategy they submitted another sell order. without due regard to the risks and By 10.29 a.m. Citigroup had sold likely consequences of its action for €13 billion worth of 119 different the efficient and orderly operation Outre leur respon- European government bonds across of the MTS platform’ (Financial Ser- sabilité sociale, les 11 platforms of the Rome-based vices Authority, 2005b). Was Citi- entreprises finan- Mercato dei Titoli di Stato (MTS) group responsible for the orderliness cières doivent s’assu- bond exchange. This was roughly of its market? rer qu’elles ont une the same amount of bonds as the responsabilité écono- entire market would typically trade Gentlemen and mique, qui consiste over one day, and it happened in one the market non seulement à produire des biens de minute. After reconfiguring their The notion of a broken manière efficace et en program, the traders bought back €4 gentlemen’s agreement emerged two billion in bonds, realizing a profit of toute légalité, mais days after the trade, with the Finan- aussi à contribuer au 15 million by 11.25 a.m. € cial Times’s Lex column asking ‘Has maintien de la stabilité Although Citigroup was not financière. Citigroup, with its audacious selling charged with market abuse, which of €11bn [sic] of Eurozone gover- is illegal, the operation was highly nment bonds within two minutes, controversial. At the time, it pro- been very clever or has it overstep- voked ‘bankers’ wrath’ (The Daily ped the boundaries of fair trading?’ Telegraph, 2004a) and ‘launched a (Financial Times, 2004a). The co- Il faut analyser les wave of ill will in the bond markets’ lumn sided with Citigroup, saying nombreuses contro- (The Daily Telegraph, 2004b). that ‘gentlemen’s agreements are verses, qui concernent The MTS exchange imposed emer- la responsabilité not a sensible way to manage risks’ gency trading limits on the entire sociale des entre- (ibid.), but failed to explain what prises financières et market (Financial Times, 2004b). a ‘gentlemen’s agreement’ or the leurs responsabilités Citigroup’s rivals, primarily inves- ‘boundaries of fair trading’ are. The économiques, pour tment banks, ‘panicked’ during the Wall Street Journal cited traders mieux les comprendre. trade, overwhelmed by its size and calling the operation ‘savvy, if not Nous commençons par speed, and some withdrew from the slightly untoward’, and referred to Citigroup. market for three days. The financial MTS having introduced measures press reported a near-consensus that to stop ‘this kind of behaviour’ (The Citigroup had broken a ‘gentlemen’s Wall Street Journal, 2004b), again agreement’. Yet no one clearly stated without explaining the ‘kind’ of be- what that agreement had been or haviour or why it was ‘untoward’. what it was for. Rival traders had ‘felt themselves When the UK’s Financial Ser- protected by a “gentlemen’s agree- vices Authority (FSA) ruled on the ment’’’, but did not elaborate what it transaction in June 2005, it levied was (The Daily Telegraph, 2004c). a fine of £14 million, its biggest to The Guardian’s Notebook co-

CORPORATE MARKET RESPONSIBILITY 282 lumn said ‘Of course, Citigroup did We need to be sure that in wha- nothing illegal here. It legitimately tever we do, we fully consider the filled orders that had been placed by impact of our actions on our clients willing counterparties, all of whom Le 2 août 2004, and the markets. We must exer- quatre opérateurs de were grown-up financial institutions cise sound judgement, know our Citigroup ont activé used to dealing in large numbers’ markets and our clients well un logiciel afin de (The Guardian, 2004a). None of and act in their best interests vendre très rapidement the US or UK newspapers that refe- (compiled from Financial Times, un très grand nombre rred to ‘untoward’ conduct specified 2004d and 2004e, The Times, 2004b d’obligations: plus de what standard had supposedly been and 2004c, The Daily Telegraph, 13 milliards de dollars infringed. 2004d, The New York Times, 2004; en quelques minutes. L’opération fut très One banker’s reaction illustrates underlining added). controversée et a the problem: ‘Really what they did This memo – particularly the refe- provoqué la colère des was smart. They didn’t do anything rence to acting in markets’ best inter- banquiers qui ont ac- wrong, they just cornered the mar- ests – was interpreted as an attempt cuse Citigroup d’avoir ket. I’ll tell you this though, $25m to placate regulators and clients. brisé un “gentlemen Media reports described the memo, agreement”. doesn’t seem like a lot of profit to make when you’ve got the whole which was sent to all of Citigroup’s world lining up against you’ (The 40,000 banking employees, but not Daily Telegraph, 2004c). If Ci- its clients, as ‘astonishing’ (Finan- La Financial Services tigroup had been smart and done cial Times, 2004d), ‘humiliating’ Authority britannique nothing wrong, then what justified (The Daily Telegraph, 2004d) and a estimé que Citigroup the world lining up against them? an ‘unprecedented apology’ (The Ti- avait exécuté une mes, 2004b). The New York Times stratégie de négocia- called it ‘an indication that the bank is tion sans tenir compte Markets’ best interests taking the investigation and the com- des risques et des Roughly five weeks after the ope- plaints seriously’, and drew a parallel conséquences pour ration, after the MTS lifted the tem- l’ensemble du système between Maheras’s language and that porary curbs on trading, newspapers financier. used by the FSA: ‘When the inquiry picked up a leaked Citigroup memo was announced, the regulator said from Tom Maheras, head of global ca- that market participants should have pital markets, stating that: “regard to the likely consequences of Les différents journaux Citigroup is committed to hol- their trading strategies in the market économiques ont eu ding itself to the highest standards concerned’’’ (The New York Times, beaucoup de mal à statuer sur le dépasse- in its business practices. We did not 2004). ment ou pas des limites meet our standards in this instance A second memo, leaked in late de la légalité des tran- and, as a result, we regret having January 2005, revealed that the sactions commerciales executed this transaction. Unfor- bank had originally set out to des- effectuées. tunately, we failed to fully con- tabilize markets. This significantly sider its impact on our clients, damaged Citigroup’s standing. The other market participants, and trade’s objectives had included im- our regulators. posing costs on competitors, decre-

CHANGING FRONTIERS OF ETHICS IN FINANCE 283 asing the attractiveness of German I will return to these corporate Pour certains, Citi- bond futures, spurring ‘copycat tra- responsibilities later on, after outli- group a joué finement des’, ‘killing off smaller dealers’, and ning a broader episode. sans commettre le ‘turning the European government moindre délit. bond market into one that more clo- Codes of conduct Quelques semaines plus tard, une note sely resembles the US government for capitalism bond market’ (memo reproduced in de Citigroup stipulait Variously labelled ‘new global Financial Times, 2005a). Descri- que la banque devait power brokers’ (McKinsey, 2007), désormais considérer bed as ‘hideously embarrassing’ by ‘giant locusts’ ( pleinement l’impact the Financial Times’s Lex column The Daily Telegra- de ses actions sur ses (Financial Times, 2005b), which ph, 2008), and ‘a force for stability’ clients et les marchés, had originally supported Citigroup, (Financial Times, 2008), sovereign en faisant preuve de the memo undid Maheras’s earlier PR wealth funds (SWFs) were held up jugement. effort. Various European investiga- to greater scrutiny in the years befo- tions, led by the FSA (Gans, 2006), re the credit crunch than almost any Cette note a été culminated in fines from the UK and other kind of financial-market actor. globalement interpré- tée comme étant une Portugal. Portugal’s regulator used an These government-funded investors, tentative d’apaiser interesting linguistic flourish to des- primarily from Asia and the Middle les régulateurs et les cribe Citigroup’s operation: ‘Repea- East, have existed since the 1950s, but clients impliqués. ted violations of the duty to defend for decades kept a low profile. Accor- Une seconde note de the market’ (Comissão do Mercado ding to data in the Google News Ar- la banque, divulguée de Valores Mobiliários, 2006). Their chive in June 2008, sovereign funds en janvier 2004, a inference was clear: markets do not were mentioned in only two news ar- révélé que la banque defend themselves. s’était, dès le départ, ticles in the nine years between 1998 fixé comme objectif In detailed analyses of the Dr and 2006 – once in 2004 and once de déstabiliser les Evil trade and its aftermath, the FSA in 2006. Then, in 2007 alone, they marchés. Il s’agissait de outlined a range of measures – rela- received over 1,400 mentions, and nuire délibérément aux ted to the exercise of due care, skill even more the following year. This concurrents européens and diligence – that Citigroup should was a rapid, though controversial, en diminuant leur have adopted in order ‘to consider the rise to public prominence, as funds attractivité. impact the trade would be likely to diversified away from low-yield bond have’ (Financial Services Authority, markets in the early 2000s and began La FSA a présenté 2005a). The FSA concluded that this toute une série de wider market impact had been ‘the to invest in high-profile companies mesures visant à garan- main issue of regulatory concern’. and real estate in the West. tir le soin, la compé- tence et la diligence, This is an unusual argument: banks The controversy surrounding que Citigroup aurait were implicitly expected to regulate SWFs is an interesting issue becau- dû adopter. La FSA a their own conduct, in pursuit of not se at first glance there was no clear estimé que l’impact only self-interest and transparency, reason for it – no misconduct by sur le marché au sens but also market confidence and sta- SWFs, or evidence that misconduct 3 large était l’un des bility. was imminent. Some politicians were principaux problèmes 3 concerned on protectionist grounds réglementaires. See also Beunza et al. (2006) on the sociology of bond markets about powerful foreign investors en-

CORPORATE MARKET RESPONSIBILITY 284 Les fonds souverains, tering their economies.4 Yet the ove- vereign funds was clarified ... in a financés par les gou- rriding concern was that SWFs might largely unnoticed speech [by a Tre- vernements essentiel- destabilize financial markets due to asury official],’ in June 2007: lement situés en Asie their large size and opaque corporate et au Moyen-orient, ‘Identifying the potential “impact existent depuis les governance – even though SWFs, on on financial market stability”, [the années 50. Ils ont tou- all the evidence, were profit-maximi- official] said that because so little jours adopté un profil zing and entirely law-abiding compa- was known about the funds’ inves- bas, jusqu’à 2007, où nies. Governments’ ultimate respon- tment policies, minor comments or ils furent cités des se to the funds was to compel them rumours could spark volatility. “It is milliers de fois, leur to adopt voluntary codes of conduct hard to dismiss entirely the possibi- montée en puissance which, as I would argue, laid down lity of unseen, imprudent risk mana- devenant publique. an ethic for being responsible market Alors que rien ne gement with broader consequences,” laissait supposer que la actors. he said...’ (The Times, 2007). faute était imminente, The first signs of controversy ils avaient pourtant emerged when politicians reviewed Controversy begets ce pouvoir de déstabi- their policies towards foreign inves- compromise lisation des marches tors. In July 2007 German chance- SWFs also had their advocates, financiers de par leur grande taille et leur llor Angela Merkel called SWFs ‘a however. American banks and a ran- gouvernance opaque. completely new conflict situation ge of economists (The Wall Street that one must respond to adequately’ Journal, 2007) pressed the govern- Dès 2007, les respon- (Bloomberg, 2007), and Germany set ment ‘to keep their [policy] reviews sables gouvernemen- up a new agency mirroring the US’s narrow enough to encourage foreign taux ont revisé leur Committee on Foreign Investment in investment’ (The Wall Street Jour- politique vis-à-vis des the United States (CFIUS) to vet fo- nal, 2008). In Europe, the British investisseurs étrangers, reign investment. France’s President chancellor of the exchequer, Alas- à l’image d’Angela Merkel et de Nicolas Sarkozy stated ‘We’ve decided not to tair Darling, argued that ‘calls for the Sarkozy. La position let ourselves be sold down the river EU to adopt a common approach to américaine sur les by speculative funds, by unscrupu- vetting corporate acquisitions by fo- fonds souverains a lous attitudes which do not meet the reign state investors’ should be resis- aussi été précisée. transparency criteria one is entitled ted (Financial Times, 2007). Italy’s to expect in a civilized world’ (The international trade minister, Emma Mais les fonds souve- Guardian, 2007a). ‘And this,’ wrote Bonino, took a similar position, sa- rains pouvaient comp- a Bloomberg columnist in July 2007, ying in respect of the country’s na- ter sur de nombreux tional airline, Alitalia, ‘I don’t care défenseurs, comme ‘is happening without anyone [any Alastair Darling en SWFs] having made any offers [no- who buys it, it can be the Chinese, Angleterre ou Emma teworthy investments] recently’. or the Eskimos, so long as they turn it around’ (ibid.). Bonino en Italie. Il y In turn, the ‘US position on so- avait un risque d’hosti- Throughout 2007-2008, both si- lité politique contre ces 4 However, there were not many reasons to des of the debate recognised there fonds, en particulier ‘protect’ domestic industries from SWFs du- was a risk of political backlash aga- contre leur comporte- ring the credit crunch. On the contrary, SWF inst SWFs, and the debate shifted ment discrétionnaire. capital helped to save many credit-starved companies, such as investment banks. towards SWFs’ discretionary con-

CHANGING FRONTIERS OF ETHICS IN FINANCE 285 duct. EU monetary affairs commis- and 2008b). These efforts culmi- sioner Joaquín Almunia described nated in a private-public initiative SWFs as offering ‘useful investment’, hosted by the IMF, establishing the adding that they ‘must acknowledge Santiago Principles: that their growing weight in global ‘Participants agreed that SWFs financial markets brings responsibi- invest on the basis of economic and lities’ (British Broadcasting Corpora- financial risk and return related con- tion, 2008). siderations … [and established] a Les premiers contours Contours of compromise emer- common set of voluntary prin- de compromis sont ged in 2008. One might have expec- ciples for SWFs, drawing on apparus en 2008 avec ted governments to work on recipro- the existing body of principles and l’élaboration de codes de conduite pour les cal official policies – for example, practices, to help maintain the fonds souverains, establishing quotas on how much free flow of cross-border in- à défaut d’accords money foreign investors could investment and open and stable juridiquement contrai- vest in particular industries, or how financial systems’ (IMF, 2008a; gnants. Il leur a fallu much influence they could exert emphasis added). adopter une éthique over the companies they invested in. An editorial in The Guardian de transparence et de Instead, they focused on developing referred to the codes as ‘users’ ma- prudence. codes of conduct for SWFs. It was nuals’ (The Guardian, 2007b) to in their view more important – per- help SWFs participate constructi- haps cheaper or more effective – to vely in markets. Sceptics such as ensure that sovereign funds learned the Kuwait Investment Authority good market conduct than to achie- (initially) and US Senator Evan Bayh ve binding legal agreements. Thus derisively referred to them as ‘best SWFs were asked to adopt an ethic practice’ (The Guardian, 2008, The of openness and prudence as a way Wall Street Journal, 2008a). The to maintain market stability. adoption of these codes signalled a Un consensus mondial impliquant les USA, From spring 2008, one year after step change. As SWFs ‘learned’ good l’Union Européenne the controversy erupted, the US, the market conduct, adopting responsi- et le FMI a pu être EU and the IMF acted more or less in ble management protocols, so public trouvé. Ces accords concert. The US Treasury agreed the perception matured. ont abouti en 2008 aux first, trilateral code of conduct for principes de Santiago. SWFs with the governments of Sin- Resolution through gapore and Abu Dhabi (US Treasury, responsibility 2008). This was framed as an input By November 2009 the IMF, a dri- to the multilateral initiatives under ver of global liberalization for 50 years, way at the IMF. The EU Council of was encouraging the Angolan govern- Ministers, which represents national ment to establish its own fund in order governments at EU level, agreed on to manage its foreign reserves (IMF, a Europe-wide stance toward SWFs 2009). Today, the idea that SWFs pose and to channel their input to the a threat to the global economy is so IMF (European Commission 2008a outdated as to seem almost quaint.

CORPORATE MARKET RESPONSIBILITY 286 A key feature of the Santiago Goldman Sachs (FCIC, 2010, video Principles is the notion that SWFs minute 01:56:00). These banks had have to do more than pursue com- ostensibly missed the scenario of fa- Les fonds souve- mercial objectives and comply with lling house prices, even though the rains doivent investir regulations. If an effective financial Bank for International Settlements en considérant les risques économiques system is to be preserved, SWFs (BIS), which oversees international et financiers, avec une must adopt other ethics of sound banking policy coordination, warned participation devant governance, risk management and in its 2003, 2004, 2005, 2006 and être constructive. commercial propriety. Before elabo- 2007 Annual Reports that a down- L’adoption de ces rating on this, I will discuss the regu- turn in housing prices was a signi- codes a marqué un latory rethink that has followed the ficant risk (see Chapter VII of each changement d’étape, credit crunch. report). Yet, according to Dimon, caractérisé par un JP Morgan had prepared for ‘almost comportement plus ‘Daddy, what’s a responsable. everything else’ (FCIC, 2010, video Aujourd’hui, l’idée que financial crisis?’ minute 01:53:00). les fonds souverains In testimony to the US Financial If a bank’s chairman can amia- puissent être une me- Crisis Inquiry Commission (FCIC) bly quip that crises happen every nace pour l’économie on 13 January 2010, Jamie Dimon, five to seven years, then how does mondiale est dépassée. his bank ‘just miss that home prices Ils doivent toutefois chairman of JP Morgan, told two adopter d’autres com- anecdotes that offer a curious juxta- don’t go up forever’? The answer is portements éthiques position.5 The first was this: that it may fail to exercise due skill, de bonne gouvernance, ‘My daughter called me up from care and diligence in risk analysis (in de gestion des risques school and said “Daddy, what’s a fi- contravention of the FSA’s Princi- et de probité commer- nancial crisis?” And without trying ples of Market Conduct). It may also ciale. to be funny, I said, “It’s something perceive an implicit guarantee that that happens every five to seven the state will fund it in case of crisis, years”. And she says “So why is ever- to prevent a system-wide meltdown. yone so surprised...?” So we weren’t This is known in economics as moral Selon une anecdote – we shouldn’t be surprised.’ hazard – over-willingness to take on risk when the consequences will be qui fait référence à une Here is the other, an hour earlier: conversation entre le largely borne by others.6 ‘The biggest mistake we made [at président de JP Morgan Whether lacking in due care, or Jamie Dimon et sa fille, JP Morgan], somehow, in mortgage influenced by moral hazard, banks les crises financières underwriting, we just missed that engaged in a wide range of legal, yet ayant lieu tous les 5 à home prices don’t go up forever.’ 7 ans, il n’y avait fina- controversial, activities. Their cor- lement aucune raison Brian Moynihan, head of Bank of porate governance failed to include d’être surpris. America, told the FCIC that his bank critical voices on company boards had made the same mistake, and (see UK Treasury, 2009, pp. 91-92) Lloyd Blankfein agreed that stress- and relied unduly on misunderstood testing had been highly deficient at 6 Curiously, moral hazard is rarely discussed 5 FCIC, 2010, video minutes 02:34:00 and as a moral issue; see, for example, Pauly 01:53:00. (1968, p. 531), cf. Dembe & Boden (2000).

CHANGING FRONTIERS OF ETHICS IN FINANCE 287 mathematical models that failed to issues that led to the crisis: ‘The re- diversify risk (Financial Services ality of excessive risk can sometimes Authority, 2009d). Innovative ac- only be spotted at systemic level’ (Fi- Comment une telle counting practices were often predi- nancial Services Authority, 2009d, p. banque peut-elle négli- cated on circumventing rather than 80).8 Now, wrote the British regula- ger la compétence, tor, ‘the future of banking regulation le soin et la diligence meeting regulatory requirements dans l’analyse des (Securities and Exchange Com- and supervision needs to be rooted’ risques ? Probablement mission, 2009b, 2009c and 2009e). in a systemic approach (Financial parce qu’elle sait que Poorly structured remuneration en- Services Authority, 2009d, p. 52). l’Etat va intervenir couraged excessive risk-taking (Tur- One dimension of this new approach et financer en cas de ner & Financial Services Authority, concerns how companies can protect crise. Ce comporte- 2009). In capital markets, the prac- financial markets. ment se nomme le tice of short selling (betting that the I would highlight two promi- «risque moral». value of a financial product will fall) La gouvernance interne nent corporate responsibilities in the des banques est remise created severe instability, leading to post-credit-crunch debate: responsi- en cause tout comme temporary bans in Europe (see Inter- ble compliance and ethical compe- les pratiques comp- national Organization of Securities tence. However specific or prescrip- tables qui contournent Commissions, 2008, Securities and tive it may be, all regulation requires les exigences régle- Exchange Commission, 2009e, UK discretionary, and responsible, inter- mentaires à défaut d’y Treasury, 2009a). In retail banking, pretation.9 répondre. so-called ‘exploding mortgages’ were The UK authorities, which fa- sold to over-ambitious house buyers, vour principles-based regulation, often aggressively or under false pre- have emphasized this point: ‘The tences (UK Treasury, 2009a). 7 Prudential Regulation Authority will expect firms not merely to meet the Responsible compliance letter of these requirements, but also Financial companies are now to consider the overriding principle facing a lasting regulatory rethink. of safety and soundness’, the Bank of Before the crisis, regulators assu- England wrote about the FSA’s suc- med that regulating individual ins- cessor in 2012. Perhaps surprisingly, Les entreprises finan- the Securities and Exchange Com- cières sont dorénavant titutions would mitigate generalized confrontées à une risks. Interdependency did not figure mission, a rules-based regulator, also refonte réglementaire highly on their agendas. In the FSA’s concluded one of its testimonies on durable. Cette régle- view, this is the main reason why re- ‘Securities Law Enforcement’ in the mentation bancaire gulators did not suitably address the following words: ainsi que la supervision 7 This account is not intended to put the whole 8 A systemic risk is one that threatens the doivent être enracinées blame for the crisis on banks. I am, however, entire financial system, or a core part of it dans une approche sys- interested in the idea that banks are expected (Financial Services Authority, 2009d), for témique, selon la FSA. to control certain legal activities when these example when one institution’s failure leads threaten market stability. I outline these as to large losses for others (International Mone- illustrations (N.B. an ‘exploding mortgage’ is tary Fund, 2010). one with very low but mandatory interest rate 9 In some cases, the more specific a regulation, repayments that subsequently increase dis- the more interpretation it requires for idiosyn- proportionately). cratic applications.

CORPORATE MARKET RESPONSIBILITY 288 ‘...we need to encourage a tone tand their risk models, and less se- and culture … that mere compliance nior managers for ‘confusing the mo- with the law, narrowly viewed, is not del with the world’ (The New York the highest goal to which we aspire, Times, 2008b). As MIT’s Andrew Lo but the base from which we start. The put it, ‘technology got ahead of our Dans le débat post- crise, il faut mettre en securities industry as whole needs ability to use it responsibly’ (ibid.). avant deux responsa- to embrace this compliance culture, It stands to reason that the ‘job bilités essentielles: le and [become] responsible stewards market’ does not always replace tho- respect de la réglemen- of the assets entrusted to them’ (Se- se who fail to do their jobs effectively tation, qui est la base curities and Exchange Commission, with more competent individuals. It de départ et la com- 2009d, pp. 14-15). pétence éthique. Les is often an individual’s ethical prero- directions des banques Complying responsibly with re- gative to acknowledge his or her own doivent encourager le gulation will entail pursuing some incompetence for a role. Honesty and personnel à développer shared objectives with regulators. competence are closely related. They des techniques inno- This should not mean complying comprise the twin categories for the vantes de surveillance uncritically; on the contrary, its fo- UK’s ‘Fit and Proper Test for Appro- et de contrôle. cus is the spirit, not the letter, of the ved Persons’, which individuals must law. Under the European principle pass in order to obtain certain jobs of ‘comply or explain’ (UK Treasury, in the financial industry or to pur- 2009, p. 38, European Commission, chase major companies. The test’s 2006), banks may identify innovati- categories are ‘Honesty, integrity and ve ways to implement controls, and reputation’ and ‘Competence and ca- these may indeed improve – and cost pability’. Explaining one decision to less than – the official guidelines. Ul- fail an individual on this test, the FSA La compétence éthique timately, senior management must cited indications of a banker’s incom- des individus est bien encourage staff to develop innovative petence, which as a result ‘prejudiced sûr primordiale: le supervisory techniques and, often, the interest of consumers’ (Financial jugement humain et responsable doit share them with the industry. Services Authority, 2009e, p. 2). prévaloir. Roszaini Haniffa calls for ‘training C’est souvent un Ethical competence in how to apply codes of conduct in impératif éthique que Individuals’ ethical competence everyday [accounting] situations’ de reconnaître que is of course paramount. The regula- (Financial Times, 2009). ‘Students l’on est capable ou pas tory debate has frequently mentioned must be exposed to alternative bu- d’effectuer une mission. L’honnêteté et la what the FSA termed a ‘misplaced siness models and thinking,’ she compétence sont donc reliance on sophisticated maths’ (Fi- continues, ‘not just trained to resol- étroitement liées. nancial Services Authority, 2009d, ve complicated financial problems 16), where the issue is not only te- through mathematical modelling. chnical content (such as the relative These tend to be detached from the merit of value-at-risk modelling ver- real world and consideration of hu- sus stress-testing) but also human man elements’ (ibid.). Ethical com- judgement. Senior executives have petence introduces human, quali- been criticized for failing to unders- tative dimensions to formalist risk

CHANGING FRONTIERS OF ETHICS IN FINANCE 289 management and compliance; it risk). The data point to three central looks for weaknesses in the models, types of ethic expected of financial Roszana Haniffa and in individuals (see also The New companies. plaide en faveur d’une formation sur la façon York Times, 2008a, and The Wall The first of theseis adopting risk d’appliquer des codes Street Journal, 2009). management practices that antici- de conduite dans la Economic theory holds that those pate the firm’s impact on its market vie financière quoti- who do not demonstrate the neces- environment. Incentives for bank dienne. La compétence éthique introduit des sary skill will succumb to compe- personnel should encourage ethical dimensions humaines titors. But it has become clear that competence at all levels, and accoun- et qualitatives visant à those who do not better their ways tability at senior level, for the bank’s optimiser la gestion des proactively may put not only them- key risk models. Day-to-day mana- risques et la conformité selves at risk, but the entire system. gement controls, such as risk-taking réglementaire. More is at stake than just the firm’s limits, should be aligned with the and the individual’s freedom to com- company’s overall risk appetite, set Une démarche non pete legally. The market commons at board level and informed by bro- proactive peut mettre relies on responsible compliance and ader market conditions. Pinpointing en danger l’ensemble ethical competence. the limitations of risk models and the du système. role of subjective judgement is also Corporate Market crucial. Appropriate risk foresight Les établissements Responsibility was important for Citigroup (which bancaires doivent The controversies involving Ci- failed to consider its trade’s impact contribuer à assurer tigroup, sovereign funds and many on the MTS market), for SWFs (to re- un système financier assure host countries that they would stable et équitable banks during the credit crunch su- not destabilize their economies) and incluant l’adoption ggest that financial firms must help d’une nouvelle éthique to ensure a fair and stable financial for the many banks that failed to pre- pour la conduite des system, adopting new ethics for bu- pare adequately for foreseeable crisis affaires. siness conduct, above and beyond scenarios. Parmi les comporte- legal regulation and profit maximi- The second is implementing ments attendus chez 10 les financiers figurent zation. In the course of researching a transparent investment policy l’adoption de pratiques these episodes, I have analysed a data with parameters for acceptable de gestion des risques sample of over 540 documents, com- financial transactions. This may pour anticiper les prising regulatory papers (as indi- take various forms. Investment pro- impacts. Repérer les cators of regulatory risk) and media ducts should be aligned with cus- limites des modèles tomers’ risk profiles; for example, de risques est tout articles (as indicators of reputational complex derivatives are generally aussi crucial, tout 10 In this paper I have used the Oxford Dictio- comme la préparation nary definition of ethic (‘a set of moral prin- not appropriate products for pen- aux scénarios de crise ciples, especially ones relating to or affirming sioners. Financial strategies such as prévisibles. a specified group, field, or form of conduct’) short selling should be suspended and moral (‘concerned with the principles of right and wrong behaviour’). See oxforddic- when they threaten market liquidi- tionaries.com. ty, lest they become self-fulfilling or

CORPORATE MARKET RESPONSIBILITY 290 abusive.11 Investments should be dri- Authority, 2005a). SWFs avoided Il faut aussi mettre en ven by financial returns on invested restrictions on foreign investment by place une politique assets, and should not aim for unfair helping to design reflexive codes of d’investissement advantages in particular markets. In conduct. Following regulatory calls transparente avec des general, parameters that define ac- for proactive improvement, major paramètres fixant les transactions financières ceptable financial transactions help investment banks have been inves- acceptables, afin de to build confidence in markets. In ting heavily in trade surveillance renforcer la confiance each of the aforementioned episo- technology to enable them to detect dans les marchés et des, the lack of such parameters (e.g. suspicious activities and report them éviter toute contro- for the Dr Evil strategy, SWF inves- to regulators. verse. tments, or ‘exploding mortgages’) La troisième mesure fuelled the controversy. Enforcing ethics éthique attendue concerne le respect de The third type of ethic is res- Together, these ethics represent a l’esprit des lois et la ponsible compliance: abiding by new corporate market responsibility proactivité nécessaire the spirit of the law and correcting (CMR). Our episodes suggest that the pour en corriger les shortcomings proactively, even absence of these types of ethic increa- lacunes. Il faut coopé- when regulations are not actua- ses regulatory and reputational risk, rer avec les organismes lly breached. There are many grey while their adoption decreases those de réglementation areas when implementing both the risks. Thus CMR ethics are voluntary, dans la compréhension but nevertheless enforced. I would ar- et codification des spirit and the letter of regulations. responsabilités, et dans This type of ethic promotes coope- gue the concept of CMR is part of a l’élaboration de tech- ration with regulators in understan- model known as meta-regulation, also niques de pointe pour ding and codifying responsibilities; referred to as ‘the regulation of self- surveiller les transac- developing and adopting leading regulation’ (Black, 2006; Braithwai- tions et détecter celles industry practices; emphasizing the te, 2003; Gray & Hamilton, 2006; suspectes. organization’s values and reflecting Grabosky, 1995; Parker, 2007). In them in procedures; and strengthe- meta-regulation, ‘the quality of firms’ Le respect de l’éthique internal controls is the paramount fo- est devenu indispen- ning compliance departments (for sable, son absence example, improving communica- cus of attention’, writes Black (2006), générant des risques tion between compliance and client- usually with the aim of managing ‘the réglementaires et une facing business units). This general extent to which, and ways in which, atteinte à la réputation. expectation was evident in each of those firms will comply with regula- Le modèle d’éthique our episodes. Citigroup’s fine was tory requirements’ (p. 3). CMR (Corporate Mar- decreased in response to impro- However, CMR also has a nor- ket Responsibility) est vements it made during the FSA mative quality (it is content, not la meilleure incarna- tion de la méta-régu- investigation (Financial Services just method): it concerns the public interest and economic interdepen- lation. 11 Short selling becomes self-fulfilling when Le CMR a également the target company finds it increasingly dif- dency. In this sense, CMR is similar 12 une qualité normative: ficult to raise funds, and ultimately becomes to ‘ethical self-regulation’. Chiu il s’agit de l’intérêt insolvent, as more and more traders become (2009) summarizes it thus: ‘In a na- public et l’interdépen- involved in the bet. Shorting can constitute dance économique. market abuse (which is illegal) if traders 12 See also ‘enforced self-regulation’: Ayres & conspire to create a self-fulfilling bet. Braithwaite (1992).

CHANGING FRONTIERS OF ETHICS IN FINANCE 291 rrow sense ethics may relate to the most renowned proponents, Alan prevention of … detrimental beha- Greenspan, told the US Congress viour that may inflict organizational ‘Those of us who have looked to the and social costs. Seen in that light, self-interest of lending institutions ethical self-regulation would include to protect shareholders’ equity, my- risk management, social responsi- self especially, are in a state of shock bility in the sense of prevention or and disbelief ... I made a mistake mitigation of externalities, and cor- in presuming that the self-interests En considérant que les porate governance. Ethics may also of organizations, specifically banks crises financières se relate to “proactively” adding to so- and others, were such that they were reproduisent tout les cinq à sept ans, c’est cial good ... ‘ (p. 32). best capable of protecting their own peut-être le bon mo- Illustrating some of the parallels shareholders and their equity in the ment pour se pencher between these various models, Par- firms ...’ (pp. 35-37). sur la responsabilité du ker (2007) writes of ‘legally accoun- The old economic morality is marché des entreprises. table corporate social responsibility’, being challenged by the emerging and Shamir (2008) of ‘responsibili- ethics of corporate market responsi- zation’ for moral conduct. CMR is an bility. Western financial markets ap- invitation to implement and develop pear to be recovering from the credit better market conduct. crunch. Several investment banks have recovered to pre-crisis levels Conclusion of profitability. If JP Morgan’s Jamie It has often been taken as given Dimon was right when he said that that, if an economic incentive exists, financial crises occur every five to se- morality will be subsumed in it; but ven years, now may be a propitious this way of thinking is rapidly lo- time to attend to corporate market sing credibility. In 2008 one of its responsibility. •

References

Aggarwal, V. (2001). Corporate Market Bank for International Settlements Finan- and Nonmarket Strategies in Asia: A Concep- cial Stability Board (2009b). Improving Fi- tual Framework. Business and Politics, 3(2) nancial Regulation: Report to the G20 Lea- Ayres, I. & Braithwaite, J. (1992). Respon- ders. Retrieved from www.bis.org sive Regulation: Transcending the Deregula- Bank of England (2009a). Financial tion Debate. Oxford: University Press Stability Report: Global Instability and Po- Bank for International Settlements (BIS) licy Response. Retrieved from www.banko- (2002-2005). BIS 76th Annual Report. Retrie- fengland.co.uk ved from www.bis.org Bank of England (2009b). Financial Bank for International Settlements Finan- Stability Report: Building a more resilient cial Stability Board (2009a). Financial Stabi- financial system. Retrieved from www.banko- lity Board response to Turner Review. Retrie- fengland.co.uk ved from www.bis.org Bank of England (2012). The PRA’s Ap-

CORPORATE MARKET RESPONSIBILITY 292 proach to Banking Supervision. Retrieved Carroll, A. B. (1979). A Three-Dimensio- from www.fsa.gov.uk nal Conceptual Model of Corporate Social Per- formance. Academy of Management Review, Baron, D. (1995). Integrated Strategy: 4 Market and Non-Market Components. Cali- fornia Management Review, 37(2) Carroll, A. B. (1991). The Pyramid of Corporate Social Responsibility: Towards the Beunza, D., Hardie, I. & MacKenzie, D. Moral Management of Organizational Stake- (2006). A price is a social thing: towards a holders. Business Horizons, 34 material sociology of arbitrage. Organisation Studies, 27(5) Carroll, A. B. (1999). Corporate Social Responsibility: Evolution of a Definitional Black, J. (2006). Managing Regulatory Construct. Business and Society, 38(3). Risks and Defining the Parameters of Blame: A Focus on the Australian Prudential Regulation Chiu, I. H. Y. (2007). Enhancing Respon- Authority. Law & Policy, 28(1) sibility in Financial Regulation – Critically Examining the Future of Public-Private Gover- Bloomberg (2006a). Deutsche Bank Sets nance. Working Paper 08/10. London: Centre Pace in European Bond Revolt: Mark Gilbert. for Law and Governance in Europe, University Retrieved from www.bloomberg.com College Bloomberg (2006b). The lonely, lonely Cochran, P. & Wood, R. (1984). Corpo- wife of a wealthy UBS client: Mark Gilbert. Re- rate Social Responsibility and Financial Perfor- trieved from www.bloomberg.com mance. Academy of Management Journal, 27 Bloomberg (2007). Hypocrisy Reigns in Comissão do Mercado de Valores Mobiliá- Anti-Takeover Defenses: Michael R. Sesit. Re- rios (2006). Processo de contra-ordenação da trieved from www.bloomberg.com CMVM no: 56/2004, Arguido(s): Citigroup Boddewyn, J. (2003). Understanding and Global Markets. Retrieved from www.cmvm. Advancing the Concept of ‘Nonmarket’. Busi- pt ness and Society, 42(3) Committee on Foreign Investment in Braithwaite, J. (2003). Meta Risk Manage- the United States (CFIUS) (2009). Covered ment and Responsive Regulation for Tax Sys- transactions, withdrawals, and presidential tem Integrity. Law & Policy, 25(1) decisions, 2006-2008. Retrieved from www. British Academy (2009). An open letter to treasury.gov the Queen. Retrieved from www.britac.ac.uk Crane, A. & Matten, D. (2003). Business British Bankers’ Association (BBA) and Ethics: Managing Corporate Citizenship Clifford Chance (undated). Double jeopar- and Sustainability in the Age of Globaliza- dy in the EU: focusing on the possibilities of tion. Oxford: University Press Schengen as a solution of prosecutors and Dembe, A. & Boden, L. (2000). Moral Ha- regulators alike. London: BBA and Clifford zard: A question of morality?. New Solutions, Chance 10(3) British Broadcasting Corporation (BBC) European Commission. (2006). Corpo- (2008). EU in sovereign wealth fund call. Re- rate Governance: European Forum clarifies trieved from www.bbc.co.uk ‘comply or explain’ principle and issues annual British Broadcasting Corporation (2009). report. Press Release IP/06/269 ‘Be afraid’, warns regulator Sants. Retrieved European Commission (2008a). A Com- from www.bbc.co.uk mon Approach to Sovereign Wealth Funds. Brown, G. (2008). Speech to the General Retrieved from ec.europa.eu Assembly of the United Nations on 26 Septem- European Commission (2008b). The EU ber 2008. Retrieved from www.un.org response to the rise of sovereign wealth funds

CHANGING FRONTIERS OF ETHICS IN FINANCE 293 (Speech/08/168). Retrieved from ec.europa.eu Financial Times (2004c). Lex live: Bond European Council (2008). Presidency trading. Retrieved from www.ft.com Conclusions: 13/14 March 2008. Brussels: EC Financial Times (2004d). Citigroup European Union (2003). Directive 2003/6/ displays contrition over deal. Retrieved from EC of the European Parliament and of the www.ft.com Council on Insider Dealing and Market Mani- Financial Times (2004e). Citigroup apo- pulation (Market Abuse). Official Journal of logises over $15m bond coup. Retrieved from the European Union, 12 December 2003 www.ft.com Financial Crisis Inquiry Commission Financial Times (2005a). Citigroup in- (FCIC) (2010). First Public Hearing of the ternal memo. Retrieved from www.ft.com FCIC: Day 1 (Video). Retrieved from www. Financial Times (2005b). Lex: Citi- fcic.gov/hearings group/MTS. Retrieved from www.ft.com Financial Services Authority (FSA) Financial Times (2007). UK warns over (2000). Our new approach to risk based re- push for state protection. Retrieved from gulation, risk, and what will be different for www.ft.com firms. Retrieved from www.fsa.gov.uk Financial Times (2008). Sovereign Financial Services Authority (2005a). Fi- wealth investment is a force for stability. Re- nal Notice - Citigroup Global Markets Limited. trieved from www.ft.com Retrieved from www.fsa.gov.uk Financial Times (2009). Time the boar- Financial Services Authority (2005b). FSA droom learnt about ethics. Retrieved from fines Citigroup £19.9 million for Eurobond www.ft.com trades. Retrieved from www.fsa.gov.uk Friedman, M. (1970). The social responsi- Financial Services Authority (2005c). bility of business is to increase its profits. The Principles-based Regulation - Focusing on the New York Times Magazine. Retrieved from outcomes that matter. Retrieved from www. www.colorado.edu fsa.gov.uk Gans, B. (2006). Lessons of MTS: Citigroup Financial Services Authority (2009a). FSA argues for international regulatory cooperation. Handbook: Principles for Business – 95 [35]. International Financial Law Review, 44 Retrieved from www.fsa.gov.uk Grabosky, P. (1995). Using Non-Govern- Financial Services Authority (2009b). The mental Resources to Foster Regulatory Com- Turner Review: A regulatory response to the pliance. Governance: An International Jour- global banking crisis. Retrieved from www.fsa. nal of Policy and Administration, 8(4) gov.uk Gray, J. & Hamilton, J. (2006). Imple- Financial Services Authority (2009c). Fi- menting Financial Regulation: Theory and nal Notice [regarding Philip Lloyd and MWM Practice. Chichester: John Wiley & Sons. Investments]. Retrieved from www.fsa.gov.uk Hutter, B. (2005). The Attractions of Risk- Financial Services Authority (2009d). based Regulation: Accounting for the emergen- Turner Review: A regulatory response to the fice of risk ideas in regulation. ESRC Centre for nancial crisis. Retrieved from www.fsa.gov.uk the Analysis of Risk and Regulation, Discus- Financial Times (2004a). Repercussions sion Paper 33. Retrieved from www.lse.ac.uk of Citigroup bond probe worry big banks. Re- International Monetary Fund (IMF) trieved from www.ft.com (2008a). International Working Group of So- Financial Times (2004b). Citigroup vereign Wealth Funds is established to facilita- deals unsettle rivals. Retrieved from www. te work on voluntary principles (IMF Release ft.com 08/97). Retrieved from www.imf.org

CORPORATE MARKET RESPONSIBILITY 294 International Monetary Fund (2008b). Crisis, 20 March 2009. Retrieved from www. Generally Accepted Principles and Practices sec.gov (GAPP) for Sovereign Wealth Funds - The Securities and Exchange Commission Santiago Principles. Retrieved from www.imf. (2009b). Testimony Before the Subcommittee org on Financial Services and General Govern- International Monetary Fund (2009). IMF ment. Retrieved from www.sec.gov lends Angola $1.4 billion to support reserves, Securities and Exchange Commission reforms. IMF Survey Magazine. Retrieved (2009c). Testimony Concerning Lessons Lear- from www.imf.org ned in Risk Management Oversight at Federal Fi- International Monetary Fund (2010). Glo- nancial Regulators. Retrieved from www.sec.gov bal Financial Stability Report. Retrieved from Securities and Exchange Commission www.imf.org (2009d). Testimony Concerning Securities International Organization of Securities Law Enforcement in the Current Financial Commissions (IOSCO) (2008). IOSCO Tech- Crisis. Retrieved from www.sec.gov nical Committee Members’ Initiatives Relating Securities and Exchange Commission to Restrictions on Short Sales. IOSCO Press Re- (2009e). Testimony Concerning Enhancing lease. Retrieved from www.iosco.org Investor Protection and Regulation of the Se- Matten, D. & Moon, J. (2004). ‘Implicit’ curities Markets. Retrieved from www.sec.gov and ‘Explicit’ CSR: a conceptual framework Shamir, R. (2008). The Age of Responsi- for understanding CSR in Europe. ICCSR Re- bilisation: on market-embedded morality. Eco- search Paper Series 29-2004. Retrieved from nomy and Society, 37(1) www.nottingham.ac.uk The Daily Telegraph (2004a). Citigroup McKinsey (2007). The New Global Power faces bankers’ wrath over bond coup. Retrieved Brokers. McKinsey Global Institute, 4 October 2007 from www.telegraph.co.uk Moon, J. (2002). The Social Responsibility The Daily Telegraph (2004b). Coup of Business and New Governance. Govern- could lose Citigroup work, say rivals. Retrie- ment and Opposition, 37(3) ved from www.telegraph.co.uk Obama, B. (2009). President’s Messa- The Daily Telegraph (2004c). How Citi- ge. A New Era of Responsibility: Renewing group launched a wave of ill will in the bond America’s Promise. Washington: US Office of markets. Retrieved from www.telegraph.co.uk Budget Management and the White House (2004d). We’re so- Parker, C. (2007). Meta-Regulation: Legal The Daily Telegraph rry, Citigroup tells staff. Retrieved from www. Accountability for Corporate Social Respon- telegraph.co.uk sibility?, in McBarnet, D., Voiculescu, A. & Campbell, T., eds. The New Corporate Ac- The Daily Telegraph (2008). Germany countability: Corporate Social Responsibili- acts to halt the ‘giant locusts’. Retrieved from ty and the Law. Cambridge: University Press www.telegraph.co.uk Pauly, M. (1968). The Economics of Moral The Guardian (2004a). Citigroup’s bra- Hazard: Comment. The American Economic zen bond bet pays off. Retrieved from www. Review, 58(3) guardian.co.uk Schwartz, M. S. & Carroll, A. B. (2003). The Guardian (2004b). Citigroup admits Corporate social responsibility: a three-domain £7bn bond trade was wrong. Retrieved from approach. Business Ethics Quarterly, 13(4) www.guardian.co.uk Securities and Exchange Commission The Guardian (2004c). Notebook: (SEC) (2009a). Testimony Concerning Securi- Citigroup’s brazen bond bet pays off. Retrieved ties Law Enforcement in the Current Financial from www.guardian.co.uk

CHANGING FRONTIERS OF ETHICS IN FINANCE 295 The Guardian (2005). Citigroup chief The Wall Street Journal (2008a). Lobb- preaches ethics in the counting house. Retrie- yists Smoothed the Way For a Spate of Foreign ved from www.guardian.co.uk Deals. Retrieved from www.wsj.com The Guardian (2007a). Chancellor backs The Wall Street Journal (2008b). Time G7 move to get tough on sovereign wealth for Sovereign Wealth Rules. Retrieved from funds. Retrieved from www.guardian.co.uk www.wsj.com The Guardian (2007b). Leader: when The Wall Street Journal (2009). We Need Beijing goes buying. Retrieved from www. Honest Accounting. Retrieved from www.wsj. guardian.co.uk com The Guardian (2008). Investors talk to Turner, A. & Financial Services Authori- sovereign wealth funds. Retrieved from www. ty (FSA) (2009). The financial crisis and the guardian.co.uk future of financial regulation: speech by Adair The New York Times (2004). Citigroup Turner, Chairman, FSA, at The Economist’s Regrets Bond Trades in Europe. Retrieved from Inaugural City Lecture, 21 January 2009. Re- www.nytimes.com trieved from www.fsa.gov.uk The New York Times (2008a). Fair Game UK Treasury (2009). The Walker Review - They’re Shocked, Shocked, About the Mess. of Corporate Governance of the UK Banking Retrieved from www.nytimes.com Industry. Retrieved from www.treasury.gov.uk The New York Times (2008b). In Mo- Underhill, G. R. D. & Zhang, X. (2008). deling Risk, the Human Factor Was Left Out. Setting the rules: private power, political un- Retrieved from www.nytimes.com derpinnings, and legitimacy in global mone- The Times (2004a). Citigroup contacts tary and financial governance. International FSA over ‘breached agreement’. Retrieved from Affairs, 84(3) www.thetimes.co.uk US Congress (2008). Testimony of Alan The Times (2004b). Bank apologises for Greenspan, The Financial Crisis and the Role controversial bond transaction. Retrieved from of Federal Regulators to the House Committee www.thetimes.co.uk on Oversight and Government Reform, 23 Oc- The Times (2004c). Citigroup regrets tober 2008. Retrieved from www.gpo.gov London bond scandal. Retrieved from www. US Treasury (2008). Agreement on Prin- thetimes.co.uk ciples for Sovereign Wealth Fund Investment The Times (2007). America to press for with Singapore and Abu Dhabi. Retrieved from restrictions on potent sovereign wealth funds. www.treasury.gov Retrieved from www.thetimes.co.uk US Treasury (2009). Financial Regulatory The Times (2008). Gordon Brown: time Reform – A new foundation: Rebuilding finan- to end the age of financial ‘irresponsibility’. Re- cial supervision and regulation. White Paper. trieved from www.thetimes.co.uk Retrieved from www.treasury.gov The Wall Street Journal (2004a). Citi- Wartich, S. & Cochran, P. L. (1985). The group faces broad UK probe over bond trades. Evolution of the Corporate Social Performance Retrieved from www.wsj.com Model. Academy of Management Review, 10 The Wall Street Journal (2004b). MTS to Wood, D. J. (1991). Corporate Social Keep Curbs on Bond Trades. Retrieved from Performance Revisited. Academy of Manage- www.wsj.com ment Review, 16 The Wall Street Journal (2007). Cross- Border Deals Take New Direction. Retrieved from www.wsj.com

CORPORATE MARKET RESPONSIBILITY 296 297

essons from LIBOR: moving LLbeyond compliance to explore the dynamics of ethics in banks

Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013

First Prize ex-aequo

Prabhay Joshi Once more the subject of ethics institutions by encouraging indivi- United Kingdom in finance has been swept into the li- duals to develop their own personal Financial Services melight. The culprit on this occasion vision of ethical integrity. Consultant, PA is the LIBOR rate-rigging scandal Many will see ethics as synon- Consulting Group*, – an episode of fraud and manipu- ymous with a sense of morality, or London lation of the benchmark interbank ‘right’ and ‘wrong’. Others would lending rate, LIBOR, which is con- strongly divorce it from this notion trolled by the British Bankers’ Asso- and claim that it is actually an inten- ciation (BBA). In the aftermath of the tion to strive for order, and so add scandal and the resulting penalties, value (Casimiro & Pellerin, 2009). this paper aims to examine why cul- A third school of thought may de- tural practices came to prevail over fine it in more practical terms as a ethical decision-making, resulting in degree of concern for society as a one of the biggest financial scandals whole. For the purposes of this pa- in recent times. My analysis suggests per, I would like readers to accept that structural regulatory reforms that ethics is a subjective notion are only part of the remedy in such with a different meaning for each * The views expressed cases. In exploring the dynamics of individual. There is therefore a dan- herein are those of how firm, team, and individual ethi- ger that, if we define the concept too the author and do not necessarily reflect those cal values are developed in major narrowly, individuals will be encou- of the Organization he is banks, I propose that the main focus raged to apply set rules or parame- affiliated to. in future should be to instil ethical ters when evaluating their actions in standards at all levels of financial terms of ethics. The arguments that

LESSONS FROM LIBOR 298 I present will move away from rule- Le cas étudié ici est The significance based ethics to focus on the benefits of LIBOR celui du LIBOR, soit of virtue ethics in business. My aim l’épisode de fraude throughout the paper is to bridge the LIBOR, which stands for the et de manipulation du taux de référence gap between organizational traits London Interbank Offered Rate, is a interbancaire de prêt, in banks and the resulting ethical percentage that indicates the rate at pour lequel les pra- practices and outcomes. Central which banks can borrow from other tiques culturelles l’ont to the arguments presented here is banks. Its significance is clear from emporté sur la prise the assumption that ethical values the volume of transactions that de- de décision éthique. Je underpin people’s actions (Locke, pend on it; according to some sour- pense qu’à l’avenir il 2 1991). The unethical outcome – the ces, more than $350 trillion worth faudrait encourager les of worldwide contracts, from student collaborateurs des ins- attempt to manipulate LIBOR – thus titutions financières à allows me to derive broader ethical loans to derivatives, are linked to développer leur propre lessons for banks. LIBOR. To put this in some kind of perspective, that figure is nearly five vision de l’intégrité The entire LIBOR episode is a éthique. times global GDP. The mechanics highly relevant analytical tool for behind setting the rate are simple, the subject of ethics in finance. The Il existe plusieurs but crucial to understanding how it question that must be asked is this: interprétations du could be manipulated. Every day at what cultural factors created an en- terme éthique. Dans le 11 a.m. a group of leading banks sub- cadre de cette etude, vironment in which traders conclu- mit their rates for ten currencies and je considère qu’il s’agit ded that the financial profits gained fifteen lengths of loan, ranging from d’une notion subjective from manipulating the system out- qui varie d’un indivi- overnight to twelve months. The key weighed the broader value of sustai- dus à l’autre. Je vais rate among these is the three-month me concentrer sur les ning one of the most integral com- dollar LIBOR, which is a rate that avantages des vertus de ponents of financial transacting? Of banks pay other banks to borrow US l’éthique. course, after a scandal such as this, dollars for three months. After the top the immediate question is how such and bottom quartiles of the estimates Dans le cas du LIBOR a crime was possible in the first pla- are discarded, an average of the rela question centrale est ce – i.e. how regulators could actua- de savoir quels facteurs maining rates is calculated, and this lly fail to detect it. This valid ques- 3 culturels ont créé un becomes the official LIBOR. There- environnement où tion has already been put to the UK’s fore, LIBOR manipulation could fea- 1 la prise de bénéfices Financial Services Authority (FSA) sibly be attempted by any of the ‘panel prime sur la valeur de and the BBA. This paper, however, banks’ that submit estimates. soutien propre à une will focus on the first question, One of the interesting aspects of transaction financière which I believe is more significant if the LIBOR scandal is that manipula- essentielle. Le LIBOR we are to avert future financial scan- concerne des transac- dals. 2 Financial Times (2013), ‘LIBOR heads tions qui représentent for history in bank rate hunt’, http://www. 350 trillions de dollars, 1 As of 1 April 2013, the FSA (the regulatory ft.com/cms/s/0/d2a008ce-abfd-11e2-9e7f- soit près de cinq fois le authority for financial services in the UK) has 00144feabdc0.html#axzz2UnHOINNc PIB mondial. been split into two separate authorities: the 3 BBA (British Bankers’ Association) LIBOR Financial Conduct Authority (FCA) and the factsheet, http://www.bba.org.uk/media/ar- Prudential Regulation Authority (PRA). ticle/understanding-bba-LIBOR

CHANGING FRONTIERS OF ETHICS IN FINANCE 299 tion occurred for two distinct reasons. case, the FSA has already published a On the one hand, traders from the report that lays out all the evidence of La mécanique derrière key institutions colluded in submit- this intent to manipulate the rate.6 la fixation du taux est ting false estimates that were higher cruciale. La manipu- or lower than their actual estimate. A culture of reciprocity lation du taux dépend directement des This enabled them to skew the final Much has been made of excerpts banques du panel qui figure in their favour – thus benefiting of conversations between traders, any financial transactions on their soumettent leur esti- external traders, brokers and rate mation du taux auquel books that were determined in some submitters that have been released les banques peuvent part by LIBOR (for example, a trader to the public. These exchanges go emprunter à d’autres would want LIBOR to be lower for a to the heart of the day-to-day dyna- banques. forward interest-rate swap, gambling mics between traders and offer the that LIBOR would fall against the set best glimpse of the competing forces fixed rate). LIBOR manipulation thus whenever employees have to make allowed them to increase their banks’ profits and their own consequent difficult choices with ethical impli- rewards. The other kind of manipu- cations. There are some key conclu- lation was done for reputational rea- sions to be drawn from these (see La difficulté repose sur sons. Barclays began to submit much appendix). The first impression is la quête de preuves qui lower rates than their actual rates, that collusion was extremely casual indiquent qu’il y a eu in an effort to maintain confidence in nature. Rate submitters or internal intention de manipuler about the state of the bank and its ac- traders would acquiesce to external le taux. Les extraits de traders’ or brokers’ demands without conversations entre les cess to credit. This paper will focus on any serious reactions of surprise or acteurs impliqués sont the first type of transgression. 7 très révélateurs. calls for discretion. It is this lack of It should also be noted that va- a reaction that best illustrates how rious empirical studies have found attempted LIBOR manipulation had evidence both for4 and against5 wides- become a cultural norm at some pread LIBOR manipulation. It has not banks. The second is a more interes- been conclusively proved whether at- ting concept that can be referred to as tempts to manipulate LIBOR actually ‘reciprocity’, and is particularly appa- affected the published rates. This is an rent from the excerpts in appendix empirical debate that is distinct from A. Traders and brokers often promi- ethical issues. Suffice it to say that, from an ethical point of view, intent sed to repay the submitters’ favours to manipulate is as pertinent an issue 6 FSA Final Notice to Barclays Bank PLC, as manipulation itself. In Barclays’ http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf 4 See, for example, Connan Snider & Thomas 7 Note that collusion took place among all of Youle, ‘Does the LIBOR reflect banks’ -bor these groups: (1) between traders and sub- rowing costs?’, mimeo, April 2010. mitters at the same bank, (2) between traders 5 See, for example, Jacob Gyntelberg & Phi- at one bank and traders at another bank and lip Wooldridge, ‘Interbank fixings during the (3) between traders and external brokers. My recent turmoil’, BIS Quarterly Review, March arguments about reciprocity apply to all these 2008, pp. 59-72. groups. For examples, see appendix A.

LESSONS FROM LIBOR 300 in some way. This was a two-way to competing firms not on the basis relationship that submitters knew of service quality or pricing advanta- L’analyse de la culture would benefit them in the future, or ge, but on past dealings with a parti- de la réciprocité had already produced dividends in cular firm. These are often called ‘re- est très importante pour comprendre the past. Robert Axelrod points to lationship deals’, and the economic la manipulation du the potential cultural power of reci- loss of efficiency is evident. A firm LIBOR. Devenue une procity in his book The Evolution pitching for business will fail to win norme dans certaines of Cooperation, and stresses that the contract even though its product banques, la pratique cooperation based on reciprocity or pricing is superior. A firm putting pourrait provenir d’un can even develop between the most out a tender for business will often accord tacite entre les extreme of antagonists: military per- accept sub-optimal service – in terms traders et les courtiers sonnel on opposite sides (Axelrod, of either product quality or pricing – pour satisfaire les déposants et vice- 1984). In the case of LIBOR, there for the sake of maintaining or stren- versa. Le principe de is evidence that such collusion ba- gthening a strategic relationship. réciprocité peut parfois sed on reciprocity was prevalent not Central to this theme of reciprocity is s’appliquer même entre just between individuals at one bank, the notion that one of the parties will partis très opposés, but also among different banks that always be implicitly owed something comme des banques would normally be competing. in return. concurrentes. Reciprocity can thrive at firm le- Excessive reciprocity as a cultural vel as well as individual level. This habit is not necessarily an ethical pro- type of reciprocity is worth briefly blem – until it starts to prevail over discussing in the broader context ethical decision-making. The LIBOR Le principe de récipro- of the entire finance industry. The scandal can be seen as a practical cité, prospère dans le industry as a whole is heavily de- example of this culture of reciprocity monde financier, est à pendent on strong principles of re- between individuals, who allowed it double tranchant car il to trump all ethical concerns. Whene- implique que l’un des lationship management. Financial acteurs impliqués aura institutions often only deal with ver a choice had to be made between une dette envers l’autre other institutions with which they acquiescing to the request and rejec- et ainsi de suite. Les have sound relationship histories. ting it, rate submitters or internal tra- négociations se sont In principle, this approach is easily ders did not display the slightest sign toujours effectuées justified. Firms in any industry want of reflection or conflict. Quite sim- sur la base de perfor- to deal with companies they have ply, they were willing to compromise mances passées utili- done business with before. In doing their ethical considerations regarding sées comme indicateur d’éventuel rendement so, they are using past performance the integrity of LIBOR, as well as run futur. as an indicator of future performan- the individual risk that they would ce. However, a problem arises when lose their jobs if they were caught firms begin to use relationship histo- out. We will now look at the reasons ries as the sole criteria for doing bu- why these two factors, which should siness with another institution – i.e. theoretically have dissuaded them when they begin to operate solely on from manipulating the rate, were not the principle of reciprocity. Financial sufficient to counteract such cultural institutions may offer their business factors as reciprocity.

CHANGING FRONTIERS OF ETHICS IN FINANCE 301 The role of community mely, the sense of protection that traders feel their firms give them. One of the reasons why traders Broadly speaking, employees of ma- La réciprocité excessive let the culture of reciprocity override jor financial institutions feel they de- n’est pas forcément un their ethical values was that it was problème éthique tant serve a measure of protection from qu’elle n’éclipse pas les acceptable within their team’s cul- their banks for the decisions and ac- decisions éthiques. ture. Virtue ethics theory, which dations that they take. In many cases Le rôle de la commu- tes back to Aristotle, highlights this this is a reasonable assumption. For nauté est important ‘role of community’ by asserting that example, traders who have been gi- pour expliquer la ethical virtues can only flourish in a ven a mandate by their firm to build relégation de l’éthique ‘conducive infrastructure’ (Dobson, exposure to a particular currency au second plan. La 1997). The reverse is also true; in a would justifiably feel that they are transgression, pour le community where ethical principles LIBOR, était devenue shielded from penalties if any pro- une pratique habituelle have been pushed into the back- blems arise as a result. This is much historique, acceptée et ground, individuals will attach less the same as claiming they are simply perçue comme natu- importance to these values. There is doing what their boss has told them relle par l’ensemble des also a utilitarian aspect to this: over to do. collaborateurs, quelle time, transgressions will encounter que soit la hiérarchie. less peer opprobrium, and hence A distorted view of will become less ‘costly’. As fresh ethical accountability evidence emerges that LIBOR rate Danger looms when the line rigging had been going on to some separating firm- or industry-level extent since the 1980s, it is reasona- Le sentiment de transgressions (for which indivi- protection des traders, ble to assume that the transgression duals are not held accountable) from au sein des grandes gradually became more acceptable individual transgressions becomes institutions finan- to traders who saw their peers – and blurred. In such cases, individuals cières, est un autre possibly superiors – behaving in a si- fait très important à have a distorted sense of their indi- milar way. The perception that this considérer. Agissant vidual level of ethical accountability. sort of behaviour was acceptable at en toute impunité, ils Evidence of this mentality can be pensent être à l’abri firm level blossomed naturally in found in another financial scandal: de toute sanction. Le some institutions. Of particular note the story of the UBS rogue trader, sens individuel de la in the LIBOR scandal is the fact that Kweku Adoboli. He defended his responsabilité éthique ethical values were undermined not est souvent biaisé dans $2.3 billion unauthorized trading just within individual banks, but losses by claiming that UBS was his le cas d’invidus croyant across a whole range of banks. As faire bien pour leur ‘family’ and that ‘every single bit of entreprise, qui est leur already mentioned, there is evidence effort [put into that organization] famille à laquelle ils that certain banks tried to persuade was for the benefit of the bank’.8 sont plus que fidèles. others to join in with the collusion. Banks such as UBS have obvious La prise de risques Yet this cultural assimilation is 8 est alors effectuée par only part of the puzzle. There is an Adoboli, Kweku, Southwark crown court procuration. (London). Quote at http://www.guardian. additional, but fundamentally diffe- co.uk/business/2012/oct/26/trader-kweku- rent, effect that is linked to it – na- adoboli-trial-ubs

LESSONS FROM LIBOR 302 motives for inspiring such loyalty the boundaries of what is ethically in their employees, but by doing so acceptable at industry level, because may encourage individuals to trans- of the institutional protection they pose their own ethical responsibili- feel they are entitled to. ties to those of the institution. There The paradox of Les collaborateurs ont are clear parallels between the two tendance à repousser situations: both the UBS trader and imposing firm-wide les limites de ce qui est the LIBOR manipulators were trying ethical standards éthiquement accep- to increase profits for their banks. I have reasoned that individuals table au niveau de As a result, they may have felt that working for a bank may be so cul- l’entreprise, en raison they were taking risks vicariously, de la protection insti- turally intertwined with the values through the institutions they were tutionnelle à laquelle of the institution and those around ils pensent avoir droit. working for. This belief is not as sur- them that they do not make inde- prising as it may sound. Only two pendent ethical decisions for them- individuals at UBS have so far been selves. They may also feel they recei- formally charged in connection with ve some measure of protection from the LIBOR scandal, although at least the institution. As these two effects 45 are implicated. are enhanced, it is increasingly likely Adoboli certainly felt that his that cultural factors will begin to superiors at UBS at least implicitly prevail over independent ethical sanctioned his actions. Exactly how decision-making. Any institution Il faudrait pouvoir much senior management at the that demands extreme loyalty from imposer les mêmes banks involved in the LIBOR scan- its employees theoretically runs this normes de l’intégrité dal knew about what was going on risk. The only way to avert this dan- éthique à l’ensemble remains a matter of conjecture. At ger is to somehow inspire the same des employés, afin ‘gold standard’ of ethical values in qu’ils puissent prendre Barclays, it led to the departure of les bonnes décisions de the chairman and the CEO, both of every single employee in the firm. manière indépendante whom, it must be assumed, accept If this could be achieved, any em- vis-à-vis de leur insti- some measure of responsibility (di- ployee taking his or her lead from tution. Il s’agirait d’un rect or otherwise). But the issue of another would meet the same stan- modèle de reference à institutional protection remains im- dard of ethical integrity. partir duquel chaque portant, for it hints at a relationship There is thus a paradox: how do employé développe sa of reciprocity that is similar to the vision personnelle de you create a firm where ethical va- l’intégrité éthique. notion discussed earlier in this pa- lues are so strong that they inspire per. Employees expect the loyalty every single employee to adhere to they show to the firm to be repaid such a ‘gold standard’, while at the through some measure of protection; same time everyone is looking to the and in some cases they may simply team around them to substantiate feel that working for the firm shields their own ethical beliefs? The an- them from external penalties against swer is that this would be impossi- their actions. In either case the result ble to achieve unless, of course, the is the same: they may tend to push firm had already reached this level,

CHANGING FRONTIERS OF ETHICS IN FINANCE 303 in which case it would be self-sustai- ethical decision-making (Dean et al., ning. This teaches us an important 2010). But we should not forget that, lesson. Firms should attempt to set in order to have a complete picture a ‘gold standard’ of ethical integrity of ethical decision-making within or- for their employees, but at the same ganizations, we must consider firms’ Il faut parvenir à créér time assume that it will never be cultural traits along with individual un processus indépen- achieved. Ultimately, each employee ethical values. Not every individual dant de jugement, qui must be encouraged to set about de- at Barclays, for example, would be doit poursuivre une veloping his or her personal vision of willing to manipulate LIBOR. This forme d’excellence ethical integrity. inclination would vary depending impliquant courage, on a range of factors including indi- sagesse, intégrité, How do we create vidual ethical integrity, team culture équité et cohérence. virtuous agents? L’éthique doit être and firm culture. Furthermore, diffe- partie intégrante des In the case of LIBOR, individuals rent pockets of culture may co-exist prises de décisions au subject to this process of indepen- within one institution. As already sein des banques. dent ethical evaluation would never mentioned, all these factors are inter- permit themselves to manipulate the linked. Individuals’ personal sense of rate – regardless of which particular ethical integrity may be pushed and definition of ethics they subscribe to pulled according to what they obser- (since manipulating LIBOR is mora- ve around them. The model propo- lly wrong, economically inefficient sed by Trevino suggests that ethical and a threat to the broader banking decision-making behaviour can be infrastructure). Virtue ethics theory better explained by the interaction Le sens de l’inté- goes one step further in highlighting of personal and situational variables grité éthique propre à this independent process of judge- (Trevino, 1986). I would go further chaque individus peut ment, stating that an agent should and assert that, in any large institu- évoluer en fonction de tion, ethics must always be conside- ce qu’il observe autour ‘not apply any specific rules in ma- red from both angles (team culture de lui. L’éthique doit king decisions’ but instead follow a donc toujours être path ‘consistent with the pursuit of a and individual values). considérée sous deux particular kind of excellence that, in As the connection between the angles : la culture turn, entails exercising sound moral employee and the firm grows stron- d’équipe et les valeurs judgement guided by virtues such as ger (as in the example of the UBS individuelles. courage, wisdom, temperance, fair- rogue trader), the more people Le lien entre le collabo- ness, integrity and consistency’ (Dob- rateur et son entreprise within the firm can influence the son, 1997). Our lessons from LIBOR, étant très fort, ceux individual’s sense of what is ‘right’, qui arrivent à initier as well as recent analysis (Crossan or in this case merely ‘acceptable’. le débat éthique avec et al., 2013), offer a compelling ar- Again, this supports my assertion eux-mêmes ont franchi gument for encouraging the virtue that every individual in a large firm la première étape en ethics approach to decision-making should be encouraged to develop a vue de devenir des within banks. personal sense of ethical integrity, agents vertueux. Some would argue that organi- rather than automatically subscribe zational context is a crucial part of to the firm’s ‘gold standard’ of values

LESSONS FROM LIBOR 304 (which should nevertheless be esta- These stringent measures will un- blished). This is certainly a difficult doubtedly have a deterrent effect. It and sometimes paradoxical ethical is worth pointing out that the threat analysis for an individual to under- of financial penalty will only be part Suite au scandale du take (given my arguments in the pre- of the impact on institutions of this LIBOR, de nombreuses vious section that personal ethics can size. The other is the effect that fines mesures sévères be influenced by external situations), of such magnitude have on the repu- ont été prises avec but it is a thought process that indi- tation of these institutions’ franchises comme objectif un fort viduals should be compelled to go across the globe. This reputational effet dissuasif. Mais les through. It could even be argued that factor is probably the most impor- sanctions financières individuals who initiate this internal tant, as shown when Bob Diamond ont un impact moins ethical debate with themselves have important que l’atteinte resigned from Barclays on 3 July à la réputation des ins- taken the first step towards becoming 2012, stating that external pressu- titutions impliquées. virtuous agents. Aristotle noted that re on the bank risked damaging the the process of contemplation is the franchise as a whole. key to ultimately fulfilling human activity (Aristotle, 1984). At the very It seems very likely that, in the least, agents who put themselves short term, regulators will be able to through this process show that they correct most of the structural flaws in are trying to become virtuous agents the LIBOR rate-setting process. Scru- – which is a virtuous act in itself. tiny of the process is now so rigorous that one can no longer envisage sub- Why we need to look mitters being able to escape penalties beyond regulation if they were to give false estimates. The bulk of this can be achieved by In the aftermath of the scandal, establishing a new oversight com- regulators have come down heavily on the institutions guilty of miscon- mittee and a strict auditing process. L’examen du processus If we accept this, then we begin to relatif au LIBOR est duct. Barclays, UBS and RBS have désormais si rigou- been fined a total of $2.6 billion. The see why ethical considerations are of reux qu’il est devenu UK’s Serious Fraud Office (SFO) has such paramount importance in the impossible d’échapper even launched a criminal inquiry scandal. Today’s financial system is à des sanctions en cas into LIBOR manipulation, and pri- so complex that we will never reach de fausses estimations. me minister David Cameron has or- a point where all the structural vul- Comme il y aura tou- nerabilities in the system are resolved jours des opportunistes dered a parliamentary review of the at the same time. It is always likely pour tenter de nou- banking sector, with the avowed aim velles manipulations à of ensuring the UK has ‘the toughest that an opportunistic, skilled ban- des fins économiques, and most transparent rules of any king professional will succeed in mail est nécessaire de major financial sector’. The British nipulating the system for the purpose réformer les individus Bankers’ Association will no longer of profit. Hence the focus must be on eux-mêmes à travers oversee the LIBOR process and will reforming the individuals themsel- leurs banques. be replaced by a data provider or a ves, through their banks. Creating regulated exchange. ‘virtuous agents’ must be the priority.

CHANGING FRONTIERS OF ETHICS IN FINANCE 305 Why banks should be values within their own teams. driving the change Senior management at these key institutions should be held accou- This paper has already ntable in order to ensure this hap- highlighted the fact that the team pens. The overriding force here is culture among traders and submit- the banks’ transparency to the puters (reciprocity) was conducive to blic and the press. In most countries Les institutions ban- such wrongdoing as LIBOR mani- we are seeing this process beginning caires doivent devenir pulation. The difficulty for outside to work well. If we subscribe to the le moteur du change- parties is that they have little in- view that a firm’s culture is the chief ment en se concentrant sight into the dynamics of indivi- executive’s primary legacy, it follows sur le fonctionnement dual teams. In some cases, even the précis de leurs équipes. that cultural changes will eventually La réforme sera plus chairman does not have a clear view cascade down to the point where se- efficace si elle est of the prevailing culture within a nior management are satisfied that conduite par les cadres particular team (consider Barclays they have an organization made up dirigeants, avec un chairman Marcus Agius’s statement of teams reflecting core standards système de cascade. that he was ‘sickened’9 after reading of ethical integrity. Chief executives the trader conversations). Yet insti- that have been given enough time to tutions have a duty to understand instil these values must therefore be exactly how their various teams held at least partially responsible for operate. Thus, although attempts to any future scandals. instil reflective ethical decision-ma- Putting this plan into practice is king values are ultimately aimed at easier said than done. Institutional individuals, senior management in cultures are built up over long pe- large institutions should be requi- riods of time, and it will be a while red to drive this reform. Efforts to Les directeurs des before we see the impact of any mea- change corporate culture should be banques devant sures to change things. Barclays boss inculquer ces valeurs aimed at the entire institution, for it Antony Jenkins has taken a positi- éthiques à l’ensemble would be impossible to identify spe- ve step in this regard by telling his de leurs équipes, ils cific teams of individuals with a high staff to sign the bank’s new code of deviennent alors par- risk of compromising ethical integri- conduct or else leave the firm. The tiellement responsables ty for the sake of greater profit. Lo- code of conduct encompasses five des éventuels scandales gically, once we begin this process, key values – respect, integrity, servi- à venir. Le rôle de l’en- cultural and ethical values should treprise dans l’accep- ce, excellence and stewardship. The tation des nouveaux cascade down from top to bottom. previous point must again be stres- codes de conduite As a final barrier, individuals should sed here: such codes of conduct are défini est grand car les develop their own sense of ethical worth little unless employees inter- valeurs clés doivent integrity as a countervailing force pret and adopt them alongside their être assimilées et mises against the legacy of negative ethical personal vision of ethical integrity. en pratique. Failing this, there is a danger that 9 Smith, Guy (producer & director) (2013), Bankers: Fixing the System, BBC (British they will assume their colleagues are Broadcasting Corporation). abiding by the code and simply bo-

LESSONS FROM LIBOR 306 rrow their values from those around what process they use in deciding them. From an ethical point of view, how to act ethically. Firms should it is just as important that the firm not expect every individual to be a L’une des priorités should influence the individual as perfectly ‘virtuous agent’. Indeed, in est de pouvoir déjà vice versa. a practical sense, there is little con- évaluer l’éthique lors du recrutement des sensus on what this ‘gold standard’ collaborateurs. Il faut How to assess ethics in really means. But firms should ensu- pour cela procéder à the recruitment process re that the individuals they hire are de véritables mises en In principle, when given the exactly that: individuals, who have situations réelles pour choice that Antony Jenkins has offe- their own process for judging what définir et apprécier les is ethically acceptable. priorités du candidat red, most individuals will happily et donc son niveau sign up to it. Very few people, espe- How to keep the d’action éthique. Il faut cially those who have gone through avant tout embaucher a demanding recruitment process, flame of ethical des individus capables will announce from the outset that reflection burning de juger ce qui est éthi- they refuse to act with respect and I would therefore caution against quement acceptable. integrity. The actual difficulty for the investing too heavily in traditional firm, and the individuals concerned, methods of corporate ethics training, is putting such a code of conduct for these tend to be too prescriptive into practice when a difficult choice and rule-based. Instead, anything has to be made. And here the firm’s banks can do to keep the flame of priorities have to be crystal-clear. ethical deliberation burning in indi- The bank’s duty is to select only viduals’ minds would be a step in the those people whose ethical integrity right direction. For example, banks could hold an annual ‘ethics day’ on Au-delà de la pres- will prevail at such junctures. The cription de codes, les first step is to clean up things at the which employees are encouraged to entreprises doivent point of entry: recruitment procedu- form groups and discuss the ethical mettre en œuvre res for graduates, associates and exe- issues arising from the decisions they diverses actions pour cutives should all include a way of have to make day by day. Robert So- maintenir l’esprit assessing candidates’ ethical values, lomon, an advocate of virtue ethics, éthique dans la and their commitment to them. But argues that excellence in business durée. Des journées these values should not just be exa- comes from understanding what role de l’éthique avec des one plays in the wider company (So- exercices et échanges mined in a simple competency-based pourraient être un interview with generic questions lomon, 1992). One simple exercise exemple de complé- such as ‘Can you give me an exam- could be for each person to draw up ment efficace. ple of a time where you showed in- an ‘impact chart’, listing every per- tegrity?’ Instead, real under-pressure son indirectly or directly affected by situations should be presented to decisions they make on behalf of the candidates in order to discover how firm – a complicated task that would they set priorities between ethical force them to think about their spe- considerations and individual, team cific role in the context of their firm and firm goals – in other words, and the broader banking system.

CHANGING FRONTIERS OF ETHICS IN FINANCE 307 This could become a key constant in for change than the accountability the equation of individuals’ ethical of large institutions to a disappro- decision-making. ving public. However, this increased Le devoir des banques accountability could cut both ways. est de veiller à ce Finally, banks themselves must que leurs employés be made to understand that it is not On the one hand, banks may clean comprennent que leur enough to put a basic code of con- up their act (which is what the evi- protection est limitée duct in place. Their responsibility is dence suggests is happening); on the lors de décisions pou- to ensure that their employees un- other hand, they could become even vant être préjudiciable derstand the following: more determined in their efforts to et que chaque action cover up potential scandals. This 1. There is a limit to the protec- prise doit toujours danger can be averted by promoting favoriser le code de tion that they are afforded by their ethical values at all levels of the orga- conduite défini, en lien banks. When making a difficult busi- avec sa propre vision nization, in line with the recommen- ness decision that may have negative dations in this paper. ce qui est éthiquement externalities, employees must assu- correct. LIBOR was an example of a scan- me that they will be largely accoun- dal that had been smouldering away table for the consequences. for a very long time, before explo- 2. In ethical terms, every decision ding into the public eye in a matter La promotion des they make on behalf of their banks valeurs éthiques doit of weeks. It will be instructive to should be judged against two criteria: être effectuée à tous les discover just how widespread ma- niveaux des organisa- • The firm’s code of conduct; nipulation was among the other pa- tions bancaires, notam- • The individual’s personal vi- nel banks. In any case, the evidence ment afin d’éviter leurs sion of what is ethically correct. regarding the three banks directly aspirations à couvrir implicated is reason enough to jus- les scandales poten- tify an ethical overhaul of the entire tiels. The future of ethics in the banking industry industry. We have entered a positive phase in which the banking com- At industry level, fortunately, munity is actively discussing these most of what can be done is now issues more than ever before. This L’affaire du LIBOR being done. This is largely due to the process of reflection and contem- a occasionné une public outcry over the numerous fi- plation – for banking institutions, révision éthique de nancial scandals that have occurred teams and especially individuals – is l’ensemble du sec- in recent times. As already mentio- the main indicator that the overhaul teur financier, qui est ned, few factors are a bigger force may be successful. • entré dans une phase positive de réflexion et d’analyse. Une démarche qui pourrait être couronnée de succès.

LESSONS FROM LIBOR 308 Appendix: excerpts from trader conversations

The following excerpts are taken from the Financial Services Authority’s Final Notices to Barclays and UBS in the matter of the LIBOR scandal.

(1) 26 October 2006 External trader: If it [LIBOR] comes in unchanged I’m a dead man. After the Barclays trader responded that he would ‘have a chat’: External Trader: Dude, I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger Source: FSA (Financial Services Authority), Final Notice to Barclays Bank PLC, www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf

(2) 18 July 2007 Broker B contacted a submitter at panel bank 1 asking about Japanese yen LIBOR submissions that the bank was going to contribute. The submitter was extremely off-hand about his bank’s submission (saying it makes no difference to me) and agreed to make the submission requested by broker B. Broker B confirmed that the request came from trader A at UBS. The conversation went as follows: Panel bank 1 submitter: Alright, well make sure he [the UBS Trader] knows. Broker B: Yeah, he will know mate. Definitely, definitely, definitely. Panel bank 1 submitter: You know, scratch my back yeah an’ all. Broker B: Yeah oh definitely, yeah, play the rules. Source: FSA (Financial Services Authority) Final Notice to UBS, http://www. fsa.gov.uk/static/pubs/final/ubs.pdf

(3) 18 September 2008 Broker requests and external requests were coordinated with internal requests. In the course of one manipulation campaign, a UBS trader agreed with his counterpart that he would attempt to manipulate UBS’s submission in ‘small drops’ in order to avoid arousing suspicion. The trader made it clear he hoped to profit from the manipulation and referred explicitly to his UBS trading positions and the impact of the Japanese yen LIBOR on those positions. He offered to ‘return the favour’ and enter into facilitation trades and other illicit transactions in order to incentivize and reward his counterparts:

(a) Trader A sought to secure the cooperation of traders at other panel banks by entering into trades that aligned their respective commercial interests so that both sides would benefit from the intended Japanese yen LIBOR manipulation.

CHANGING FRONTIERS OF ETHICS IN FINANCE 309

(b) Trader A and another trader entered into ‘wash trades’ (risk-free trades that cancelled each other out and had no legitimate commercial rationale) in order to facilitate corrupt brokerage payments to at least three brokers at two broker firms as a reward for their efforts in manipulating the submissions of panel banks. For example, in a telephone conversation on 18 September 2008, trader A said to broker A at broker firm A:

If you keep 6s [the six-month Japanese yen LIBOR] unchanged today … I will … do one humongous deal with you … like a 50,000-buck deal, whatever. I need you to keep it as low as possible … if you do that … I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want … I’m a man of my word.

Source: FSA (Financial Services Authority) Final Notice to UBS, http://www. fsa.gov.uk/static/pubs/final/ubs.pdf

References Aristotle (1984), Aristotle’s Ni- Organizational Context, and (Un) comachean Ethics, trans. Hippocra- ethical Encounters’, Journal of Busi- tes G. Apostle, Grinell, Peripatetic ness Ethics, 97 (1), pp. 51-69 Press Dobson, J. (1997), ‘Ethics in Fi- Axelrod, R. (1984), The Evolu- nance II’, Financial Analysts Jour- tion of Cooperation, New York, Ba- nal, January/February sic Books Locke, E. A. (1991), ‘The motiva- Casimiro, M. & Pellerin, E. tion sequence, the motivation hub, (2009), ‘Du bon usage de l’ordre dans and the motivation core’, Organiza- le désordre de la finance (Good prac- tional Behavior and Human Deci- tice and financial disorder)’, Finance sion Processes, 50(2), 288-299 & the Common Good/Bien Com- Solomon, R. (1992), Ethics and mun, 33 Excellence: Cooperation and Inte- Crossan, M., Mazutis, D. & Seijts, grity in Business, Oxford, Oxford G. (2013), ‘In Search of Virtue: The University Press Role of Virtues, Values and Charac- Trevino, L.K. (1986), ‘Ethical De- ter Strengths in Ethical Decision Ma- cision Making in Organizations: A king’, Journal of Business Ethics 113 Person-Situation Interactionist Mo- (4), pp. 567-581 del’, Academy of Management Re- Dean, K. L., Beggs, J. M. & Kea- view, July 1986, 11 (3), pp. 601-617 ne, T. P. (2010), ‘Mid-level Managers,

LESSONS FROM LIBOR 310 311 TThe Ethical Challenge of Systemic Financial Distrust

Friedemann Bieber Germany Ethics & Trust in Finance PhD-Student in Global edition 2016-2017 Political Philosophy, University of Zurich*, Switzerland Second Prize

In one of the opening sentences global financial crisis (Roth, 2009; of his Meditations on First Philosophy Shiller, 2008; Krugman, 2013). René Descartes observes that “it is Second, there was an accompanying prudent never to trust completely external breakdown of public trust those who have deceived us before” in those working in the financial (1996 [1641]: 12). Some 350 industry, its major organizations, Dr. Juri Viehoff years later, Lady Gaga, in her song Germany and, crucially, the financial system’s Researcher in Telephone, agrees: “Trust is like a ability to fairly deliver prosperity. In Philosophy & mirror, you can fix it if it’s broke, a 2016 study, only 8% of Americans Economics, but you can still see the crack in that said that they trust their house- University of Zurich*, [expletive]’s reflection!” The near- bank or financial intermediary, a Switzerland universal human truth that these two figure that used to be well above very different thinkers – each in their 50% prior to the crisis (Close, own idiom – stress is that once it is 2016). Another study persistently lost or betrayed, trust is very hard to ranks the financial sector as the regain and may never fully recover. least trustworthy industry (de It is this insight that the Bruin, 2014; Edelmann, 2016). financial industry has painfully had Perhaps harder to put into figures, to confront over the tumultuous but ultimately more consequential * The views expressed herein are those of the au- last decade. First, there was the is the loss of faith in the economic thors and do not necessarily internal breakdown of trust amongst structure of which finance is an reflect those of the Organiza- market participants that triggered, integral part, as witnessed by tion they are affiliated to. magnified and perpetuated the resurgent populist condemnations

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 312 of ‘(financial) globalism’ and Trust and Distrust Dans Les Méditations, calls for protectionism and René Descartes observe unilateralism. Overcoming internal Trust is everywhere. From the qu’« il est prudent and external distrust should be a most casual everyday choices to the de ne jamais faire most agonising and momentous totalement confiance goal for professionals who aspire decisions in our lives, we are à ceux qui nous ont to work in a prosperous and fair déçu auparavant ». financial industry. But because constantly engaged with assessing Quelque 350 ans plus these breakdowns in trust have whom, what, when and why to tard, Lady Gaga, dans the potential to threaten the very trust. Crucially, trust is not just sa chanson Téléphone, existence of a liberal democratic one additional thing to consider va dans le même sens order, distrust in finance is an – it is almost always a decisive : « la confiance est acute problem that is of everyone’s concern: As lovers and friends, comme un miroir, concern. we end relationships when our vous pouvez le réparer trust has been betrayed. As voters quand il est cassé, mais This essay contributes to our and citizens, we do not support a vous pourrez toujours understanding of trust in finance. candidate in whose sincerity we have voir la marque dans We approach the issue from a new doubts. As consumers and investors, son reflet ! » La vérité philosophical angle by investigating presque universelle qui we refrain from purchasing products first the problem of systemicdistrust . en découle est le fait or shares when we lack faith in the qu’une fois la confiance We proceed in four steps: Section management’s truthfulness. Trust perdue ou trahie, elle two lays the groundwork by offering relations underpin life as we know it. est difficile à regagner. a philosophically sound account of Without trust, close relationships are trust and distrust. Crucially, we inconceivable, democratic politics demonstrate that distrust is at heart impracticable, and prosperous L’industrie financière a so-called “thick” ethical concept, market exchanges unworkable. a dû y faire face avec which is grounded in the trustee’s peine durant les 10 moral obligations. Section three Some Characteristics dernières tumultueuses of Trust années. D’abord, il y turns to distrust in the financial a eu l’effondrement system. We distinguish between But what exactly is trust? First, interne de la confiance agential and systemic distrust, and we must distinguish between trust chez les participants au we list some evidence and possible and distrust and trustworthiness marché qui a déclen- causes. But our goal is more than and untrustworthiness. Whereas ché la crise financière diagnostic. In section four, we (dis)trust is the attitude that we globale. Ensuite, il advance proposals for alleviating y a eu une perte de display towards those we consider confiance externe du distrust in the financial system. We trustworthy, (un)trustworthiness public dans la capacité present short-term as well as more is the property that a trustee must du système à appor- aspirational ideas, distinguishing objectively have for trust to be ter équitablement la three complementary strategies: warranted (Hardin, 1996; McLeod, prospérité. La méfiance generating agreement about the 2015). Thus, we can fail to trust dans la finance est une obligations of the financial system, or even distrust those who are préoccupation pour introducing reforms to increase objectively trustworthy, and we chacun. its reliability, and communicating can trust those who are objectively improvements. untrustworthy. With this distinction

CHANGING FRONTIERS OF ETHICS IN FINANCE 313 La confiance est in mind, let us now confront some slipshod neighbour fails to water my partout. Comme les necessary aspects that all cases of the tomato plant, then it is ceteris paribus amoureux, nous met- form “A trusts B in respect of X” have warranted that I am resentful towards tons fin aux relations in common (Baier, 1986; O’Neill, her for this omission, and it would be quand notre confiance 2002): a été trahie. Comme appropriate for her to apologize. les électeurs, nous 1. Trust is task-focused. Three Insights éliminons les candi- Though we sometimes speak as if About Trust dats pour la sincérité there was ‘trust tout court’, trust is to desquels nous avons be understood as a threefold relation The aspects identified above des doutes. Comme between a truster, a trustee, and indicate that trust is intimately les investisseurs, nous some tasks: When we worry that the connected to questions of ethics. By évitons les entreprises its very nature, trust is something dont la gestion ne nous average person’s trust in bankers is paraît pas sincère. declining, then we of course do not that can be betrayed, and when this Nous devons dis- worry about his expectation that his occurs (and in contrast to cases tinguer la confiance banker will reliably send him flowers of mere reliance) morally charged (méfiance) de la (non) on his anniversary, but that she will emotions like resentment and blame fiabilité: alors que la reliably and faithfully execute those are in order. Such emotions are confiance (méfiance) tasks that customers can legitimately justified when it is ethically correct est l’attitude que nous expect. to assume that the trustee had a montrons à ceux que moral duty to do what we trusted nous considérons 2. Trust entails risk and comme (non) fiables, vulnerability. Trusting always her to do. Similarly, we have reason la (non) fiabilité est la involves a risk to something to be regretful when we distrusted qualité qu’un adminis- valuable for the truster, and hence somebody and later learn that this trateur doit objective- vulnerability (Attas, 2016). When distrust was unfounded. So, this is ment avoir pour être I transfer my savings to a wealth our first insight (Hawley, 2014: 8): digne de confiance. manager, I take a risk that trust was Insight 1: Trust and distrust (as La confiance est une misplaced: I may lose my money. relation triple entre opposed to reliance) presuppose a celui qui fait confiance, 3. Trust presupposes moral obligation or commitment celui à qui la confiance expectations and reliance. A only trusts between truster and trustee. est faite et certaines B in respect of X when A expects However, the absence of tâches. Faire confiance that B will in fact do X. When I ask trust is not by itself sufficient for implique toujours my upstairs neighbour to water the characterising a relationship as one un risque en rapport tomato plant on my balcony while of distrust. While I do not rely on avec quelque chose de I am on holiday, but already expect valeur pour celui qui my friend to bring me chocolate if fait confiance. her to forget, then I do not trust her she never does so, it cannot be said A a seulement to do it (Holton, 1994: 64). that I distrust her in this regard. confiance en B par 4. Trust is grounded in emotions The appropriate response when rapport à X lorsque A and ethical attitudes. Trust requires unexpectedly offered chocolate attend que B fasse X. that, when A’s belief in B’s doing X is thankfulness, not remorse for La confiance est basée is frustrated, it is appropriate for A to misplaced distrust. It would be sur des émotions et des have certain emotions and attitudes absurd to apologise to my friend for attitudes éthiques. towards B (Jones, 1996). When my the previous absence of trust in her

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 314 offering chocolate (comp. Hawley, The financial system is human- 2014: 3). This yields our second made and changeable, and therefore insight: assumptions about moral obligations (and hence distrust) are apt. Aperçu 1 : la confiance Insight 2: Distrust (as opposed to et la méfiance (par non-reliance) is the expectation that Systemic Distrust opposition à la dépen- a trustee will fail to perform a moral in Finance dance) présupposent obligation or duty. une obligation morale It’s time to connect our ou un engagement We started out by considering philosophical reflection to empirical entre celui qui fait not merely distrust in finance, but practice: We saw that people who confiance et le trustee. systemic distrust. One might think distrust will: that systemic distrust merely is (A) believe that some agent or Aperçu 2 : la méfiance distrust in the financial system, but institution (the trustee) has some (par opposition à la this is too simple. If an individual moral obligations or commitments; non dépendance) est distrusts the financial system, this le fait de s’attendre à cannot amount to systemic distrust. AND ce que le trustee ne (B) expect that the trustee will s’acquitte pas de son Systemic distrust presupposes that obligation morale ou many agents jointly distrust, where betray or violate those obligations. de son devoir. this distrust can in turn undermine (A) and (B) together suggest the the system since it emerges from the structure for the following empirical Aperçu 3 : la méfiance interaction of numerous agents: diagnosis of distrust: Subsection systémique est dis- Insight 3: Systemic distrust is 3.1 analyses what people – those tincte de la méfiance who mistrust – see as the moral dans un système car distinct from distrust in a system as obligations and commitments of elle présuppose la it presupposes widespread distrust méfiance généralisée among interacting agents. the financial system and those in it. What are possible objects of a entre des acteurs en These insights clarify when there interaction. betrayal of trust? In 3.2 we assess the is distrust as opposed to merely the grounds for the expectation of non- absence of trust and when distrust compliance. amounts to systemic distrust. Moreover, if there is distrust, then What People S’il y a méfiance, its existence holds both a threat Expect from the son existence même and a promise. The threat is that Financial System contient à la fois those who distrust believe that a une menace et une Of course, there is no clear moral obligation will be violated. promesse. La menace catalogue of obligations that est que ceux qui se The promise is that distrusters at everybody agrees on when it comes méfient pensent qu’une least believe that there are ethical to the financial system. Nor need obligation morale sera obligations that can, in principle, there be complete agreement on this violée. La promesse be observed. Put more bluntly: in a pluralistic society. Our moderate c’est que ceux qui se financial calamities are not like bad goal here is to sketch important méfient croient au weather – inevitable facts of life that values that we think matter to a moins qu’il y a des may disappoint us, but about which vast majority of citizens. We do not obligations morales qui ethical judgment is nonsensical. draw on extensive empirical survey

CHANGING FRONTIERS OF ETHICS IN FINANCE 315 peuvent, en principe, data but trust that our readers, upon criterion (e.g. hard work, talent) être respectées. Les reflection, will agree that these are or the contribution that inequality désastres financiers indeed widely-shared expectations. makes to overall prosperity (James ne sont pas comme le For analytic clarity, we focus on those 2012; Rawls, 1999). mauvais temps – des outcomes that the financial systemas faits inévitables de la Agents’ Obligations: a whole is expected to produce, and vie qui peuvent nous Competence and Motivation désappointer, mais sur then on the obligations of individual lesquels un jugement agents, notably natural persons and Beyond outcomes, there are éthique n’a pas de sens. corporations that matter for trust. moral expectations about agents Le système financier For these agents, we differentiate of finance, their actions, standards est fait par l’homme et between non-compliance that stems of behaviour, and, more generally, peut être changé. their business culture. Assessment from (i) lack of competence, or (ii) of agents is distinct from the moral lack of motivation. assessment of structures and Systemic Purpose: institutions: Agents act, i.e. they have Les gens qui se méfient Equitable Prosperity plans, form intentions and respond (a) croient qu’un agent At the most abstract level, the to reasons in the pursuit of their ou une institution (le purpose of the financial system is to aims. When it comes to placing trust trustee) a des obliga- serve the common good (Hendry, in agents, we do not only care about tions morales, et (b) 2013: 46; Shiller, 2012: 7; Steigleder, the outcomes they bring about, but et s’attendent à ce que 2011). What does that entail? Our also about why and how they do so. le trustee trahisse ou We believe agents in the financial viole ces obligations. suggestion is that the financial system are considered trustworthy Ainsi, pour établir un system must contribute to ‘equitable diagnostic empirique prosperity’, which is shorthand for by society at large when they meet de la méfiance, nous a system that reliably makes people two conditions: considérerons d’abord better off whilst ensuring that nobody 1) They are capable of ce que les gens croient is treated inequitably. Finance’s performing the function they occupy, être des obligations crucial role for prosperity consists where this function is justified in morales du système terms of the system’s overall purpose. financier et jusqu’où ils in efficiently allocating capital to pensent qu’elles seront productive resources, providing 2) They are motivated in the honorées. Lorsque les financial services, and managing right way to pursue these goals. deux sont divergentes risk (Boatright, 2013; James, 2012; Just to give an example of this la méfiance apparaît. Santoro and Strauss, 2013). dual requirement: As the CEO of Même s’il n’y a pas With regard to equitableness, de catalogue des a company looking to acquire a obligations clair sur the obligation is, at the very least, competitor, we will trust our M&A lequel tout le monde a negative one, namely (i) to avoid advisor only if, first, we are convinced est d’accord, les deux contributing to outcomes that are that she is sufficiently competent points de vue suivants so bad that they amount to economic to counsel us about the industry, semblent être large- harm, and (ii) avoiding unfair corporate finance, and so forth. But ment acceptés : (1) outcomes where massive gains to secondly, we will only trust her if l’objectif du système some cannot be justified in terms she is motivated to look out for our financier de contri- of either some ethically relevant interest, as witnessed, for example, by

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 316 buer à une prospérité the absence of conflicting mandates, during the financial crisis, been a équitable, c’est-à-dire her own investment decisions, source of instability causing dramatic d’améliorer le sort des and so forth. Both competency reductions in overall economic gens et de ne traiter and motivation are properties that wellbeing (Lowenstein, 2010). Thus, personne de façon iné- are not imminently observable, so the experience-grounded expectation quitable. (2) les agents à l’intérieur du système that we generally seek to establish that the system can robustly produce financier doivent être their presence by reference to past prosperity has been shaken. compétents pour exer- behaviour and current constraints How about its ability to deliver cer la fonction qu’ils and incentives on action. This, we equitable outcomes? The first occupent et avoir de shall now see, explains the present condition here was that the financial droites motivations. problem of distrust. system should do no harm. But, How Past Experience to give just one example, IMF and Give Rise to Distrust World Bank estimate that as a result of the financial crisis, up to 83 million Les attentes sont large- Distrust arises if there is the people more will have to live below ment basées sur l’expé- expectation that obligations will not the line of severe poverty (United rience passée, nous be met. We have identified what the Nations, 2010: vi). More locally, the devons donc prendre public thinks are the obligations. financial crisis has in many instances en considération les What are its expectations? We had a dramatic impact on the lives résultats et le compor- begin by considering outcomes and of those already worse off, e.g. low- tement dont le public a behaviour the public has witnessed, été le témoin. skilled labourers now unemployed. assuming that expectations are Aux yeux de beaucoup, The second component of equity les marchés finan- to a large extent based on past was basic fairness in distributive ciers ont mené à une experience. In so doing, we focus outcomes. Here too, there is a mauvaise allocation du primarily, though not exclusively, on widespread sense that whilst the capital et ont causé la the 2008-10 financial crisis since it gains of the finance-fuelled pre-crisis crise financière globale most drastically shaped the public’s boom largely benefitted one layer qui a provoqué des current perception of financial of society, the subsequent costs of réductions dramatiques markets. du bien-être écono- the crisis were fully ‘communalized’ mique général. De Outcomes of the Financial through bank bailouts, jobs cuts même, la promesse de System and austerity measures, which disproportionally burden those résultat équitable a été Focusing first on the promise of ébranlée. dependent on social assistance and prosperity, it seems clear that this unfairly exempted those responsible has been called into severe doubt: for these outcomes. Whether or not Rather than facilitate efficient these judgments are accurate, they capital allocation, financial markets clearly bolster the narrative that “the Il y a un sentiment have in the eyes of many led to a system is broken”. général selon lequel misallocation of capital, including pendant que les gains human capital. And instead of Behaviour of Agents in provenant du boom distributing and managing risks Finance d’avant crise alimenté emanating from the real economy, Beyond the failure to live up par la finance profi- the financial industry has, at least to the expectations in terms of

CHANGING FRONTIERS OF ETHICS IN FINANCE 317 taient à une mince aggregate outcomes, the financial concerns about motives. By couche de la société, crisis has also exposed a severe lack developing and selling such les coûts de la crise of competence among individual as products, parts of the financial ont été complètement well as institutional agents. industry had alienated themselves « socialisés » à travers des sauvetages. At the institutional level, many from the fundamental social purpose banks did not comprehend the that finance as a profession was products they were dealing with. The meant to fulfil, namely to manage German Landesbanken, largely state- risk and facilitate real economic owned banks that have historically growth. What these segments of the Quelles sont les per- focussed on doing business with industry where doing was in fact ceptions des acteurs the opposite: releasing their ‘toxic financiers ? Distin- small to mid-sized German firms, guons les dimensions are an example. Lured by high financial products’ into the real « compétences » et « returns, they started investing in economy and killing productivity, motivation ». La crise credit default swaps, collateral debt employment and growth (Stiglitz, financière a mis en obligations and other structured 2010). évidence un manque financial products, blindly trusting Beyond this basic failure to meet de compétence grave the rating agencies’ verdicts. As : de nombreuses ins- its social purpose, the public also titutions ainsi que les Constantin von Oesterreich, head of witnessed the financial services personnes à l’intérieur the HSH Nordbank, later remarked: industry display more specific de ces institutions his bank was investing “everywhere deficiencies of motivation. The engagées dans des without being qualified to do so” recent string of discoveries of fraud interactions sur le (The Economist, 2015). on its own is impressive. In 2008, marché ne compre- naient pas pleinement Remarkably, even those who Bernard Madoff was charged with ce qu’ils faisaient. invented the complex financial choreographing the largest Ponzi Même les inventeurs products that fuelled the financial scheme in history (Ionescu, 2010). des produits financiers crisis eventually lost the ability to In 2012, it became public that complexes ont finale- handle them (Schwartz & Cresswell, banks had colluded to manipulate ment perdu la capacité 2008). As mortgages were placed the London Interbank Offered Rate de les contrôler. Il y in large bundles, claims to which (Libor) for over ten years (Kennan, a non seulement eu des cas particuliers were divided hierarchically and 2012). The discoveries of often de problèmes légales, then repeatedly re-sold, even the record-setting fraud have become so mais à un niveau plus constructors of these products could regular that it seems the industry is général, des segments no longer gauge their value, though corrupt to the core. de l’industrie finan- they knew they were risky. Beyond But even where financial cière ont engrangé des such product complexity, there is institutions have stayed within the profits à court terme also an impairment to manageability plutôt que de faciliter boundaries of the law, they have often and foreseeability from algorithmic la prospérité écono- been deemed to have crossed ethical high frequency trading that has, in mique. boundaries. A good example is the the past, led to ‘flash crashes’ and recent Cum-Ex scandal in Germany, arguably increased volatility. in which local and international In addition, there have been banks effectively conspired to

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 318 receive €31.8bn tax ‘refunds’ from obligations are, we want to preface the treasury on taxes never paid in this with a simple, structural idea: the first place (Blickle, 2017). for any chance of systemic distrust to recede, assumed obligations need Il y a en principe deux Alleviating Distrust: to be jointly realisable, and hence façons d’atténuer la Proposals for Reform assumptions of different agents within society need to converge. méfiance : changer les There are in principle two ways hypothèses relatives By this logic alone, it is crucial that of alleviating systemic distrust in aux obligations ou whatever changes are implemented financial markets. First, one can dispel modifier les attentes. are the product of democratic the assumption of an obligation: if no En ce qui concerne les procedures. Our proposals here are hypothèses relatives obligation is assumed, then there can invitations for citizens and financial aux obligations, il est be a perception of unreliability, but professionals to deliberate. With important qu’elles no distrust. Arguably, this was the this expectation management and ne divergent pas. case prior to the advent of modern reciprocal engagement in view, we Pour cette raison, economic theory and the belief that les agents financiers governments could and should shape propose the following: devraient s’engager • Short-Term Proposals à éviter de faire des the economic landscape. Second, promesses trompeuses, one can remove the expectation that (a) Forums should be established qui alimentent les obligations will be violated, which to discuss the obligations of the attentes irréalistes. requires convincing people that the financial system, demarcating them Puisque les entreprises financial system is trustworthy. from additional obligations society at individuelles peuvent This section will look at the large has. Such forums could be held trouver un intérêt merits of these approaches in turn. from the local level upwards, bringing dans de telles règles, si elles sont appliquées Our proposals are always split into together professionals, politicians conjointement, il n’y two categories. First, those that and laypeople. a pas besoin d’une could realistically be implemented (b) Financial agents should intervention de l’État. in the short-term; second, those commit to avoiding deceitful En même temps, plutôt that are more aspirational. Through promises, which could contribute to que de blâmer « les this two-tiered approach we hope unrealistic expectations about what banquiers », les politi- to provide a comprehensive ‘menu finance can achieve. Since individual ciens et les organes de of choice’, guarding against pure presse devraient iden- firms may have an interest in such tifier avec précisions utopianism while not curtailing rules, if implemented jointly, this quelles sont les devoirs ambitions by focussing too narrowly need not require state intervention. on the feasibility constraints of the et obligations spéci- • Aspirational Ideas fiques que le système moment. financier ou les agents (a) At a political level, a list should individuels n’ont pas Obligations be composed of the obligations the respecté. It matters what obligations the financial system and the agents within financial system is assumed to have. it have. This could be done at different While we make some substantive levels, with regions or nations adding (but we hope not outrageous) obligations to a global list. These lists assumptions about what these could then guide reforms.

CHANGING FRONTIERS OF ETHICS IN FINANCE 319 (b) Rather than blaming ‘the Structural Weaknesses bankers’, politicians and media outlets should be careful to identify We suggested that in contrast to specific obligations the financial agents, trust in systemic institutions system or individual agents is based foremost on outcomes. This subsection considers the financial have failed to meet. As informed system at the macro-level. Increasing La réforme actuelle debate requires knowledge, reliability primarily requires vise à augmenter la better educating students about increasing the system’s ability to fiabilité du système the financial system may also be absorb shocks to its components financier, afin que an important long-term goal to celui-ci devienne plus (Goldlin & Mariathasan, 2015). reinstate trust. digne de confiance. One aspect of this is the presence of Les faiblesses structu- Actual Reform systemically important institutions, relles sont présentes whose failure could quickly impair While there might be au niveau macro. the whole system. Another concern Elles proviennent tout disagreement about the precise is whether market participants are d’abord de la présence obligations, those mentioned in 3.1 really able, in times of crisis, to d’institutions d’impor- and 3.2 clearly seem to be part of any quickly evaluate the creditworthiness tance systémique et reasonable set. On this assumption, ensuite d’un manque of financial products and institutions. the financial system, at least prior to de transparence. Des This form of transparency is vital règles plus strictes en the 2008-10 financial crisis, was not for maintaining business between matière de liquidités reliable in meeting its obligations, banks. In the crisis, it was primarily pourraient contribuer so it was not trustworthy. In order the collapse of trust in the interbank- à la stabilité et il pour- then to effectively and permanently lending market that caused havoc in rait être raisonnable alleviate distrust, there needs to de transformer les the real economy as credit became be actual reform to make it more institutions financières unavailable to firms (Krugman d’importance systé- reliable. Our analysis of the origins 2013). of the failure of the financial system mique en des entités • Short-Term Proposals plus petites. Des règles suggests that there are primarily additionnelles en ma- three sources of unreliability, (a) To increase the resilience of tière d’information et namely: the financial system, more stringent un changement dans la liquidity rules should be introduced (i) structural weaknesses, procédure pour l’éva- in accordance with each institution’s luation de la solvabilité such as the presence of systemically susceptibility to systemic impact des produits financiers relevant institutions; (Admati & Hellwig, 2014). The pourraient augmenter (ii) a lack of competence, such more equity capital financial firms la transparence. as an inability of asset managers have, the longer they can absorb to comprehend the complex losses and the lower the likelihood of products they were dealing with contagious effects. and;motivational shortcomings, (b) Additional disclosure rules such as short-term profit seeking. could help increase transparency. A comprehensive strategy should While it is a task for experts to address all three components. determine what kind of information

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 320 should be published, the aim should • Short-Term Proposals be to make it easier to reliably (a) A non-profit institution evaluate the creditworthiness of akin to consumer advice centres financial products and institutions. should be created with the Un comportement expertise to advise firms on risks de prédateur de la (c) Specific, stricter rules should part des institutions be developed for institutions involved in complex financial financières envers les that are deemed systemically products. Firms have incentives to clients pauvres, tels relevant to ensure that they are in train their employees so that they que le chargement a strong position to absorb even are aware of all risks involved in par les banques de pronounced shocks (IMF, 2011). products they handle, but might frais excessifs en cas lack the expertise to identify risks. Aspirational Ideas de retard, devrait • (b) A study should be être interdit. Une (a) If possible at reasonable cost, commissioned to identify products, telle mesure pourrait all systemically relevant financial atténuer la méfiance trading practices and business institutions should gradually be models that increase the complexity de deux façons : en transformed into entities that are premier, elle changera of financial markets, evaluating la perception aux yeux not too big (or interconnected) benefits and costs. The aim is to du client. En second, too fail. Such entities not only acquire data on the basis of which to en tant qu’exemple de constitute an inherent weakness, decide (at the political level) which prise en compte de la but also create adverse incentives activities to disincentivise or curtail. vulnérabilité du client, for risk-seeking behaviour (firms For example, existing rules on elle peut aider à mettre know they will be saved). spoofing, layering and front-running en place une culture (b) The way the moins étroitement axée in high-frequency trading should creditworthiness of products sur le profit. be refined to reduce the danger of and firms is assessed should be excessive volatility. re-examined. There might, for • Aspirational Ideas example, be a case for reducing (a) At a political level, a decision the epistemic weight assigned to should be made on how to weigh the Plutôt que de pure- credit ratings (de Bruin, 2017) or benefits of highly complex financial ment proscrire certains for changing incentive structures products against the risks they give produits, la charge to ensure impartiality. de la preuve dans rise to. Complexity in some areas quelques domaines à Lack of Competence can likely be considerably reduced at little or no cost to social productivity haut risque devrait être There are two ways to ensure inversée. En utilisant and welfare. les règles actuelles that an agent is competent to pour l’approbation de accomplish a given task. One can Motivational Shortcomings nouveaux produits train her to carry it out, or reduce It would be neither fair nor pharmaceutiques, les the skill-level required. Valuable productive to place blame for entreprises financières products might be complex, but motivational shortcomings solely on devraient alors être complexity in finance (as in law) individual agents. The structures in obligées de démon- is, also, always in the private which they are embedded matter as trer que les bénéfices interest of those who can outsmart attendus des nouveaux they shape norms as well as incentives others. (Murdoch, 2015). In addressing

CHANGING FRONTIERS OF ETHICS IN FINANCE 321 produits l’emportent motivational shortcomings, we • Aspirational Ideas sur leurs risques. distinguish between narrowing a trust (a) Rather than merely outlawing L’atténuation de la gap – by making unreliable behaviour certain products, regulators should méfiance nécessite un less attractive – and bridging a trust changement dans les shift the burden of proof to providers attentes. Tandis que gap – by changing cultural norms in some high-risk areas. Taking les attentes du public (Attas, 2016). current rules for the approval of new peuvent s’adapter • Short-Term Proposals pharmaceuticals as a guide, financial au fil du temps si le firms might then need to demonstrate système financier reste (a) To curtail reckless behaviour, financial firms could be obligated that the expected benefits of new fiable, les attentes sur products outweigh their risks (Allen, les marchés financiers to share in their customers’ risk. sont souvent auto-ré- For example, Mian and Sufi 2013). alisatrices, d’où il est (2014: 171-184) advocate shared- (b) A moderate financial d’importance vitale liability-mortgages, where monthly transaction tax could be introduced. que les changements payments shadow movements in This has been proposed e.g. by soient communiqués the market value of a property while Darvas and Weizsäcker (2009). rapidement. Plausibly, such a tax would primarily Propositions à court the amortisation schedule is fixed. terme : imposer un Such mortgages could be made target highly speculative short-term moratoire sur les fonc- obligatory for borrowers with low investments that have little economic tionnaires voulant tra- creditworthiness. benefit. Similarly, some regulators vailler dans l’industrie (e.g. the Japanese Financial Service (b) Predatory behaviour by financière ; établir (ou Agency in 2017) have proposed financial institutions towards poor renforcer) des instituts ‘speed limits’ on high-frequency customers, such as the imposition of de recherche gérés par trading to reduce volatility. l’État afin d’acquérir excessive overdraft fines by banks, une expertise publique should be prohibited. Such a measure Communication sur les marchés finan- could alleviate distrust in two ways. ciers. Reforms of the financial system First, it will alter the perception of matter, but are not necessarily Idées à plus long terme consumers. Second, as an example of : imposer une sépara- sufficient. Alleviating distrust also tion stricte entre les taking vulnerabilities of consumers requires changes in expectations. régulateurs financiers into account, it may help create a less While the public may adapt its et les professionnels de narrowly profit-driven culture. expectations over time if the financial la finance (avec pour (c) Criminal prosecution should system continues to be reliable, modèle les relations be reinforced, with individual agents communication is needed. Since avocats–juges) ; étant being held responsible where there donné les biais dans expectations are often self-fulfilling l’octroi des finan- was clear illegal behaviour. There has in financial markets (Farmer, cements, réguler le been a sharp decline in convictions for 2014), it is vital that changes can be financement externe de fraud in favour of deferred-prosecution communicated quickly, so that the la recherche acadé- agreements (Radden Keefe, 2017), public can adjust its expectations. A mique plus étroitement which creates a perception (among sensible aim would be to establish a et introduire un code the public and finance professionals), group of experts who can evaluate d’honneur pour les that one can get away with breaking progress and are able to reach the ear universitaires. the rules in finance. of the public.

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 322 This was historically the role of should be encouraged, fraternisation academics, public regulators and as well as a change in employment politicians. However, trust in these across the divide should not. The groups has also declined (Edelmann, relationship between judges and L’analyse philosophique était nécessaire 2017: 6,11). There are two plausible lawyers could serve as a guide. pour déterminer l’ana- explanations for this. First, there (b) Given empirical evidence of tomie de la méfiance ; is a perception that there are few funding bias (Krimski, 2013), external nous avons ensuite mis competent experts. The fact that few funding of academic research should l’accent sur les attentes economists predicted the 2008-10 be regulated more strictly. A code of normatives que les so- financial crisis has contributed to honour could encourage academics ciétés ont à l’égard des this impression. Second, publicised résultats que le système not to accept favours from those who conflicts of interest have led to financier produit et du might have an economic interest in comportement que les doubts about the impartiality of questions relating to their research. acteurs adoptent dans experts: many financial regulators ce secteur. Plus loin, formerly worked in finance; banks Conclusion nous avons expliqué provide grants to economists; high- We began this essay in the lofty quels développements profile politicians have delivered heights of philosophical reflection historiques ont donné pricey speeches at investment banks. naissance à des doutes about distrust, and ended it in profonds sur la ma- • Short-Term Proposals the messy lowlands of practical nière dont le système proposals. But we see no reason (a) Employment moratoria financier remplit ces to apologize for this. To (freely) should be imposed on public attentes ; finalement, rephrase a famous Kantian dictum: nous avons examiné officials who want to work in Theory without practice is empty; comment reconstruire industry. Similar restrictions should reform without reflection is blind1 la confiance publique be imposed for those who wish to dans la finance, en switch jobs in the other direction, To recap: our philosophical étudiant la gestion but possibly gradually, given the analysis was necessary to determine des attentes et des need for expertise in regulation. the anatomy of distrust. Based on obligations, la réforme this, we focused on the normative institutionnelle, et les (b) State-run research institutes expectations that society at large has pratiques de com- focussed on establishing expert of the outcomes that the financial munication. Vaincre knowledge of financial markets system should generate and of the la méfiance dans la should be established (or finance, comme le behaviour agents of the financial strengthened). The state can only fait de reconstruire la system should display, as judged claim credibility if it does not need confiance dans une by their competence and their to rely on outsiders who may face relation, nécessite de motivation. We then explained faire des ajustements conflicts of interest. which historical developments peu à peu plutôt qu’un • Aspirational Ideas geste exceptionnel. 1 The reference here is to Kant’s expression Mais (en revenant à (a) There should be a strict “Gedanken ohne Inhalt sind leer, Anschauun- Lady Gaga) il y a de separation between financial gen ohne Begriffe sind blind.“ (Kant, 2009 l’espoir : un miroir [1787]:B75), literally translated as “Thoughts regulators and professionals in cassé peut ne plus without content are empty, intuitions without finance. While an exchange of ideas concepts are blind.”

CHANGING FRONTIERS OF ETHICS IN FINANCE 323 jamais produire le and current features have given Overcoming distrust in finance, like même reflet, mais une rise to widespread doubts that the rebuilding trust in a relationship, réparation prudente financial system lives up to these requires piecemeal adjustments peut transformer une on many fronts, rather than grand fissure en quelque normative expectations. Finally, we one-off gestures. But (and to come chose de précieux : un have chartered the terrain of how aimable rappel de sa to rebuild public trust in finance, back to Lady Gaga) there is also hope. A broken mirror may never fragilité fondamentale. looking at expectation and obligation provide the exact same reflection, management, institutional reform, but in time, careful mending and and communicative practices. frequent polishing can turn a crack In fact, our colourful range into something valuable: a gentle of proposals is as it should be. reminder of fundamental fragility. •

References Aaronson, D. (1999). A Note nobody trusts financial institutions. on the Benefits of Homeowners- Time Magazine. Retrieved 31 hip. Journal of Urban Economics, July 2017, from http://time.com/ 47(3), 356–369. money/4293845/trust-financial- institutions-study/ Allen, H. (2013). A new philosophy for financial stability Darvas, Z., & Weizsäcker, regulation. Loyola University J. (2011). Financial transaction Chicago Law Journal, 45(1), 173– tax: small is beautiful. Society and 231. Economy, 33(3), 449–473. Attas, D. (2016). Terms of de Bruin, B. (2015). Ethics trust. Oxford Studies in Political and the global financial crisis: why Philosophy, 2, 209. incompetence is worse than greed. Cambridge: Cambridge University Baier, A. (1986). Trust and Press. antitrust. Ethics, 96(2), 231–260. de Bruin, B. (2017). Information Blickle, P., et al. (2017). Cum- as a condition of justice in financial Ex scandal: the multibillion markets: The regulation of credit- euro theft. Die Zeit, 8 June. rating agencies. Oxford: Oxford Retrieved from http://www.zeit. University Press. de/wirtschaft/2017-06/cum-ex- scandal-tax-evasion-dividend- Economist (2015). Lost a stripping-germany fortune, seeking a role. The Economist. Retrieved from https:// Boatright, J. R. (2013). Ethics www.economist.com/news/ in finance (3rd Edition). Oxford: finance-and-economics/21638143- Wiley-Blackwell. seven-german-landesbanken- Close, K. (2016). Almost survived-financial-crisis-are-still

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 324 Edelman, R. (2016). 2016 2017, from https://blogs.imf. Edelman Trust Barometer: org/2011/05/27/too-important- Executive Summary | Leadership | to-fail-conundrum/ Leadership & Mentoring. Retrieved Ionescu, L. (2010). The from https://de.scribd.com/ mechanism of the largest Ponzi doc/295815519/2016-Edelman- scheme in history and its Trust-Barometer-Executive- wide-felt impact on the global Summary financial architecture. Economics, Edelman, R. (2017). 2017 Management and Financial Edelman Trust Barometer: Markets, 5(3), 245. Executive Summary | James, A. (2012). Fairness Globalization | Employment. in practice: a social contract for Retrieved 31 July 2017, a global economy. New York: from https://de.scribd.com/ Oxford University Press. document/336621519/2017- Jones, K. (1996). Trust as an Edelman-Trust-Barometer- affective attitude. Ethics, 107(1), Executive-Summary 4–25. Farmer, R. E. A. (2014). How Kant, I. (2009 [1787]). Kritik the economy works: confidence, der reinen Vernunft: Vollständige crashes and self-fulfilling Ausgabe nach der zweiten, hin und prophecies. New York: Oxford wieder verbesserten Auflage 1787 University Press. vermehrt um die Vorrede zur ersten Auflage 1781. Köln: Anaconda. Hardin, R. (1996). Trustworthiness. Ethics, 107(1), Keenan, D. (2012). My 26–42. thwarted attempt to tell of Libor shenanigans. Financial Times, 27 Hawley, K. (2014). Trust, July. Retrieved from http://www. distrust and commitment. Noûs, informath.org/media/a72/b1.pdf 48(1), 1–20. Krimsky, S. (2013). Do Hendry, J. (2013). Ethics financial conflicts of interest and finance: an introduction. bias research? An inquiry into Cambridge: Cambridge the ‘funding effect’ hypothesis. University Press. Science, Technology, & Human Holton, R. (1994). Deciding Values, 38(4), 566–587. to trust, coming to believe. Krugman, P. (2013). End this Australasian Journal of Philosophy, depression now! (Reprint). New 72(1), 63–76. York: Norton & Company. IMF. (2011). A Tale of Titans: Lowenstein, R. (2010). The The Too Important to Fail end of Wall Street. New York: Conundrum. Retrieved 31 July Penguin Press.

CHANGING FRONTIERS OF ETHICS IN FINANCE 325 McLeod, C. (2015). Trust. In Roth, F. (2009). The effect of E. N. Zalta (Ed.), The Stanford the financial crisis on systemic Encyclopedia of Philosophy (Fall trust. Intereconomics, 44(4), 203– 2015). Metaphysics Research Lab, 208. Stanford University. Retrieved Santoro, M. A., & Strauss, from https://plato.stanford.edu/ R. J. (2012). Wall Street values : archives/fall2015/entriesrust/ business ethics and the global Mian, A., & Sufi, A. (2014). financial crisis. Cambridge ; New House of debt: how they (and York: Cambridge University you) caused the Great Recession, Press. and how we can prevent it from Schwartz, N.D., Cresswell, happening again. Chicago: The J. (2008). What created this University of Chicago Press. monster? The New York Times, 28 March. Retrieved from https:// Murdoch, R. (2015). www.nytimes.com/2008/03/23/ Behavioural Ethics and the Next business/23how.html Generation in Finance. Finance & Bien Commun, (42 & 43). Shiller, R. J. (2012). Finance Retrieved from http://www. and the good society (Reprint). obsfin.ch/wp-content/uploads/ Princeton: Princeton University Document/Murdoch_RCP.pdf Press. O’Neill, O. (2002). A question Steigleder, G. K. (2012). Ethics and global finance. In The of trust: the BBC Reith lectures Morality and Global Justice Reader. 2002 (2002 ed.). Cambridge: Boulder, CR: Westview Press. Cambridge University Press. Stiglitz, J. (2010). The Stiglitz Radden Keefe, P. (2017). Why report reforming the international corrupt bankers avoid jail. The monetary and financial systems in New Yorker, 24 July. Retrieved the wake of the global crisis. New from http://www.newyorker. York: The New Press. com/magazine/2017/07/31/why- corrupt-bankers-avoid-jail United Nations. (2010). World Economic Situation Rawls, J. (1999). A theory and Prospects 2010. Retrieved of justice (Rev.). Cambridge, from http://www.un.org/en/ Mass.: Belknap Press of Harvard development/desa/policy/wesp/ Univeristy Press. wesp_archive/2010wesp.pdf

NOBODY TRUSTS THE BANKS: WHAT TO DO ABOUT IT? 326 327 EEthical Leadership and Ethical Legacies

Ethics & Trust in Finance Global edition 2016-2017

Third Prize ex-aequo

Bibi Mehtab Lately, the financial sector with whom you “could well have Rose-Palan has been perceived as being more coffee with that morning. And they Mauritius unethical than any other. This paper were still good people who’d made Credit Executive will take as an example the Wells terrible choices.” Corporate, Fargo scandal. It shows how, once Lisa Ordonez, Vice Dean and The Mauritius again, employees are at the heart of Professor at the University of Commercial Bank*, an ethical crisis in financial services. Arizona talked about how “goals Port Louis Such crises have now become a great have a strong effect of causing tunnel concern for moral psychologists, for vision, narrowly focusing people spiritual leaders, and for behavioural at the expense of seeing much else scientists who are trying to around them, including the potential understand what led to that situation consequences of compromised and what caused such behaviours. choices made to reach goals.” How can 5,300 employees all lose The first section of this paper their moral compass? is focused on the ethical dilemmas The truth is that we are all faced by bank employees today and vulnerable. Despite our good how our financial system is gradually intentions, we may sometimes be becoming ethically lethargic. Going * The views expressed herein are those of forced to make choices we never from ethical to unethical is not a the author and do not thought we would make. According sudden shift, but rather a gradual necessarily reflect those to former prosecutor Serina Wash process that starts with those minor, of the Organization she is (2016), most of the corruption today unethical decisions that employees affiliated to. comes from “ordinary good people” allow themselves to make. The daily

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 328 repetition of dishonest actions creates consisted of collecting information a pattern in our subconscious. Over in scrolls and books. Socrates refused time, our reaction to such situations to write anything down based on Le monde de la finance becomes automatic and does not even his argument that written words a graduellement passé register as unethical. d’un système haute- “seem to talk to you as though they ment éthique à un By reviving an ancient approach were intelligent, but if you ask them système éthiquement to ethics written some 2000 years anything about what they say, from léthargique. Cette ago by Aristotle, I emphasize in the a desire to be instructed, they go on situation de léthargie a second section the importance of telling you the same thing forever”. été un incubateur par- promoting ethical leadership in our (Phaedrus, section 275d). fait pour le dérapage organisations to inspire employees’ de 5300 employés de Today we live in a world in la banque Wells Fargo to embrace ethical values in their constant change. Technology has en 2016. daily behaviour. I also encourage been an important trigger in the a re-examination of cultures and evolution that banks have faced whistleblowing systems to facilitate over the last decades. Technological En tant qu’employés ethical leadership by looking at the development of the banking system de ce système, nous following questions: and digitalisation of banking channels sommes vulnérables have enabled customers to have non- et pouvons répéter 1. What can management do to les mêmes erreurs. La create a more ethical organisational stop access to banking services without transgression inoffen- culture? having to physically enter a branch. sive de l’éthique que 2.How can we optimize the Digitalization has swept through bank nous nous permettons effectiveness of whistleblowing operations and enhanced customer de commettre régu- system? experience with alternate customer lièrement crée, à long channels. Customers are now being The future and the profitability of terme, un modèle dans offered multiple interaction points notre subconscient our financial system depend greatly including branches, ATMs, internet qui force une réaction on the next generation of employees. automatique lorsque It is therefore our responsibility banking and, now, mobile banking. nous faisons face à des to build an ethical legacy for this The smartphone has brought a real situations contraires à digital generation and to ensure transformation to everyday retail l’éthique. that the system that was once banking. By digitalising customer created to safeguard the interests of service, banks have become more the community still has value and effective and faster in their customer interaction. This, in turn, has changed Ce papier commence importance in the heart and mind of en fournissant au each person in society. the structure of the organisations: lecteur une analyse new units have been created such as situationnelle des Tech - no - logic call centres and back office operations dilemmes éthiques The transition from one method have been extended. At the same auxquels font face les of communication to another is time, the front line service is more employés de banque always morally contentious. Socrates concentrated on winning business and dans différents secteurs lived in an era when people were increasing the firm’s portfolio. As a dans l’organisation moving from communicating orally result, employees often face excessive et élabore différentes to a new form of technology which pressure to meet unrealistic targets.

CHANGING FRONTIERS OF ETHICS IN FINANCE 329 solutions selon des Moreover, the processes and the approches telles que, Call centres- The conflict between the organisation itself are constantly (i) un leadership pour in flux, introducing new rules and promouvoir l’éthique needs of customers and regulations. That churn discourages chez les employés, (ii) the needs of the bank l’amélioration de la employees from putting rules and An article in the International culture et (iii) revoir le regulations into practice. The rules, système de reporting. Il Journal of Work Innovation (Csillag regulations and targets imposed s’agit de répondre aux et. al, 2012) identified how work in a are seen as unfair by the employees questions suvantes call centre is emotionally demanding, and cheating is seen by many as (a) comment peut- with high pressure and routine, and the only solution. Employees are on promouvoir le boring and repetitive tasks. Further, also stuck between the competing leadership en matière employees’ performance targets are expectations of the customers and d’éthique dans une based on the number of customers of the organisation. The loyalty and organisation ? dealt with and the employees have (b) comment la direc- confidential clauses in the employees’ little or no control over how work is tion peut-elle créer une contract bind them to sometimes culture d’entreprise allocated. Others have described call lie, withhold information and giving plus éthique ? centres as the: “high tech workplaces wrong information to cover up for of the future, symbolizing the close (c) comment rendre le their organisation. système de reporting and value-creating interactions of efficace? information technology and human Back office operators – beings” (Moss et al 2008; Altieri et al The factory workers 2002) The job of back office employees La technologie a été un This article goes further to identify has been undervalued over time important catalyseur two ethical issues that employees in causing them to become demotivated dans la transformation call centre face: and adopt a mechanical approach to du secteur bancaire 1. Organisational issues: work. These employees are invisible de l’ère traditionnelle Overregulation and control of the to the customers and are often viewed à l’ère numérique. On employees, together with and the collectively by the management offre maintenant des points d’interaction highly unrealistic performance targets as a processing department. Their multiples aux clients à reduces the sense of responsibility individual contribution are generally travers les agences, les that the workers have, may numb recognized only by their direct distributeurs auto- their conscience and may encourage reporting superiors who sometimes matiques de billets, la them to cheat. neglect to reward them accordingly. banque en ligne et sur 2. Customer interaction issues: mobile, qui permettent Once again, irrespective of de repousser les limites If staff are encouraged to lie to how they behave, these employees du service client. customers this will, over time, create find that the targets imposed on a moral distance in an employee’s them are the only measure of their subconscious. performance. That is why ethical Unethical behaviour seen in values are overlooked in their quest Toutefois, comme l’a call centres is, most of the time, a for better reward and remuneration. bien visualisé Socrates, result of the unrealistic goals and Knowing that how they behave is not bien que la technologie standards imposed on the employees. being monitored, but rather how they

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 330 paraisse intelligente, perform, they have a superficial sense Cross- selling is at the heart of il faut un cerveau of freedom from having to behave every financial organisation and it humain pour penser et ethically all the time. is seen as an aggressive sale pitch agir pour elle. to increase the earnings of banks, Tout ceci débouche sur Not convinced? Let me put it une pression excessive this way: how do you eat when you rather than as a means to inform sur les employés pour are having a formal dinner with your the customers of their options. On suivre la vitesse du boss in a restaurant compared to hav- top of that, some banks have selling développement techno- ing a pizza in front of your television contests in which they reward their logique et respecter les alone? Ethics are like good table best performers with either cash objectifs peu réalistes manners. If they are not recognised, prizes or vacation as, for example, at fixés par les dirigeants they are ignored. The rule of thumb Morgan Stanley where a total of $24m de l’organisation. of new loans was generated in the Pour les besoins de ce is that you will behave ethically only texte, nous considé- when you are being observed, be- period 2014 to 2015. rerons trois niveaux cause being observed makes you feel How far these sales can be différents d’une orga- accountable. considered as good sales? For the nisation financière et sake of achieving targets, old people feront toute la lumière Relationship Manager – without computers or mobile phones sur les dilemmes The Jehovah’s Witness have been granted Internet & mobile éthiques auxquels font of the bank face les employés de banking access. Large loans that had banque aujourd’hui. One morality-diminishing factor been rated credit-grade became non- that forced employees at Wells Fargo performing, because the risks had to modify their behaviours was the been neglected to drive a higher profit aggressive sales target imposed. margin. Le Centre d’appels est The employees were forced to work The disconnect between the qualifié comme «le lieu unpaid overtime to meet the target. de travail d’avenir et de bank’s expectations of ethical In an attempt to do so, at least 5000 haute technologie». Ce behaviour by an employee and the travail met l’opérateur employees became involved in the goals and restriction imposed on the sous haute pression Wells Fargo Scandal of 2016, (The employee is counterproductive and it et il est très exigeant Guardian, 2016) reported. A total of increases confusion and doubt in the émotionnellement. at least 2 million deposit and savings minds of bank staff. In order to reduce L’employé est confron- accounts were opened in the names of tension and anxiety, employees té à deux dilemmes : the customers without their consent. create a rational explanation for their 1. Réduction de la res- Wells Fargo’s internal analysis ponsabilité et encoura- behaviour without realizing that, over gement à la triche du revealed that more than 1.5 million time, they are losing their emotional fait des objectifs inac- deposit accounts and at least 565,000 sensibility and abandoning their cessibles et un contrôle credit cards were set up between ethics to blindly follow procedures. rigoureux. 2011 and 2015. “This dishonest 2. Créer une distance and unethical conduct”, as the top Employee engagement – morale dans le sub- securities regulator of Massachusetts The missing carrot conscient de l’employé would eventually describe it, was the Another major crisis that the fi- en le poussant à mentir result of great pressure on, and low nancial system has been facing sin- au clients. consideration for, the employees. ce the credit crunch of 2007-2008

CHANGING FRONTIERS OF ETHICS IN FINANCE 331 is in employee engagement levels. In an article published by the Although organisations worldwi- Asia Pacific Journal of Human Re- de recognize that employee enga- sources, Eve Anderson (2009) men- gement is crucial for their growth, tioned how an organisation can De même, les employés the level of engagement has barely “face difficulties” if the interests of du back-office se moved over the past decade. Ga- individuals aren’t considered “when défaussent de leurs res- llup Daily tracking (2015), reports changing work policies and proces- ponsabilités éthiques that only 32% of U.S employees are ses”. Employees can be disengaged en échange de meil- engaged and on a worldwide scale if they feel that they have no benefit leures rémunérations only 13%. Engagement determines from, and value in, the change pro- et de la reconnais- the degree to which ethics are dis- cess. sance. En effet, ils sont played. Most of the bank emplo- notés seulement sur la So why are we still failing despite base de leurs perfor- yees today find themselves stuck in the many attempts? How can we sol- mances mesurables Maslow’s (1943) first level of emplo- ve this ethical crisis in our system? ce qui les entraîne à yee need, the survival level. They The answer is simple; by calling a adopter une approche have abandoned their hope for a spade a spade. mécanique dans leur better life; doing more does not ne- travail. Les chargés de cessarily imply being recognized. To Neuroethics – clientèle sont ceux qui be promoted today, you must either A social practice se battent sur le front be in the good books of the mana- sous haute pression Today there are many standards pour respecter les dé- gers, or, sadly, report on your peers. for defining ethical values. For ins- lais serrés et reçoivent Subsequently, ethics for employees tance, on the basis of pragmatism or peu de considération at the survival and security level are of a belief in what is right and what comme dans le cas de quasi non-existent. They are wor- is wrong. According to Howard Wells Fargo. king only to pay the bills and their Gardner’s multiple intelligence children’s school fees, and to get a theory, moral intelligence is a “form retirement pension at the end. They of neuro-biologically-enabled social have no vision of being part of the La contradiction intelligence.” Moral intelligence is flagrante entre les at- system as an important stakeholder. therefore not a matter of the logical tentes de la banque en Who is to blame then? accuracy of language. Neuroethi- termes de traitement The Gallup Report (2015) fur- cist Antonio Damasio (2006) in his éthique et les objectifs ther identifies some of the causes of book, Descartes’ error (p.10) claims imposés aux employés, that “ethical behaviours are a sub- augmente encore plus this disengagement among emplo- la confusion dans yees: set of social behaviours”. This close l’esprit des employés. 1. A focus on surveying engage- connection between social and moral Pour pouvoir faire ment, rather than investing in and intelligence suggest that the human face à cette tension, ils mentoring employees. brain conceives moral intelligence as choisissent de suivre a socially-interactive intelligence and 2. Not treating employees as aveuglément les procé- that it is visible in our interactions; stakeholders within the chain. dures tout en laissant for instance, in negotiating agree- de côté leur sensibilité 3. The wrong culture. ments, communication, reciprocity, émotionnelle. 4. Abusive role models. and mitigating conflicts. Matt Rid-

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 332 ley, in The Origins of Virtue (1996), vernance and ethical leadership has further adds that the brain “is equip- grown. Ethical leadership has been Le niveau d’enga- ped with special faculties to enable shown to have a positive impact on gement parmi les it to exploit reciprocity, to trade how well organisations function by employés du secteur fi- increasing management effective- nancier est aujourd’hui favours, and to reap the benefit of à son plus bas. Les social living.” This includes mutua- ness, job satisfaction, improvement employés se battent lly beneficial forms of conduct that in followers’ performance and citi- seulement pour sur- encourage positive feedback, and in zenship behaviour within the orga- vivre et l’éthique à ce turn inspire moral actors to repeat nisation. niveau est inexistant. these good social behaviours. Most Ethical leadership is defined as Les causes d’un tel importantly, moral intelligence em- leadership that is directed by respect désengagement d’après powers the actors to live peacefully le suivi journalier de for ethical beliefs and values and Gallup (2015) sont : with each other and to distinguish for the dignity and rights of others. 1. l’absence d’investis- between beneficial and harmful inte- It thus relates to concepts such as sement dans l’employé ractions, examples of the latter being trust, honesty, consideration, charis- 2. une considération lying and committing fraud. Such a ma, and fairness. (Wikipedia 2015). faible sense of duty is not only anchored in It can also be seen as a function of 3. une culture toxique the psychological approach of the in- the leader’s personal characteristics 4. des modèles de rôles dividual, but rather a social practice. and of environmental circumstan- abusifs. This is referred to as the practice of ces. (Lewin, 1951). It is further mutual obligations, the equivalent defined by Brown, Treviño, and Ha- of mutual benefit as in the relation- rrison (2005) as the “the demons- La neuro- éthique ship between management and the tration of normatively appropriate est définie comme la employees. In such a relationship, conduct through personal actions pratique sociale de there are both rights and responsi- and interpersonal relationships, and l’éthique. Selon Anto- bilities. By this token, neuroethics, the promotion of such conduct to fo- nio Damasio (2006), la supports a social deontology (a con- llowers through two-way communi- connexion étroite entre l’intelligence sociale cept of duty) and social utilitarianism cation, reinforcement, and decision- et morale permet au (mutual benefit). making” (p. 120). cerveau de concevoir Ethical leadership encompasses l’intelligence morale Ethical Leadership –when everything both a visible and an invisible aspect. comme une intelli- The visible side of ethics is revealed gence socialement else failed in individual behaviour and actions. interactive. L’intelligence morale permet à We are not only concerned about The invisible part is embedded in the l’individu de distinguer recent scandals in the financial in- character and moral values of the in- les interactions béné- dustry but, taking a wider context, dividual. The first principles of ethi- fiques de celles qui about man-made catastrophes per se cal leadership can be traced back to sont nocives ; mentir – such as the latest scandal in the oil Aristotle. In his work Nicomachean et frauder d’un côté, industry, which resulted in an eco- Ethics, Aristotle defines phronesis as donner aux gens les logical disaster and was triggered by the intellectual capability for com- moyens de vivre paisi- profit-oriented leadership practice. bining ethics and actions to help blement, de l’autre. The public interest in ethical go- people achieve eudaimonia (happi-

CHANGING FRONTIERS OF ETHICS IN FINANCE 333 Le leadership éthique ness). It is “about having the right leadership, which is a more modern est un leadership qui feelings at the right time on the right approach to Aristotlean philosophy. est dirigé par le respect occasion towards the right people Transformational leadership theory pour des croyances et for the right purpose and in the right was introduced by McGregor in des valeurs éthiques et est considéré comme manner.” Phronesis is essential for 1978 in his book “Leadership”. dépendant de la per- decisions towards promoting eudai- In his approach, (McGre- sonne du dirigeant et monia. gor,1978) elaborates on the respon- du contexte. According to Aristotle, phronesis sibility of both leaders and followers On trouve le premier is more like a practical phenomenon to raise one another to higher levels principe d’un leader- than a purely rational one. Men with ship éthique dans of morality and motivation. This lea- l’ouvrage d’Aristote sur phronesis have developed through dership approach has the ability and l’Ethique de Nicoma- experience an “eye for things so they capacity to transform an individual. chean. D’après lui, la can see correctly”. It brings positive change to followers phronesis est la capa- The eight traits of an ethical lea- with the objective of turning them cité qu’a un individu der have been summarized in quotes into leaders. Likewise, it becomes an de combiner l’éthique from Aristotle below: example of ethical and moral values avec l’action pour parvenir au bonheur. 1. “To avoid criticism say nothing, to leader peers. do nothing, be nothing.” Bernard M. Bass (1985) further 2. “He who cannot be a good fo- elaborated on McGregor’s theory by Une approche plus llower cannot be a good leader.” explaining that the degree to which moderne du leadership a leader is transformational depends éthique est le leader- 3. “We are what we repeatedly ship transformationnel, do. Excellence then is not an act, on how much influence they have élaboré par MacGregor but a habit.” on their followers. The qualities of en 1978. Selon cette a transformational leader – such as 4. “To run away from trouble is approche de leader- the ability to inspire trust, loyalty a form of cowardice and, while ship, le dirigeant a la and respect – empower and motiva- it is true that the suicide braves possibilité et la capa- te followers to willingly work harder cité de transformer un death, he does it not for some no- towards objectives. Along the way, individu et d’amener ble object but to escape some ill.” the followers will also develop and des changements posi- 5. “Liars when they speak the tifs pour ses adeptes. espouse the same ethical values as truth are not believed.” the leader. By providing an inspi- 6. “Happiness belongs to the self- rational vision and endowing them sufficient.” with a new ethical identity, the lea- Bernard M Bass (1985) 7. “Tolerance and apathy are the der is offering the followers more est allé plus loin dans than just work self-gain. cette théorie en expli- last virtue of a dying society.” quant que la mesure 8. “Patience is bitter, but its fruit Through charismatic and exem- dans laquelle un leader is sweet.” plary influence, which is founded est transformation- in high ethical values, such leaders nel dépend de son Next breed of leaders transform, motivate, and stimulate influence sur ceux qui Ethical leadership is significantly the intellectual and personal consi- le suivent. associated with transformational derations of their followers.

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 334 Given the significance Ethical mandate in of this subject, how organisations can we promote In a complex environment like ethical leadership in the financial world, conflicts may La complexité du our organisations? arise between ethical goals and the monde financier provoque des conflits It is argued that the complexity practices for achieving these goals, entre les objectifs of an organisational environment and different stakeholders may have éthiques et la pratique is negatively correlated with the different ethical expectations. Budde, permettant de réaliser development and maintenance of Child, Francis, & Kieser (1982) ces objectifs, ainsi ethical leadership. Sharfman & Dean elaborate on how an organisation qu’entre les attentes (1991) defined the three dimensions with a strong policy of ethical contradictoires des behaviour can create an atmosphere différentes parties of environmental complexity as: of high awareness of ethical issues, prenantes. (a) the level of knowledge essential to understand the organisational and develop ethical orientations environment; (b) the level of in leaders and employees. In such changeability in the environment; an environment, leaders develop Les organisations avec and (c) the level of existing resource an increased awareness and de hauts standards from the environment. In complex sensitivity to humanitarian issues, éthiques aident à which is then reproduced in their réduire cette diffé- situations, leaders have to constantly daily interpersonal and leadership rence en créant une evaluate and monitor unpredictable atmosphère propice à changes in the environment to be able behaviour. According to Festinger’s la prise de conscience to provide the appropriate solutions. (1978) theory on cognitive des problèmes éthiques Edgar Schein (1985) emphasised that dissonance, it is impossible to work et en développant une it is crucial for an organisation to for an organisation that aims to be sensibilité éthique chez embrace uncertainty as an advantage highly ethical and simultaneously les dirigeants et les in order to be more adaptive. He also treat others inhumanely. From employés. the employees’ perspective, they De plus, en tenant does a great job in demonstrating how les dirigeants respon- transformational founding leaders become more sensitive to the sables de leur conduite succeed in managing internal and ethical dimension of leadership and contraire à l’éthique, external challenges by incorporating appreciate being treated justly, fairly l’organisation envoie other values and perspectives, and humanely. un message clair à thus creating shared culture in Based on the theory of social tous ceux qui en font young organisations. In his book, learning, employee support for partie sur le fait que ethical leadership is linked to positive l’éthique est prise très Organisation culture and leadership, au sérieux. 4th edition, Schein (1985,) noted that: progression and maintenance “With the changes in technologi- though reinforcement and through cal complexity, the leadership task has positive feedback loops. (Bandura, changed. Leadership in a networked 1977, 1986) organisation is a fundamentally differ- Firms with a policy of ethical ent thing from leadership in a tradi- behaviour moreover attract tional hierarchy” (p.12). applicants who embrace greater

CHANGING FRONTIERS OF ETHICS IN FINANCE 335 ethical awareness and higher moral Culture review development (Kohlberg, 1976), which means they have social motivations During his speech at Brooklyn beyond getting an attractive salary College in New York in 2014, the president of the Federal Reserve Bank On peut comparer la and career prospects. This candidate of New York, Mr. William Dudley, culture au caractère self-selection in turn facilitates d’un individu. Il est dé- the development and maintenance reiterated the necessity for banks to crit par Schein (1985) of ethical leadership in the improve their culture and further comme « les phéno- organisation. Most of the employees suggested that senior executives mènes sous la surface will have a more positive attitude to should lead by example and that the qui contraignent et ethical issues and will have more or banks should reward the employees guident le comporte- less the same preferences for ethical who dare speak out. ment » et aussi défini comme la façon dont leadership. Simply put, culture is “the way we nous « faisons les Accountability of do things around here”. It consists of choses ». cognitive entities like leadership style, Leaders (Walk the talk) process, actions and relationship Too often, leaders take credit for which can be further grouped into all achievement but when it comes values and practices. A survey Une organisation doit conducted in 2016 by MIT Sloan aussi être prudente to taking responsibility for failures lorsqu’elle décide de find ways to avoid it. Instead, they Management review and Deloitte fusionner afin d’éviter blame employees, the system and Digital, revealed that financial des heurts de culture the organisation. By holding leaders institutions are investing massively in comme dans le cas accountable for unethical conduct, digital transformation by developing de Wells Fargo, une an organisation sends a clear signal digital products to improve the ancienne entreprise to the rest of the firm and society customer experience and strengthen de diligences express on how seriously ethics is taken. their engagement. However, many qui a fusionné avec firms today are focusing on the Norwest en 1998. Bien For instance, Carrie Tolstedt, que fonctionnant sous senior executive of retail banking external environment and how to le nom Wells Fargo, at Wells Fargo, walked away with leverage their digital capabilities and c’est la culture de vente only a fine of $67 million. Junior are not spending enough resources agressive de Norwest employees, in contrast, were the on the internal development of the qui a continué de pré- most severely punished as in the organisation and on its culture. valoir. La culture pré- case of the 5,300 employees who dominante de Norwest Culture in an organisation can a définitivement été lost their job. Accountability in be compared to the character of an un déclencheur dans leadership builds trust and promotes individual. Schein (1985) describes la conduite contraire ownership in the organisation in culture as the “phenomena beneath à l’éthique des 5300 contrast to the commonly held view the surface that constrain and guide employés. that accountability means people are behaviour”. under constant surveillance. When correctly applied, accountability Is your culture toxic? builds employees’ confidence in Have you ever felt like a cog in a themselves and in their leader. machine and that your contribution

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 336 is not being recognized? Are told CEO Dick Kovacevich explained that to get on with your work and stop his bank was involved in “selling asking questions? Those are all signs money” through different financial Robin et Judge (2009) of a toxic culture. Employees today instruments like ATM cards, credit ont approfondi cinq pratiques qui aident à have switched to “survival mode” in cards, and loans. All the financial construire une culture order to safeguard their jobs or get a instruments were considered éthique : raise and this often implies making consumer products no different 1. devenir un modèle unethical choices. A good example from, for example, the bread sold de référence visible of an unethical organisational culture in a bakery. According to him, the 2. communiquer des was Enron. The firm valued profits branches were the “stores” and the attentes éthiques over ethical behaviour and it was bankers the “sales people” whose claires described by Sims and Brickmann only task was to “cross-sell”. He said 3. offrir des formations en éthique (2003) as “the ultimate contradiction it was his “business model” and “it 4. récompenser des between words and deeds, between a was a religion. It was very much the actes éthiques et deceiving glossy facade and a rotten culture”. punir ceux qui y sont structure behind”. (p.243) Norwest’s dominant culture was contraires Organisations have to also be a definite trigger in the unethical 5. installer un méca- cautious when deciding to merge. nisme de protection. conduct of 5300 employees despite They are not only combining staff and the Wells Fargo code of ethics locations, but corporate cultures. The that qualifies such conduct as CEO of Wells Fargo, John Stumpf “gaming”: “the manipulation and/ « Le lancement d’alerte defended his bank culture and put or misrepresentation of sales and » est un système bien the blame on the “bad” employees. referrals….in an attempt to receive connu utilisé par les “Everything we do is built on trust,” compensation or to meet sales goals”. organisations finan- he said. He further defined his bank cières aujourd’hui. Il culture as “a pattern of thinking and What can management consiste à offrir un do to create a more canal anonyme pour acting with the customer in mind… the habit of doing the right things, ethical organisational signaler des compor- culture? tements contraires and doing things right.” However, à l’éthique. Selon this is not what the organisation’s Truxillo, Bauer, & Erdogan (2016) une étude menée par history tells us. Wells Fargo was claimed that an organisational culture « Transparency established in 1852. The bank was that emphasizes ethical behaviour can International Global a former stagecoach express that reduce organisational misbehaviour. Corruption Barometer» 91500 personnes dans carried valuable goods from gold They say that whether an organisation 86 pays sont prêtes mines. It had merged with Norwest adopts a culture that “emphasizes à dénoncer les fautes in June 1998. Although the Norwest doing the right thing even when it is professionnelles pour name no longer exists, its culture still costly comes down to whether leaders, autant qu’elles soient prevails. Prior to the merger of both starting with the CEO, consider the effectivement proté- banks in 1997, Norwest launched ethical consequences of their actions. gées. a product campaign called “Going Leaders with a moral compass set for Gr-Eight”. In an interview with the tone when it comes to ethical Fortune Magazine in 1998, the then dilemmas” (p. 385).

CHANGING FRONTIERS OF ETHICS IN FINANCE 337 Robbins and Judge (2009) the right behaviour should elaborate on five practices that help be rewarded, while unethical building an ethical culture which behaviours should be penalized. have been adapted for the purpose 5. Instate protective mechanisms. of this paper: Employees should be encouraged 1. Become a visible role model to report any unethical conduct By acting and behaving ethically, of peers or managers without senior management sends a positive fear of being reprimanded. I shall message to their subordinates. further discuss in the next section They provide a model of what the importance of creating a proper behaviour is, or is not, acceptable ethical reporting platform as a L’efficacité de ce sys- in the organisation. proactive measure to detect any tème d’alerte peut être 2. Communicate clear ethical sign of unethicality well before it optimisée (a) en pro- expectations. turns into into fraud and crime. mouvant une culture Communication is an effective tool basée sur un haut Ethics reporting in eliminating ethical ambiguities. niveau de conscience Too often ethics is brought up Ethical rules and code of conduct éthique et de transpa- only after a scandal has occurred, rence ; (b) en proté- should be clear at all levels of the or during the yearly compliance geant les employés qui organisation. It should be first policy review. Employees are dénoncent les fautes et embraced, as mentioned above, not really conscious of the code en ne les traitant pas by the organisation’s elite and avec hostilité ; (c) en of conduct expected from them. cascaded down to the rest of the établissant un cadre Without a clear code of conduct in organisation. de confiance et un mind, it is difficult to differentiate système d’examen les 3. Provide ethics training. between what’s ethical and what’s faits et les accusations Training can be used to reinforce not. Once employees are clear avant d’entreprendre the ethical code of conduct about the ethical goals, there will des actions, protégeant by equipping employees with ainsi les employés de be less hesitation in reporting fausses allégations. knowledge of, and practice in, ethical misconduct. what is allowed and what is not. One approach, which is being 4. Reward ethical acts and punish increasingly used in organisations unethical ones. today, is an ethics hotline or ‘whistle- Performance measurements in blowing’ system. Its first intention financial firms nowadays are is to provide an anonymous designed to include measurable channel where employees can targets and achievements. They report unethical behaviour without do not include the evaluation of fear of retaliation. The Protected decisions made according to the Disclosures Act (No. 26 of 2000), code of ethics. Appraisals should, the so-called ‘whistle-blower act’, however, not only be focused on ensures that the employees are the results but on how those results protected from occupational were achieved. And, consequently, disadvantage for reporting offenses.

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 338 A survey done by Transparency consisting of senior management International’s Global Corruption for actions against employees. The Barometer 2010 revealed that 91,500 actions taken should be matched people in 86 countries are willing to the gravity and nature of the to report misconduct provided they charge. The committee should also are effectively protected. So why be aware that this system can lead are many employees still reluctant to false and mischievous reporting. On estime que la to report transgression? Thus, it is important to also have a génération Z est la It depends at which level this review system to verify the facts and première génération transgression is being carried accusations before taking action, in qui est née dans un order to protect employees from environnement totale- out. For example, employees ment technologique, feel vulnerable when it comes to false allegations. on présume qu’ils sont reporting senior management. They Legacy for the très réalistes, avec un could be at risk of losing their job, digital generation esprit entrepreneurial, a promotion and career prospects. animés par des valeurs Generation Z, born after 1992, is et qu’ils prennent au How can we optimize considered to be the first generation sérieux les problèmes the efficiency of born into a fully technological de stabilité financière. the ethics reporting environment. They are said to En reconstruisant system? une forte réputation be very realistic, entrepreneurial, éthique basée sur un First and foremost, the culture and very curious and value-driven leadership éthique, of the organisation needs to be and, above all, they are said to et en favorisant une conducive to reporting wrongdoings take financial stability issues very culture fondée sur la and should encompass high levels of seriously. It is not difficult to see collaboration et sur ethical awareness and transparency. why that might be. They grew up in la relation bilatérale, Second, the informer should a period of economic and political nous parviendrons à be viewed as a loyal employee faire émerger une géné- instability and have seen the older ration Z d’employés safeguarding the interest of the generation struggle. Gen Zers are engagés. La seule façon organisation and not be treated with determined to avoid committing d’atteindre ce but est hostility. It takes courage to report the same mistakes and they are self- de retourner aux vieux such misconduct, and it should be motivated. According to a new principes et de recréer viewed as act of bravery. global study by EY (2016), 71 % un système ancré dans Another important factor, which of Gen Z view respect and ethical l’éthique pour un meil- behaviour as the most important leur futur. should not be neglected, is the people on the ethics committee. characteristic of a future employer. Establishment of a proper trust The study also revealed that this framework is crucial for the effective generation is not insensible to functioning of the committee. their parent’s experience and that For example, there could be one these experiences had a “very or committee consisting of board somewhat negative” effect on how members for the sanctioning of much they will trust their future management and another committee employers.

CHANGING FRONTIERS OF ETHICS IN FINANCE 339 So how can we ensure image, and by fostering a culture the financial system built on collaboration and two-way is appealing to the relationships, we will engage Gen next generation? Z employees. The striking part is that our system was once built on My journey as a banker started ethical foundations. However, while when I was only 8 years old. One we have embarked on a digitalised hour spent at the bank with my journey into the future, we have father was enough to inspire a lifetime’s career. The ethical culture lost track of the ethical values and and leadership in those days were so responsibilities we had in the past. strong that it could be felt, although The only way to get back on the not understood, by a young girl. I right path is to halt and return to the believe that by rebuilding a strong old principles of a system anchored ethical reputation based on ethical to ethics. That will lead to a better leadership and authentic brand tomorrow. •

References Aon Hewitt (2015). 2015 Trends Brown, M. E. , Treviño, L. in Global Employee Engagement. K. , & Harrison, D. A. (2005). Retrieved from http://www.aon. Ethical leadership: a social com/attachments/human-capital- learning perspective for construct consulting/2015-Trends-in-Global- development and testing. Employee-Engagement-Report.pdf Organizational Behavior and Human Decision Processes, 97, 117–134. Bandura, A. (1977). Social learning theory. Englewood Cliffs, Budde, A., Child, J. , Francis, NJ: Prentice-Hall. A. ,& Kieser, A. (1982). Corporate goals, managerial objectives, and Bandura, A. (1986). Social organizational structures in British foundations of thought and action. and West German companies. Englewood Cliffs, NJ: Prentice-Hall Organization Studies, 3, 1–32 Bose, S. (2016). Respect, ethical Community Tool Box (2017). behavior top list of Generation Ethical leadership. Retrieved from Z must-haves from employers. http://ctb.ku.edu/en/table-of- Small Business Trends, 20 contents/leadership/leadership-ideas/ September. Retrieved from https:// ethical-leadership/main smallbiztrends.com/2016/09/ characteristics-of-generation-z- Csillag, S., Takacs, S., Kiss, employees.html C. & Szilas R. (2012). Ethical

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 340 References dilemmas in call centres. How to as stakeholders. Asia Pacific survive the modern sweat shops. Journal of Human Resources, 47 International Journal of Work (2) 186-200. Retrieved from Innovation, 1 (1), 42-64. Retrieved http://journals.sagepub.com/doi/ from https://www.researchgate.net/ pdf/10.1177/1038411109105441 publication/264819771_Ethical_ Growth Consulting and dilemmas_in_call_centres_How_to_ Training Pte Ltd (2016). Bass survive_in_the_modern_sweatshops Transformational Leadership Damasio, A. (2006). Descartes’ Theory. An Executive Summary. error: emotion, reason and the human Retrieved from http://cdn2. Brain. Vintage hubspot.net/hubfs/2459927/ Growth_Consulting_Asia_Aug2016/ Eidinow, E., Ramirez, R. (2012). Bass_Transformational_Leadership_ ‘The eye of the soul’: phronesis Theory_-_An_Executive_Summary. and the aesthetics of organizing. pdf?t=1473728892366 Organiszational Aesthetics, 1(1), 26- 43 Hirshleifer, J. (1997). A review of Matt Ridley’s “The origins of virtue: Eisenbeiss, S., Giessner, S. human instincts and the evolution of (2012). The emergence and cooperation”. Retrieved from http:// maintenance of ethical leadership in www.econ.ucla.edu/workingpapers/ organisations. Journal of Personnel wp771.pdf Psychology, 11, 7-19. Retrieved from http://econtent.hogrefe.com/doi/ Hypertextual (2013). Edgar full/10.1027/1866-5888/a000055 Schein: Organizational Culture and Leadership. Retrieved from https:// EY (2016). Could Trust Cost thehypertextual.com/2013/01/17/ You a Generation of Talent? edgar-schein-organizational-culture- Global Generations Survey. and-leadership/ Retrieved from http://www.ey.com/ Publication/vwLUAssets/EY_ Ideas for Leaders (2017). Global_Generations_Survey/$FILE/ Aristotle, Ethics and the ‘Art’ EY%20Global%20Generations%20 of Leadership. Retrieved from Survey%203.0.pdf https://www.ideasforleaders.com/ ideas/aristotle-ethics-and-the- Festinger, L. (1978). A theory %E2%80%98art%E2%80%99-of- of cognitive dissonance. Bern, leadership Switzerland: Huber. Juta & Co Ltd (2005). Protected Greenwood, M., Anderson, E. Disclosure Act 26 of 2000. Retrieved (2009). `I used to be an employee from: http://www.justice.gov.za/ but now I am a stakeholder’: legislation/acts/2000-026.pdf Implications of labelling employees

CHANGING FRONTIERS OF ETHICS IN FINANCE 341 Kasperkevic, J (2016). Wells Mann, A., Harter, J. (2016). The Fargo eliminates sales quotas after worldwide employee engagement unauthorized accounts scandal. The crisis. Business Journal, 7 January. Guardian, 13 September. Retrieved Retrieved from http://www.gallup. from https://www.theguardian. com/businessjournal/188033/ com/business/2016/sep/13/wells- worldwide-employee-engagement- fargo-eliminates-sales-quotas- crisis.aspx unauthorized-accounts McGee, S. (2016). Wells Fargo Kohlberg, L. (1976). Moralstufen banking scandal: a financial crisis und Moralerwerb: Der kognitiv- we can finally understand. The entwicklungstheoretische Ansatz Guardian, 7 October Retrieved from [Moral stages and moral acquisition: https://www.theguardian.com/ The cognitive-developmental business/us-money-blog/2016/ theoretical approach]. In Edelstein, oct/07/wells-fargo-banking-scandal- W., Oser, F., & Schuster P., (Eds.), financial-crisis Moralische Erziehung in der Schule, Greenwood, M., Anderson, E. 35–62. Weinheim, Deutschland: (2009). `I used to be an employee Beltz but now I am a stakeholder’: Kupfer, K., Scott, S. (2016) Wells implications of labelling employees Fargo : what drives toxic corporate as stakeholders. Asia Pacific culture? Forbes, 29 September. Journal of Human Resources, 47 Retrieved from https://www.forbes. (2) 186-200. Retrieved from com/sites/realspin/2016/09/29/wells- http://journals.sagepub.com/doi/ fargo-what-causes-toxic-corporate- pdf/10.1177/1038411109105441 culture/#78b1fd6749a1 Growth Consulting and Laurence Kohlberg’s stages Training Pte Ltd (2016). Bass of Moral Development (2000). Transformational Leadership Retrieved from https://www.csudh. Theory. An Executive Summary. edu/dearhabermas/kohlberg01bk. Retrieved from http://cdn2. htm hubspot.net/hubfs/2459927/ Growth_Consulting_Asia_Aug2016/ Lewin, K. (1951). Field theory Bass_Transformational_Leadership_ in social science. New York, NY: Theory_-_An_Executive_Summary. Harper& Row pdf?t=1473728892366 LinkedIn (2015). Aristotle: 8 McLean, B. (1998). Is This Top Leadership Traits for Today. Guy The Best Banker In America?. Retrieved from https://www. Fortune Magazine, 6 July.. Retrieved linkedin.com/pulse/aristotle-8- from http://archive.fortune.com/ top-leadership-traits-today-cory- magazines/fortune/fortune_ galbraith archive/1998/07/06/244842/index. htm

ETHICAL LEADERSHIP AND ETHICAL LEGACIES 342 Moss, P., Salzman, H. & Tilly culture. Reuters, 21 March. Retrieved C. (2008). Under construction: from http://uk.reuters.com/article/ the continuing evolution of job us-usa-fed-dudley-banks-idUKKBN1 structures in call centres. Industrial 6S13Z?mod=related&channelName Relations: A Journal of Economy and =ousivMolt Society, 47 (2), 173–208 Sharfman, M., Dean, J. (1991). Nguyen, S. (2011). Creating Conceptualizing and measuring an ethical organisational the organizational environment: a Culture. Workplace Psychology, multidimensional approach. Journal 14 February. Retrieved from of Management, 17, 681–700 https://workplacepsychology. Sims, R.R., & Brinkmann, J. net/2011/02/14/creating-an-ethical- (2003). Enron ethics (or: culture organizational-culture/ matters more than codes). Journal of Northern Illinois University Business Ethics, 45(3), 243-256. (2009). Howard Gardner’s Theory Tools Hero (2014). on Multiple Intelligences. Retrieved Organisational Culture Model from https://www.niu.edu/facdev/_ (Schein). Retrieved from https:// pdf/guide/learning/howard_gardner_ www.toolshero.com/leadership/ theory_multiple_intelligences.pdf organisational-culture-model-schein/ Philosophy Now (2017). Ethics Transparency International on the Brain. Retrieved from https:// (2016). Global Corruption philosophynow.org/issues/87/ Barometer 2010/11. Retrieved from Ethics_On_The_Brain https://www.transparency.org/ Plato (1925). Plato in Twelve gcb201011/results Volumes (Vol. 9 translated by Treviño, L. K. (1986). Ethical Harold N. Fowler). Cambridge, MA, decision making in organizations: Harvard University Press; London, a person-situation interactionist William Heinemann Ltd. 1925. model. Academy of Management Retrieved from http://www.perseus. Review, 11, 601–617. tufts.edu/hopper/t?doc=Perseus%3A text%3A1999.01.0174%3Atext%3DP Truxillo, D. M., Bauer, T. N., & haedrus%3Asection%3D275d Erdogan, B. (2016). Psychology and work: perspectives on industrial and Robbins, S.P., & Judge, T.A. organizational psychology. New York: (2009). Organizational behavior Routledge. (13th ed.). Upper Saddle River, NJ: Pearson Education, Inc Wikipedia (2015). Ethical Leadership. Retrieved from https:// Reuters Staff (2017). Fed’s en.wikipedia.org/wiki/Ethical_ Dudley repeats need for better bank leadership

CHANGING FRONTIERS OF ETHICS IN FINANCE 343

an Complex Firms Be Ethical: CCan Argument for Simplicity of Financial Institution

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Third Prize ex-aequo

Christian Between 2009 and 2013, some of nishment of firms’ misdeeds, rather Buckson the world’s largest banks were fined than making substantive strides to USA nearly £150 billion, with the totals improve ethics. Management into 2015 set to take this amount to The regulators’ apparent priority, Consulting Analyst, over £200 billion (Sterngold, 2014). illustrated by the current Conduct re- Accenture*, London Regulators in the United States and gime, is flawed in that it views “ethics” United Kingdom especially have fo- as either motives-based or conse- cused on the culture within firms and quence-based, without adequately imposed heavy fines for instances of factoring in firms’ structural comple- misconduct. A recurring question, xity. In other words, regulators seem however, is whether or not the va- to judge a firm’s ethics by its ability to rious methods of regulatory scrutiny conform to vaguely defined standards and punishment are really improving of corporate responsibility or by the ethics within the financial industry. outcomes of its actions. Both of these If not, is the current strategy appro- may ignore the critical issue in ban- priate, or even sustainable and what king ethics cases—complexity. After are the possible alternatives? As the an overview of recent regulatory ap- * The views expressed global economic recovery begins to proaches, I will show that regulators, herein are those of strengthen, financial firms will look while well intentioned, have failed to the author and do not to improve their balance sheets whi- significantly improve financial ethics necessarily reflect those le complying with increasingly strin- because their efforts have failed to of the Organization he is affiliated to. gent regulations.The focus of these deal with the complexity within the regulations appears to be reactive pu- industry.

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 344 In section one of this paper, I last decade on better behaviour in Une question qui will define the Conduct agenda, its the financial industry. International revient sans cesse relationship to corporate ethics and regulators like the Financial Stability consiste à savoir si related regulatory trends . I will also Board (FSB) and in turn the Finan- les méthodes actuel- cial Conduct Authority (FCA) and a lement utilisées pour define consequential and deontolo- examiner, surveiller et gical evaluations of ethics, giving an number of US regulators (Robson et sanctionner augmen- overview of the evolution of Con- al., 2013) have been the main drivers tent le niveau éthique duct in what I will call a motives-ba- of the Conduct agenda. Regulators dans l’industrie finan- sed and consequence-based view of have intentionally avoided defining cière. Si ce n’est pas regulatory expectations. In sections Conduct for firms, though one can le cas, cette approche two and three, I will examine the loosely see Conduct as a broad focus est-elle adaptée par shortcomings of a Conduct regime on customer outcomes, and fairness ailleurs, voire même and integrity within financial mar- défendable et quelles founded on either motives- or con- sont les alternatives sequence-based evaluations, poin- kets (“Culture and Conduct: Putting possibles ? Alors que la ting out that while each approach the customer at the heart of your bu- reprise économique se helps to establish levels of transpa- siness model,” 2013; Financial Ser- renforce, les entre- rency and accountability, neither ap- vices Authority, 2012; Robson et al., prises financières vont proach does much to improve ethics. 2013). chercher à renforcer Finally, I will argue that, in order to leurs bilans tout en res- improve the ethics of financial firms, Trust us—A Motives- pectant les régulations Based Approach les plus exigeantes the complexity of the businesses inqui sont destinées à volved must be taken into account, The aim of the Conduct agenda, punir les entreprises de concluding with the premise that whether rightly or wrongly, is to manière réactive plutôt streamlining, or downsizing, is the improve the behaviour of financial que de les amener à best way for firms to improve ethics firms and reduce incidents of risky faire des progrès en within the industry while meeting matière éthique. practices through increased regula- increasingly stringent regulatory re- tory scrutiny and industry-defined L’attention des régu- quirements. Conduct standards. Although over- lateurs, illustrée par le What are ethics? simplified, this definition does help régime actuel du Ban- clarify that Conduct as an initiati- king Conduct Regime “Conduct”, “ethics”, “fairness”— ve can be judged as successful by repose sur la fausse these words are used often in regula- three criteria: 1. Changed business prémisse selon laquelle tory language, especially in the wake l’éthique serait soit culture, 2. Fewer fines and 3. Clear celle des conséquences, of the financial crisis and instances conduct definitions within the fi- soit celle des motiva- of misconduct in the banking indus- nancial industry with banks—rather tions (vertus), mais elle try (Benedict, 2014). Attempting to than regulators—the “drivers” of ne tient pas compte de provide holistic definitions of each the agenda. Conduct more broadly manière adéquate de la is beyond the scope of this paper, has had what I will identify as two complexité des institu- though I will define how these terms major approaches before and after tions. Les régulateurs will be used to frame the argument the 2008 financial crisis: a motives- donnent l’impression which follows. By Conduct, I refer to based agenda and a consequences- de juger l’éthique des a focus by regulatory bodies over the based agenda.

CHANGING FRONTIERS OF ETHICS IN FINANCE 345 entreprises d’après leur “Those of us who have looked to legality became very closely rela- conformité aux stan- the self-interest of lending institutions ted within the financial industry. dards vagues de la res- to protect shareholder’s equity (myself As long as the motives of financial ponsabilité sociale des especially) are in a state of shocked firms were “pure”—in other words, entreprises ou d’après disbelief.” Alan Greenspan1 as long as the banks were simply tales conséquences de leurs actes. Chacun The two definitions of ethics co- king advantage of favourable econo- de ces critères passe rrelate to two distinct approaches mic and regulatory environments as sous silence un aspect to regulating financial firms: one opposed to actively ripping off cus- crucial de l’éthique approach relies on a degree of self- tomers—then the firm’s ethics were bancaire, à savoir la regulation and the other on strong more or less acceptable. Of course, complexité. regulatory intervention. The first the line between simple and preda- approach, based on self-regulation, tory practices began to blur as eco- mirrored the gradual move to dere- nomic growth in the 1990s and early 2000s caused ethics to give way to L’objectif du Conduct gulation in financial markets in the Regime est d’améliorer 1980s and 1990s. Financial institu- profitable, risky behaviour. la qualité du compor- tions were effective at lobbying go- Homeownership tement des institu- vernments, especially in the U.S., and Motives tions financières et de to relax a number of regulations on One example of the hands-off re- réduire les incidents the industry (Komai & Richardson, des pratiques ris- gulatory environment and its effect 2011). These institutions, along with quées au travers d’une on ethics is the growth of homeow- a number of economists, argued that surveillance accrue nership in the United States from the this deregulation could spur conti- de la part du régula- mid-1990s. President Bill Clinton teur et des standards nued economic growth and improve was a driving force in expanding ho- du Conduct Regime competition within a less stringent meownership in the United States définis par l’indus- regulatory environment (Ibid). and helping to change government trie. Il s’agit là d’une As financial regulations receded, policy to help make this happen. présentation simplifiée firms were more or less able to poli- This shift built upon an already tan- de ce qui a été réalisé ce themselves within the limits laid au prix d’un immense gible, “American” idea of homeow- out by the law. These limits grew effort au moment de la nership and formed a key plank of more blurred, especially in the Uni- crise financière. Cette the “American Dream” (Watkins, ted States, as acts meant to separa- définition permet de 2008). Government policy, acade- montrer que l’initiative te banking and non-banking (i.e. mic reports and economic research du Conduct Regime investment banking) activities like generally showed positive effects of a été couronnée de the 1933 Glass-Steagall act were re- homeownership and of increasing succès si l’on en juge pealed (Sherman, 2009). In effect, access to credit among populations selon trois critères : 1. the “free market” became the ethical Le changement dans with low rates of home ownership, standard to which firms were expec- la culture des affaires, particularly minorities and first ted to adhere. Financial institutions 2. La réduction des time borrowers (Aaronson, 1999; were operating within the confines amendes et 3. La défi- Green & White, 1997; Timiraos, of the law, and therefore were not nition plus claire des 2015; Watkins, 2008). In respon- comportements dans acting “wrongly”. Thus, ethics and se to the growing expectations of l’industrie financière 1 (Custer, 2012) the American dream, the American

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 346 avec les banques – et government and private financial and self-policing of motive had co- non les régulateurs institutions began to incentivise ho- llapsed into an “ethic-less” system – dans le rôle proac- meownership both directly, through which prized good economics over tif. Plus largement, tax incentives, and indirectly, good ethical choices. le Conduct Regime through low mortgage rates which a utilisé successive- As the money sunk into subpri- ment deux approches, were in turn enabled by the low in- me mortgaging in the United States avant et après 2008 : terest rates of the early 2000s (Bajaj grew, lending standards fell dramati- une approche par les & Leonhardt, 2008; Denning, 2011; cally. The number of subprime loans motivations et une Gopal, 2013). offered by banks to those with below approche par les consé- In this regard, the strategies of average credit increased by almost quences. the largest banks were able to do- fifteen times between 1998 and 2007 vetail with an arguably “good” mo- (Bernake, 2009; Visser, 2010). By the tive—getting more Americans into time the housing bubble burst in the homes which they owned—even United States in 2006 and the sub- La première approche if there were obvious profit moti- prime loans made began to go into de l’éthique, basée vations. In order to help drive this default, the financial industry was sur l’auto-régulation, change, banks began making riskier left holding too much bad debt to re- reflète la tendance à la loans to previously unqualified bu- main viable (Holt, 2009). This led to dérégulation des mar- yers and casting this expansion in chés en vogue dans les massive government bailouts in both années 1980 et 1990. home ownership as a goal of a redefi- the U.S. and United Kingdom in or- Au fur et à mesure que ned Corporate Social Responsibility der to prevent the collapse of the bro- la régulation perdait de (CSR), a marked change from how ader financial system (Barker, 2008; sa vigueur, les entre- the concept had been previously Darling, 2008; Paulson, 2008; U.S. prises se sont avérées understood (Herzig & Moon, 2012; Senate Committee on Banking Hou- être plus ou moins Visser, 2010). This change is so- sing and Urban Affairs, 2008). The capables de se disci- mething that continues to be seen light touch “motives” approach to pliner dans les limites today, as home loans and mortga- imposées par la loi. regulating financial institutions was Celles-ci sont devenues ge approvals are still typically seen a significant cause of the 2007-2008 plus floues, spéciale- as one element of CSR for many fi- financial crisis and led to stagge- ment aux Etats-Unis, nancial institutions (Shen & Chang, ring losses for both consumers and avec la révocation des 2012; Visser, 2010). financial institutions. The failure of lois (comme celle du In hindsight, the motives of the ethical controls within banks would Glass-Steagle Act de bank were obvious—profit was good eventually result in multibillion do- 1933, en 1991) qui séparaient les activités at almost any cost, social or otherwi- llar fines for shoddy lending practi- bancaires des activi- se. But because there was no real ces, poor controls and misdeeds in tés non-bancaires, à ethics regime in place, or at least no the lead-up to the greatest financial l’instar de la banque regime which had not been repealed crisis since the Great Depression. d’investissement. A in the era of deregulation which do- The failure of this approach signa- cette époque, la réfé- minated the 1980s and 1990s, finan- lled the beginning of a broader shift rence au libre marché cial institutions were able to engage to a more strict, consequences-based est devenue la norme in increasingly reckless and risky be- regulatory environment (Braithwaite éthique à laquelle les haviours. The era of self-regulation & Nasiripour, 2013).

CHANGING FRONTIERS OF ETHICS IN FINANCE 347 entreprises étaient The Consequence- In addition to fines, regulators supposées adhérer. have focused on forcing banks to Par conséquent, tant based approach hedge against risk through higher ca- qu’elles opéraient sans “Treating customers fairly (TCF) pital requirements (BIS, 2010; Jochen enfreindre la loi, elles remains central to our expectations of et al., 2011). The Basel III reforms ne pouvaient pas agir are the most visible example of this mal. C’est ainsi, que la firms’ conduct, that firms put the well- approach as they define the required loi et l’éthique se sont being of customers at the heart of how entremêlées. they run their businesses.” Financial minimum capital buffers for finan- Conduct Authority2 cial institutions, though there is potential for these capital requirements The shift towards a consequences- to increase further on a country by based view of regulation has been country basis (Bank for International Les stratégies des plus based on three defining aspects: stiff Settlements, 2014; Onaran, 2013). grandes banques ont financial penalties for wrongdoing, in- American regulators have taken réussi à faire coïncider creased capital requirements to hedge such an approach by requiring banks la bonne intention against future downturns and more to hold minimum leverage ratios d’ouvrir largement robust Conduct rules to address the of 5-6% (Armour & Tracy, 2014). l’accès à la propriété lack of a strong ethical framework for Banks have been able to weather the avec leur soif de profit, the industry before the financial crisis. increased capital requirements, cut- mais au prix de crédits plus risqués aux ache- In the wake of the financial crisis ting costs, reigning in dividends and teurs immobiliers peu of the last decade, regulators have bonuses, though whether this achie- solvables. En résumé, moved from allowing self-regulation ves the goal of reducing overall risk les motivations des to requiring more stringent regulatory remains to be seen (Barth & Prabha, banques étaient évi- requirements on financial institutions. 2013; Cohen, 2013). dentes: les bénéfices In addition to billions of dollars in fi- The final pillar of the recent regu- étaient bons et à n’im- nancial penalties, negative public per- latory approach has been the release porte quel coût social. ception and remediation efforts, firms of requirements on business Con- Comme il n’y avait pas have also seen increasing regulations duct, either by building on post-crisis de référentiel éthique en place, ou du moins and government rules enforced by legislation like the 2010 Dodd-Frank qu’il avait disparu avec strong regulatory bodies in the U.S., Act or by releasing standalone codes la dérégulation des European Union and U.K. (Zarroli, of business Conduct like the FCA’s années 1980-90, les 2015). American and British regula- Conduct of Business Sourcebooks institutions financières tors have been especially muscular in which came into force from 2007- ont pu se comporter their approach to punishing perceived 2009 (Building Societies Association, sans scrupules et l’ère misconduct, with almost $65 billion 2013; Financial Conduct Authority, de l’auto-régulation et paid in penalties by American and 2007; Financial Services Authority, de l’auto-contrôle s’est European banks in 2014 alone (Ster- 2014)3. Through these sourcebooks effondrée pour donner ngold, 2014). As fines continue to be and similar guidelines, regulators lieu à un système sans have attempted to outline the expec- éthique où la quête de levied against both institutions and résultats économiques individuals, regulators are laying clear 3 By sourcebooks, I refer to the FSA/FCA’s prévalait sur toute markers of the standards of behaviour Business, Mortgages and Home Finance, Insu- considération éthique. expected of financial institutions. rance and Conduct of Business sourcebooks (BCOBs, MCOBs, ICOBs and COBs respecti- 2 (Financial Conduct Authority, 2006) vely.

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 348 Le déplacement du tations placed on firms in the provi- & West, 2014). Whether rightly or régime de régulation sion of service to customers . In an wrongly, regulatory focus has been vers la prééminence almost legislative fashion, regulators primarily on holding senior mana- des conséquences have set out guidance on how firms gement accountable for the poten- repose sur trois must behave in the market, putting tial consequences of their actions, composantes: des fines or other punishments in place amendes salées en cas namely actions which result in sig- for those which fall short of the lis- de mauvaise conduite, nificant customer detriment. But if des exigences accrues ted regulatory expectations. Through the aim is to improve ethics within de fonds propres pour a combination of regulatory guidance financial institutions while ensu- and legal requirements, the financial couvrir les risques ring an environment where they can industry has moved towards satis- de retournement de grow, is this approach effective? conjuncture et des fying regulatory expectations with règles continues dans a renewed focus on Conduct and The SMR is a positive step le Conduct Regime creating sustainable, positive outco- towards improving accountabili- plus robustes pour mes for customers (Bank of England, ty within the financial industry, pallier l’absence d’un 2014; Robson et al., 2013). making a clear link between the cadre éthique contrai- decisions people make, the risks gnant dans l’industrie, Improving ethics inherent in those decisions, and ul- avant la crise. through accountability timate outcomes(Financial Conduct Toutefois, bien que cette approche ait été A key concern of the growing Authority, 2015; Jones, 2015). Does adéquate lors de la number of regulations is improving this approach, however, actually im- montée de la crise, clarity on what is expected of firms prove ethics or does it merely stren- on doit constater and increasing accountability within gthen accountability—and clarify aujourd’hui qu’elle est the financial industry. One example blame— in instances where banks plus efficace que celle of this focus is the Senior Managers fail to meet their ethical objectives? basée sur l’éthique des If the goal, as mentioned, is to im- motivations (convic- Regime (SMR) being developed by prove culture, increased accounta- tion ou vertus) pour the Prudential Regulatory Authority renforcer l’éthique au (PRA) and FCA (Bank of England, bility only enhances a consequence- sein de l’industrie ban- 2014). The SMR has an overall ob- focused view of Conduct without caire. Les coûts pour jective of increasing responsibility necessarily improving ethics. In l’industrie du Conduct and accountability within finan- other words, the Conduct agenda Regime ont atteint des cial institutions (Bank of England, thus far has been defined and driven sommets en 2014 et 2014). Designated senior managers by regulators without driving a subs- il n’y a pas de raisons tantive change within firms because qu’ils décroissent de will now be held responsible for manière significative acts of misconduct in their busi- it further incentivises a “box-ticking” dans un avenir prévi- ness areas. When Conduct failings approach to Conduct management to sible comme des nou- are reported, these senior managers satisfy those outside of the business veaux délits ne cessent will need to go beyond stating that looking in (Rands & West, 2014). In d’apparaître. Toutefois, they had no material knowledge of this light, the approach represented on a de la peine à dire the fault—the onus will be on these by the SMR seems to improve re- si ces coûts accrus ont managers to prove that they exhaus- gulatory scrutiny, but does little to contribué à faire pro- ted all options to either prevent or improve ethics. Thus, firms would gresser l’éthique. mitigate acts of misconduct (Rands not be addressing potential ethics

CHANGING FRONTIERS OF ETHICS IN FINANCE 349 problems, but would rather seek to Defining Complexity comply with existing rules, potentia- La régulation ancrée lly leaving firms open to new risks “This proposal encompassed multi- dans une approche and new ethics problems. ple, complex credit trading strategies, conséquentialiste se using jargon that even the relevant justifie en période de The consequence-based ap- actors and regulators could not un- crise, mais il n’est pas proach to regulation, while unders- derstand.” Senate report describing prouvé aujourd’hui tandable in the wake of the finan- a proposal made to JPMorgan Chase qu’elle soit plus cial crisis, has yet to prove that it efficace que l’approche senior management approving the is more effective than the motives- par la motivation pour London Whale trades. améliorer le cadre based approach in improving ethics Firms must manage the comple- éthique de l’industrie within the banking industry. Con- financière. Malgré les duct costs rose to record levels in xity of their business in order to im- coûts plus élevés du 2014 and these costs are not set to prove ethics within the industry. In the wake of the financial crisis, regu- Conduct Regime et decrease appreciably for the industry ses exigences accrues lators have focused on large “mega- in the foreseeable future as additio- en matière de gouver- banks” as “too big to fail” or “too big nal wrongdoing is brought to light nance pour le top ma- to manage”, both from an economic (Sterngold, 2014). Yet the fact that nagement, les résultats and regulatory point of view (Coll- concernant l’éthique se additional wrongdoing has to be pu- ins, 2014; Federal Reserve Bank of font toujours attendre. nished in itself questions the efficacy St. Louis, 2012). As banks become of a consequence-based approach. L’approche actuelle larger and more complex, it becomes While it is generally easy to say that renforce plutôt la harder to both adequately evidence a financial institution has commit- vision de l’éthique motive and create enough transpa- comme relevant du fait ted a wrong—whether by violating rency that regulators can effectively de “cocher des cases”, sanctions, misselling to customers regulate (Collins, 2014; Denning, plus adapté pour satis- or by violating standards of product 2013). In other words, it has proven faire les exigences de suitability—it is less easy to say that hard to improve the ethics of finan- régulations qu’à pro- fines address the root causes of the- duire des changements cial institutions because it has beco- culturels et éthiques. se violations. The results of both the me harder and harder to understand C’est seulement en motives and consequences-based the inner workings of these busines- s’attaquant à la com- approach of regulation have shown ses (Santoro, 2013; Tett, 2012; U.S. plexité des structures that there is clearly an element mis- Senate Permanent Subcommittee on des entreprises, des sing in the formula to bring banking Investigations, 2013). Whether the produits et des proces- ethics to a higher standard. That mis- sus, que les régulateurs complex derivative products which sing element is one which neither et les entreprises finan- helped fuel the sub-prime mortga- cières peuvent pro- approach has adequately addressed: ge bubble or the complex company gresser effectivement complexity. Only by addressing structures which allowed billions of en matière d’éthique et complex business structures, pro- dollars of trading losses to go un- restaurer la confiance ducts and processes can regulators detected, complexity within the fidu public dans l’indus- and financial firms make concrete nancial industry has frustrated both trie financière. steps to improving ethics and res- motive and consequence-based ap- toring trust in the banking industry. proaches to regulatory scrutiny.

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 350 The 2012 London Whale episode tain risks. Agreements to improve provides an example of how com- internal oversight by financial ins- plexity within financial institutions titutions and fines levied by regula- can hide potentially unethical actors are failing to achieve their goal tions from both regulators and the of inducing true change and a more firms themselves. Traders in JPMor- ethical industry (Admati, 2014). gan Chase’s London office engaged

in risky trades, often at a loss, over Changing Priorities— a sustained period (Hurtado, 2015; Enforced Ethics ? Norris, 2013; Santoro, 2013). What As fines fail to have the desired is striking here is that this case is the effect, legislative and regulatory Comme le “too big to perfect marriage of motive and con- fail” devient “too com- efforts in the US, UK and EU have plex to regulate”, les sequence-based scrutiny: there were focused on ways to reduce the size entreprises financières, rules in place to restrict the types of of financial institutions and regulate tout comme les régu- trades which occurred, a company the types of activities they can con- lateurs, se trouvent commitment to follow these rules duct. American regulators in par- en difficulté pour and consequences in place to punish ticular have taken a lead in placing prévenir l’inconduite failure to follow listed regulations. more scrutiny on how banks grow, dans les parties les plus Yet, in this case, both the bank and opaques de l’industrie. most recently in the 2010 Dodd- regulators failed to notice the loss- En 2012, l’épisode du Frank Act which places more repor- Requin de Londres making trades for a sustained period ting requirements on financial insti- montre à l’envie à because of changes to the “Value at tutions of a certain size and restricts quel point même ceux Risk” (VaR) risk management tool their trading activities (Barth & Pra- qui sont internes à used by the firm (Hurtado, 2015; Ko- bha, 2013; U.S. Senate Permanent l’industrie peinent à pecki & Son, 2013; Santoro, 2013). Subcommittee on Investigations, comprendre la portée In turn, regulators in the United Sta- 2013). In addition, the act prohibits des engagements pris tes failed to detect the increasingly par les directeurs. Ce mergers of financial institutions of qui frappe dans ce cas, skewed risk profiles of the firm’s tra- a certain size and requires “living c’est la conjonction de ding portfolio and the potential dan- wills” from the largest banking ins- la surveillance dans ger those trades could cause to the titutions, giving regulators a way to la logique des consé- broader financial system. deal with banking failures in an or- quences avec celle In addition to suffering billions derly fashion (“Banks Must Show ancrée dans la logique of dollars in losses, JPMorgan Chase They Can Die Quietly,” 2014). The des motivations. Des règles existaient pour agreed to pay over $920 million in aim of these regulations is to protect limiter les transactions fines to American and British regu- consumers and the wider economy du type de celles qui lators in 2013 (Robson et al., 2013; while ensuring that investors bear ont eu lieu; l’entreprise Scheer & Kopecki, 2013; U.S. Se- the brunt of the resulting fallout s’était aussi engagée nate Permanent Subcommittee on (“Bank resolution: Pre-empting the à suivre ces règles; Investigations, 2013). Perhaps more next crisis,” 2015; Hamilton, 2014). les sanctions étaient importantly, the episode exposed a Similar efforts to separate areas of big également prévues serious flaw in both regulatory and banks, whether the UK’s “ringfence” pour punir les vio- industry efforts to identify and con- approach or the EU’s efforts to have

CHANGING FRONTIERS OF ETHICS IN FINANCE 351 lations de ces règles. banks create separate legal entities is happening under their watch. La complexité est le for proprietary trading and other Streamlining and simplification véritable enjeu dans activities are also underway in other must be the next “approach” used by ce cas. Cette dernière, jurisdictions(Barth & Prabha, 2013). regulators and financial firms alike plus que l’absence de conséquences assignées These actions will create some chan- to improve and embed ethics within ou de motivations ge in financial institutions, however, the banking industry. these changes are too recent to de- floues, est au coeur des Where do we go problèmes éthiques monstrate that they have had a clear auxquels les entre- impact on ethics within the indus- from here? prises financières sont try. Legal or structural separation Simplification, whether reducing actuellement confron- of banking activities can help make the number of legacy systems pre- tées. banking activities more transparent sent within banks or creating sim- to an extent, but it is unclear that pler business models, is integral to Les exigences des simply breaking up a complex whole establishing an environment for bet- régulateurs en matière into a series of smaller, still complex ter ethics. The key question is how de fonds propres et parts will improve ethical considera- to make a streamlining agenda work de cloisonnement des tions within banks (Baily, Elliott, & and actually change the industry in activités sont des élé- Swagel, 2014). a way which positively impacts its ments importants d’un ethics. While this is a complicated puzzle de plus en diffi- These steps are important, howe- cile à mettre ensemble. ver, in terms of improving ethics question and an even more com- Ces mesures ne sont this is another example of “outside plicated process, there are four key toutefois que le pro- in” requirements (“Bank resolution: principles in this new approach: longement des efforts Pre-empting the next crisis,” 2015). changes must be industry led, they destinés à améliorer Outwardly, both financial institu- must dovetail with a substantive le standard éthique tions and regulators have made con- change in business culture, they de l’extérieur. Or, le must strengthen risk functions and véritable changement crete steps towards managing risk, they must lead to a retreat from risky dans l’industrie doit reducing incidents of misconduct être initié et conduit and putting forward a desire for an markets, behaviours and processes. par les entreprises image of ethical behaviour and trust. First, any change must be indus- elles-mêmes. Il doit In reality, however, these steps have try led. While this may seem like a se concentrer sur la proven inadequate in the face of return to self-regulation, true chan- simplification des a complex financial system where ge will need to come from within fi- processus et des entre- misconduct can go unnoticed on a nancial firms in order to ensure the prises, par ailleurs trop complexes. Le chemin grand scale. In order to substantively best outcomes for customers and the vers une culture articu- improve ethics or Conduct within industry. If financial firms are forced lée autour de l’éthique the industry, a massive effort to sim- into streamlining or downsizing, the ne peut commencer plify and streamline financial institu- approach chosen for the banks may que si les régulateurs tions is required. This is the only via- be more painful and against more et les entreprises elles- ble method to ensure that financial aggressive timelines than a plan de- mêmes comprennent institutions are not overly large and signed within the industry itself. vraiment ce que font complex enough that management One only needs to look at the mas- ces dernières. cannot understand and control what sive efforts around ringfencing in

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 352 the UK, and the associated costs, to Senate Permanent Subcommittee on see that an effort developed, led and Investigations, 2013). This type of implemented by banks will lead to a scenario needs to be addressed with smoother transition to the streamli- stronger risk functions within banks ning agenda (Fleming, 2014). and a greater degree of coordination In addition, changes need to be and communication between risk founded on a commitment to a new managers and heads of business. culture and commitment to ethics. Once an industry-led, Culture In part, the Conduct agenda achie- La simplification est ves this, but only to an extent—staff focused change programme is in pla- indispensable pour within financial institutions need to ce, with robust support from risk, la mise en place d’un the final step in the streamlining ap- environnement favo- be able to link complexity, risk and rable à l’éthique. Elle business detriment in a clear way. proach is to responsibly retreat from doit être obtenue, aussi Using examples from past misdeeds, certain risky markets, products and bien par la réduction banks must show that the movement strategies. In the years following the du nombre de régimes to a simpler, streamlined business financial crisis, low interest rates différents – souvent is both a regulatory focus and a ne- and fragile balance sheets have cau- hérités du passé – cessity in order to continue to grow présents au sein des sed banks to search out markets and as an industry in a sustainable way. établissements, que products with higher returns. At ti- This type of cultural change will re- par la simplification mes, this search for higher rates of quire more than emails and memos des modèles d’affaires. return have led to increasingly risky Ce changement doit on improving conduct. Rather, se- concerner toute nior management must get involved bets and complex products which l’industrie, il doit être in a tangible way, defining the dan- are hard for consumers, regulators, ancré dans l’engage- gers of a complex business, laying and sometimes the firms themselves ment en faveur de la out a roadmap for substantive chan- to decipher (Norris, 2013). In im- nouvelle culture et de ge and defining the “end state” of a l’éthique. Il doit être plementing a streamlining strategy, centré sur l’abandon simpler, better business. financial firms must move to redu- de certains marchés, Senior management visibility is ce potential risks by avoiding risky produits et stratégies key in any streamlining agenda, es- strategies, like acquiring seemin- risqués. pecially senior risk managers and gly profitable competitors in areas governance structures. In short, risk with looser regulatory standards, and ethics management must be and winding down complex pro- front and center within firms and, to ducts and trading activities. Again, as great an extent as possible, need to in part, this has begun to be addres- be independent with robust powers sed by ringfencing initiatives, but to execute their duties. One major lessons from the London Whale case as mentioned, simply breaking up a was that in multiple instances, risks complex whole into smaller but still raised to senior management were complex pieces will neither improve either ignored or never received an ethics nor create positive outcomes in-depth follow up as needed (U.S. for customers.

CHANGING FRONTIERS OF ETHICS IN FINANCE 353 The final (ethical) short and medium term however, the frontier ? streamlining agenda is the best hope for banks wishing to retain their pla- The question remains on ce as major international players and whether any financial firm can be deliver the ethical outcomes which ethical. After all, banks are primarily shareholders, regulators and con- institutions whose primary purpose sumers expect. There are arguable is to create positive returns for sha- benefits to consumers in a reformed reholders, and this role has become financial system with large banking more apparent as these institutions players, especially in terms of the En effet, le chemin grow larger. At some point there is price benefits of an economy of sca- vers des standards a limit to how much good regulation le (Baily et al., 2014; Federal Reser- éthiques plus élevés can actually do in a corporation with ve Bank of St. Louis, 2012; Hughes, et vers l’amélioration thousands of individual actors, each 2013; Wheelock, 2012)4. Given des performances pour of which make an unknown number leurs clients, passe par past experiences with large financial of decisions per day and face innu- la réduction de la com- institutions, however, legislators re- plexité inhérente aux merable opportunities to either do main open to the idea of breaking entreprises financières. the right thing or not. Changing the up large, complicated financial ins- Cela ne veut pas dire ethics of a firm becomes harder as titutions into smaller, more easily que tout produit ou more and more possible actors are understood units (Morrison, 2015; transaction complexe added who, in turn, bring personal Slater, 2014). If the streamlining doit être abandonnée, views on how best to help the firm and simplification agenda fails, then mais que les entre- and the ethical considerations—or this type of enforced downsizing will prises ont le devoir de lack thereof—which need to be made s’assurer que leurs stra- follow motives-based, consequen- in their actions. Complexity of the tégies et leurs produits ces-based and complexity-based sont en ligne avec les institutions being regulated is one scrutiny as the next era in financial attentes des régulateurs reason “ethics” within the industry is regulation. • et des consommateurs so hard to define and strengthen. Re- en matière d’éthique. gardless, there is a standard of right and wrong actions which, at the risk of sounding utilitarian, either hurt or help customers and fulfil broader socio-economic purposes. So can large financial firms be ethical or must they be broken into smaller, more manageable chunks by regulators? For now, it is un- 4 There are a range of academic studies on clear whether such a stance is either whether large banking firms really achieve achievable or desired in the foreseea- economies of scale at their current levels. ble future (Baily et al., 2014). And For more information, see Feng & Serletis, even with this approach, there are “Efficiency, Technical Change, and Returns to Scale in Large U.S. Banks, Hughes & Mes- gaps in how well ethics within large ter, “Who Said Large Banks Don’t Experience financial firms can be policed. In the Scale Economies,” among other works

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 354 References Aaronson, D. (1999). A Note on ponsibility and accountability in the the Benefits of Homeownership. Jour- banking sector. Retrieved from http:// nal of Urban Economics, 47(3), 356– www.bankofengland.co.uk/publica- 369. tions/Pages/news/2014/106.aspx Admati, A. R. (2014). Banks’ Im- Bank resolution: Pre-empting the mensity Undermines Responsibility. next crisis. (2015). The Economist. New York Times. Retrieved April 9, Retrieved April 6, 2015, from http:// 2015, from http://www.nytimes.com/ www.economist.com/news/finance- roomfordebate/2014/01/12/are-big- and-economics/21647312-regulators- banks-out-of-control/banks-immensi- desire-make-banks-easy-kill-determi- ty-undermines-responsibility ning-how-they Armour, S., & Tracy, R. (2014). Banks Must Show They Can Die Big Banks to Get Higher Capital Re- Quietly. (2014). Bloomberg View. Re- quirement. Wall Street Journal. Retrie- trieved April 7, 2015, from http:// ved April 7, 2015, from http://www. www.bloombergview.com/arti- wsj.com/articles/SB100014240527023 cles/2014-08-06/banks-must-show- 03456104579489643124383708 they-can-die-quietly Baily, M. N., Elliott, D. J., & Swa- Barker, A. (2008). Brown says gel, P. L. (2014). The Big Bank Theory: UK leads world with rescue. Fi- Breaking Down the Breakup Arguments. nancial Times. Retrieved April 8, Washington, D.C. Retrieved from 2015, from http://www.ft.com/ http://www.brookings.edu/research/ cms/s/0/a3fb9670-951c-11dd- papers/2014/10/big-bank-breakup- aedd-000077b07658.html?nclick_ arguments-baily-elliott check=1#axzz3WkWIsaKS Bajaj, V., & Leonhardt, D. (2008). Barth, J. R., & Prabha, A. (2013). Tax Break May Have Helped Cau- Breaking (Banks) Up is hard to do: New se Housing Bubble. New York Times. Perspective on “Too Big to Fail.” Santa Retrieved April 8, 2015, from http:// Monica, CA. Retrieved from http://as- www.nytimes.com/2008/12/19/ sets1c.milkeninstitute.org/assets/Pu- business/19tax.html blication/ResearchReport/PDF/Brea- kingBanks.pdf Bank for International Settlements. (2014). Basel III Phase-in arrange- Bernake, B. (2009). Four Ques- ments. International Regulatory fra- tions about the Finanical Crisis. Fe- mework for banks (Basel III). Retrieved deralReserve.gov. Retrieved April 8, April 7, 2015, from http://www.bis. 2015, from http://www.federalre- org/bcbs/basel3/basel3_phase_in_ serve.gov/newsevents/speech/ber- arrangements.pdf nanke20090414a.htm Bank of England. (2014). News Re- BIS. (2010). An assessment of the lease - Prudential Regulation Authori- long-term economic impact of stronger ty and Financial Conduct Authority capital and liquidity requirements. Ba- consult on proposals to improve res- sel. Retrieved from http://www.finan-

CHANGING FRONTIERS OF ETHICS IN FINANCE 355 cialstabilityboard.org/wp-content/ Denning, S. (2011). Lest we for- uploads/r_100818a.pdf?page_mo- get: Why we had a financial crisis. ved=1 Forbes. Retrieved April 7, 2015, from http://www.forbes.com/sites/steve- Braithwaite, T., & Nasiripour, S. denning/2011/11/22/5086/ (2013). US banks pay $20bn mortgage crisis bill. Financial Times. Re- Denning, S. (2013). Is JPMorgan trieved April 7, 2015, from http:// Too Big And Complex To Manage? www.ft.com/cms/s/0/9d9756f8- Forbes. Retrieved April 7, 2015, from 58cb-11e2-bd9e-00144feab49a. http://www.forbes.com/sites/steve- html#axzz3WcvJ0LHC denning/2013/03/21/is-jpmorgan- too-big-complex-to-manage/ Building Societies Association. Federal Reserve Bank of St. Louis. (2013). Banking Conduct of Busi- (2012). In-Depth: The Big Banks: Too ness Sourcebook - industry guidan- Complex To Manage? Central Banker. ce. Retrieved April 8, 2015, from Retrieved April 6, 2015, from https:// http://www.bsa.org.uk/information/ www.stlouisfed.org/publications/ publications/industry-publications/ central-banker/winter-2012/the-big- banking-conduct-of-business-source- banks-too-complex-to-manage book-industry-gu/ Financial Conduct Authority. Cohen, B. H. (2013). How have (2006). Treating customers fairly. Fi- banks adjusted to higher capital re- nancial Conduct Authority. Retrieved quirements? BIS Quarterly Review, April 10, 2015, from http://www.fca. (September), 25–41. Retrieved from org.uk/firms/being-regulated/mee- http://www.bis.org/publ/qtrpdf/r_ ting-your-obligations/fair-treatment- qt1309e.pdf of-customers Collins, N. (2014). Banks have be- Financial Conduct Authority. come too complex to grasp. Financial (2007). Conduct of Business Source- Times. Retrieved April 6, 2015, from book (COBS). FCA COBS. Retrieved http://www.ft.com/intl/cms/s/0/f94e- April 8, 2015, from http://fshand- db04-65c8-11e4-aba7-00144feabdc0. book.info/FS/html/handbook/COBS html#axzz3WZ7l6bnc Financial Conduct Authority. (2015). Custer, O. (2012). The Intellectual Strengthening accountability in banking: a new regulatory framework Origins of the Global Financial Crisis. for individuals – Feedback on FCA (R. Berkowitz & T. N. Toay, Eds.). CP14/13 / PRA CP14/14 and consulta- New York: Fordham University Press. tion on additional guidance. London. Darling, A. (2008). Statement Retrieved from http://www.fca.org. by the Chancellor on financial sta- uk/static/documents/consultation- bility. In Statement by the Chance- papers/cp15-09.pdf llor on financial stability. London: Financial Services Authority. HM Treasury. Retrieved from http:// (2014). The Banking Conduct Re- webarchive.nationalarchives.gov. gime. Retrieved April 8, 2015, from uk/20130129110402/http://www. http://www.fsa.gov.uk/Pages/Doing/ hm-treasury.gov.uk/statement_ Regulated/banking/bcobs/index.sht- chx_081008.htm ml

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 356 Fleming, S. (2014). Banks under Hurtado, P. (2015). The London pressure on UK ringfencing plans. Fi- Whale. Bloomberg. Retrieved April nancial Times. 7, 2015, from http://www.bloombergview.com/quicktake/the-london- Gopal, P. (2013). Homeowner- whale ship Reconsidered. Bloomberg. Re- trieved April 8, 2015, from http:// Jochen, S., Aikman, D., Collazos, www.bloombergview.com/quicktake/ P., Farag, M., Gregory, D., & Kapa- reconsidering-homeownership dia, S. (2011). The long-term economic impact of higher capital levels. Green, R. K., & White, M. j. BIS Papers, (No. 60), 1–81. Retrieved (1997). Measuring the Benefits of from http://www.bis.org/publ/bppdf/ Homeowning: Effects on Children. bispap60j.pdf Journal of Urban Economics, 41(3), 441–461. Jones, H. (2015). HSBC chairman says new banker accountability Hamilton, J. (2014). Big Banks’ rules are reasonable. Reuters. Retrie- “Living Wills” Get Failing Grade. ved from http://uk.reuters.com/arti- Bloomberg Business. Retrieved April cle/2015/03/24/uk-hsbc-britain-regu- 6, 2015, from http://www.bloom- lations-idUKKBN0MK1N920150324 berg.com/news/articles/2014-08-05/ biggest-u-s-banks-told-to-simplify- Komai, A., & Richardson, G. their-living-wills- (2011). A Brief History of Regula- tions Regarding Financial Markets in Herzig, C., & Moon, J. (2012). the United States 1789 to 2009 (No. Corporate Social Responsibility, the 17443). Cambridge, MA. Retrieved Financial Sector and Economic Reces- from http://www.nber.org/papers/ sion. Nottingham. Retrieved from w17443.pdf https://nottingham.ac.uk/business/ businesscentres/crbfs/documents/re- Kopecki, D., & Son, H. (2013). searchreports/paper86v2.pdf JPMorgan Whale Report Spreads Bla- me as Dimon’s Pay Halved. Bloom- Holt, J. (2009). A Summary of the berg. Retrieved April 7, 2015, from Primary Causes of the Housing Bub- http://www.bloomberg.com/news/ ble and the Resulting Credit Crisis: articles/2013-01-16/jpmorgan-halves- A Non-Technical Paper. The Journal dimon-pay-says-ceo-responsible-for- of Business Inquiry, 8(1), 120–129. lapses-1- Retrieved from http://www.uvu.edu/ woodbury/docs/summaryofthepri- Morrison, C. (2015). MPs warn marycauseofthehousingbubble.pdf breaking up banks may be best for competition. CityA.M. Retrieved April Hughes, J. P. (2013). The Cost 9, 2015, from http://www.cityam. Consequences of Breaking up Large com/211307/mps-warn-breaking- Banks: Do Large Banks Enjoy Tech- banks-may-be-best-competition nological Cost Advantages? Journal of Stock & Forex Trading, 3(1). Re- Norris, F. (2013). Masked by Gib- trieved from http://omicsgroup.org/ berish, the Risks Run Amok. New York journals/the-cost-consequences-of- Times. Retrieved April 9, 2015, from breaking-up-large-banks-do-large- http://www.nytimes.com/2013/03/22/ banks-enjoy-technological-cost-ad- business/behind-the-derivatives-gib- vantages-2168-9458-3-113.pdf berish-risks-run-amok.html?_r=0

CHANGING FRONTIERS OF ETHICS IN FINANCE 357 Onaran, Y. (2013). U.S. Weighs Shen, C.-H., & Chang, Y. (2012). Doubling Leverage Standard for Corporate Social Responsibility, Fi- Biggest Banks. Bloomberg Busi- nancial Performance and Selection ness. Retrieved April 7, 2015, from Bias: Evidence from Taiwan’s TWSE- http://www.bloomberg.com/news/ listed banks. In J. R. Barth, L. Chen, articles/2013-06-21/u-s-weighs-dou- & C. G. Wihlborg (Eds.), Research bling-leverage-standard-for-biggest- Handbook on International Banking banks and Governance (pp. 458–484). Nor- thamton, MA: Edward Elgar Publis- Paulson, H. M. (2008). Remarks hing Ltd. by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Eco- Sherman, M. (2009). A Short His- nomic Update. U.S. Department of tory of Financial Deregulation in the the Treasury. Retrieved April 8, 2015, United States. Washington, D.C. Re- from http://www.treasury.gov/press- trieved from http://www.cepr.net/ center/press-releases/Pages/hp1265. documents/publications/dereg-timeli- aspx ne-2009-07.pdf Slater, S. (2014). UK banks face Rands, H., & West, N. (2014). break-up threat as watchdog plans Banking Reform - The Reversal of the competition probe. Reuters UK. Re- Burden of Proof and Criminal Liabili- trieved April 9, 2015, from http:// ty. MemeryCrystal. Retrieved April 1, uk.reuters.com/article/2014/07/18/ 2015, from http://www.memerycrys- uk-banks-britain-competition- tal.com/Articles/04-11-2014/banking- idUKKBN0FN0IY20140718 reform--the-reversal-of-the-burden- of-proof-and-criminal-liability.aspx Sterngold, J. (2014). For banks, 2014 was a year of big penalties. Robson, A., Camfield, H., Cowan, Wall Street Journal. Retrieved April 7, M., English, S., Jacques, K., Ham- 2015, from http://www.wsj.com/ar- mond, S., & Walshe, J. (2013). Con- ticles/no-more-regulatory-nice-guy- duct Risk Report 2013. for-banks-1419957394 Santoro, M. A. (2013). Would Tett, G. (2012). The banks that are Better Regulations Have Prevented too complex to exist. Financial Times. the London Whale Trades? The New Retrieved April 6, 2015, from http:// Yorker. Retrieved April 7, 2015, from www.ft.com/cms/s/0/65281562- http://www.newyorker.com/curren- b0c1-11e1-a2a6-00144feabdc0. cy-tag/would-better-regulations-ha- html#axzz3WZ7l6bnc ve-prevented-the-london-whale-tra- Timiraos, N. (2015). U.S. Ho- des meownership Rate Falls to 20-Year Low. Wall Street Journal. Retrieved Scheer, D., & Kopecki, D. (2013). April 8, 2015, from http://blogs.wsj. JPMorgan Pays $920 Million to Settle com/economics/2015/01/29/u-s-ho- London Whale Probes. Bloomberg Bu- meownership-rate-falls-to-20-year- siness. Retrieved April 9, 2015, from low/ http://www.bloomberg.com/news/ articles/2013-09-19/jpmorgan-chase- U.S. Senate Committee on Banking agrees-to-pay-920-million-for-lon- Housing and Urban Affairs. (2008). don-whale-loss Summary of the “Emergency Econo-

AN ARGUMENT FOR SIMPLICITY OF FINANCIAL INSTITUTION 358 mic Stabilization Act of 2008.” Retrie- Watkins, T. (2008). The Nature ved April 8, 2015, from http://web. and the Origin of the Subprime Mort- archive.org/web/20081004201320/ gage Crisis. San Jose State University http://banking.senate.gov/public/_fi- Department of Economics. Retrieved les/latestversionEESASummary.pdf April 7, 2015, from http://www.sjsu. edu/faculty/watkins/subprime.htm U.S. Senate Permanent Subcom- mittee on Investigations. (2013). JP- Wheelock, D. C. (2012). Too Big Morgan Chasse Whale Trades: A Case To Fail: The Pros and Cons of Brea- History of Derivatives, Risks and Abu- king Up Big Banks. The Regional Eco- ses. Washington, D.C. Retrieved from nomist, 20(4), 1–25. Retrieved from http://www.hsgac.senate.gov/sub- https://www.stlouisfed.org/~/media/ committees/investigations Files/PDFs/publications/pub_assets/ pdf/re/2012/d/re_oct_2012.pdf Visser, W. (2010). CSR 2.0: From the Age of Greed to the Age of Res- Zarroli, J. (2015). For banks “too ponsibility. In W. Sun, J. Stewart, & big to jail,” prosecutors count on a D. Pollard (Eds.), Reframing Corpora- promise to behave. NPR. Retrieved te Social Responsibility: Lessons from April 7, 2015, from http://www.npr. the Global Financial Crisis (1st ed., org/2015/03/24/394897368/not-pro- pp. 231–252). Bingley, UK: Emerald secuting-companies-if-they-promise- Group Publishing Limited. to-behave

CHANGING FRONTIERS OF ETHICS IN FINANCE 359

anking, ethics and BBsustainability: the need for a self-critical look at corporate social responsibility strategies

Ethics in Finance, Robin Cosgrove Prize Iberoamerican edition 2012-2013

Second Prize

Beatriz Cuevas Can we still speak of El Mundo wrote that the crisis had Fernández ethics and finance? bottomed out with the failure of the Spain British bank Northern Rock. This PhD student It all started in August 2007 – to was followed by shocking results (research in Social be precise, on 9 August 2007, when for banks in general, and Citigroup and Environmental one of Spain’s leading newspapers and Morgan Stanley (complete with Accounting and CSR), published the news of the subpri- resignations) in particular. And whi- Pablo de Olavide me meltdown. From this point on, University*, Seville le the general public in Spain – and a series of events was unleashed that many other countries – were stru- would culminate in the greatest fi- ggling to grasp what a ‘subprime’ nancial and economic crisis to hit mortgage was, and what the fall-out Spain, and the rest of the world, since might be, what is now known as the the Second World War. And at first ‘subprime crisis’ was starting to tri- the source seemed quite unexpected: gger a major worldwide downturn the banking and mortgage sector. in a jittery credit sector, the pillar of The Spanish newspaper El Mun- the market economy. In December of do was to state that, between 9 and the same year, US President George 11 August 2007, the European Cen- W. Bush attempted to tackle the pro- * The views expressed tral Bank alone put 155,000 million blem by reaching agreement with the herein are those of euros into circulation after the fa- banks on a five-year moratorium on the author and do not necessarily reflect those mous crises in such financial insti- changes to interest rates for high-risk of the Organization he is tutions as BNP Paribas and the Ger- mortgages – a solution which already affiliated to. man bank Sachsen LB. In September seemed likely to prove inadequate.

BANKING, ETHICS AND SUSTAINABILITY 360 The collapse of Lehman Brothers known as los indignados (‘the ou- on 15 September 2008 not only traged’), whose slogans against poli- brought the 158-year history of one ticians and bankers struck home in of Wall Street’s flagship companies Tout a commencé en a country that was in turn seized by août 2007, soit le début to an end, but made clear that the a thirst for change. To this day the de la fameuse crise des financial heart of the United States movement is actively fighting what it subprimes. Comme les was in stormy waters. Within days, calls the prevailing status quo. autres pays, l’Espagne other institutions on both sides of a été durement frappée the Atlantic admitted that they were A case in point: Spain par la crise. in serious trouble, causing a precipi- In this increasingly turbulent and Le grand public tate stock-market crash. The collap- espagnol découvrait uncertain context, Spain’s financial se of the high-risk mortgage market pour la première sector entered 2012 with such news fois ce qu’étaient les in 2007 was now having an impact as the first complaints from victims prêts hypothécaires à well beyond the institutions origina- of the preference shares fraud, a risques, sans réelle- lly concerned. Fearful of losing their partial government takeover of the ment comprendre de money, banks stopped lending, and Bankia concern, constant rumours quoi il s’agissait. the crisis started to threaten con- of a bailout for Spanish banks and sumption and spread to the rest of much else besides, and ended the the economy. year with the first news of suicides La faillite de Leh- In 2010 came the Greek bailout, following eviction orders issued by man Brothers le 15 followed by the Irish one. And in the country’s banking institutions. septembre 2008 a été this global economic context Spain In 2013 the prospects for Spain’s le point d’orgue et le found itself having to make more financial sector – and specifically for point de départ d’une and more cutbacks – with the cons- banks – seem hardly more encoura- crise qui a touché tant suspicion that these would not ging. If we look up the term ‘bank’ l’ensemble de l’écono- mie mondiale. be enough to satisfy the market’s on Google (currently the most wi- L’Espagne a progressi- appetite. The global economy appea- dely used search engine in Spain), vement été contrainte red to be recovering; some countries we find that the main information d’effectuer de nom- began to show positive growth rates circulated or produced by the media breuses réductions and, although they were still unable is just as critical and pessimistic as in budgétaires. L’année to create employment, could state recent years; to some extent this me- 2011 fut dominée that they had bottomed out. But in rely confirms the picture that the ge- par le fort taux de others, such as Spain, it was a very neral public already has of such ins- chômage, conséquence titutions and their role in the crisis. directe de la crise mon- different story. In 2011 unemploy- diale pour l’Espagne. ment was the dominant factor and Among the hits are things such as emerged as the most damaging con- ‘Spanish premier Rajoy does not rule sequence of the crisis, while news out the possibility that the banks will about the economy, the problems need more money, but it won’t come facing banking institutions or pos- from the bailout’, ‘the Fitch rating sible bailouts for countries such as agency calculates that the banks will Portugal and Spain continued to have to stump up more than 10,000 pour in. This led to the movement million because of refinancing’, ‘par-

CHANGING FRONTIERS OF ETHICS IN FINANCE 361 liamentary debate on housing as- January 2012 Barometer, just a year L’année 2012 a vu sociations’ debts to banks’, ‘public earlier, the equivalent figure was s’établir un contexte prosecutor in the province of Galicia 0.0%. ‘Evictions’ have also appeared général de plus en hopes that, in the trial on the mass for the first time in the same survey plus incertain, avec sale of preference shares, the banks’ as one of Spain’s worst problems, les multiples plans de sauvetage des banques directors will be required to explain with 3.5% of respondents putting it espgnols, à l’image de why such “toxic products” were in the top three. In 2012, ‘evictions’ la situation de Bankia. sold in the first place’, ‘private pro- was not even one of the available op- En 2013, les perspec- secutor in the Blesa case (the Clean tions. tives pour le secteur Hands trade union) calls for prison Another CIS survey, the February financier espagnol, en sentence without bail for the former 2011 Barometer designed to measure particulier pour les president of the Caja Madrid bank’, the concept of ‘justice’, also yielded banques, ne semblent ‘director of the Banco Pastor released guère plus encou- interesting information as to what on bail following arrest for fraud’... If rageantes si l’on se the general public thought about réfère aux résultats de we add the term ‘corruption’ to our banking institutions. For instance, recherches relatives search, we find such things as ‘So- when asked how much protection au terme « banques » ciété Générale dismisses the head of they felt they could expect from the dans le Google espa- its subsidiary Rosbank, accused of law in a dispute with a major concern gnol. corruption’, ‘Banking, short selling or a bank, 50.2% of the sample an- and corruption: Spain falls in ran- swered ‘Not much’. Of the remainder, Une récente enquête kings’, ‘Blesa, first banker to be jai- 22.1% answered ‘None at all’. de l’institut espagnol led’, ‘Oxfam alleges that 9.5 trillion de recherches sociolo- euros are in tax havens linked to EU’. Two realities? giques montre que le concept de “banques” All this information appears to Given the playing field – or per- est désormais cité confirm the now widespread pic- haps we should say ‘minefield’ – that comme étant l’un ture in Spanish society (which can the financial sector and the sectors des trois plus sérieux be extrapolated to most developed and authorities linked to Spanish problèmes du pays. Le countries) regarding the crisis, the banking are currently operating in, terme d’expulsions est country’s problems and above all lui aussi entré dans le can we still fairly speak of ethics? Is it who is to blame, including banking trio de tête. still possible to assume that banking institutions. Whether in the media, institutions will act ethically and sus- Dans cette situation institutions or NGOs, or even civil tainably while responding to society’s très difficile, pouvons society, the general opinion is the real demands? Or, and this is more nous encore espérer same. important, should we not be asking que les institutions Indeed, if we look at the latest ourselves whether, as seems most bancaires vont agir (January 2013) Barometer survey by likely, society – or what in the busi- de façon éthique ? Il ness context could be termed ‘stake- est probable que les the Centre for Sociological Research besoins de la société in Spain (CIS), some respondents holders’ – and its needs may be going et les intérêts des – 5.8% of the sample – have for the in one direction, and banks and their banques aillent dans first time named ‘banks’ as one of interests in a very different one? des directions très the country’s three most serious pro- Under the circumstances, the différentes. blems. This is significant, for in the demonization of Spain’s finance

BANKING, ETHICS AND SUSTAINABILITY 362 and banking system (and hence the derstand and assess what CSR is, and Dans ce contexte, le country’s main banks) would seem should be, and how the main compa- secteur bancaire a unfair, given the efforts the various nies in the sector approach this con- besoin d’un regard banking institutions are trying to cept and the way it is applied. autocritique quant à make in terms of Corporate Social son rôle. Ses actions In recent decades we have seen a doivent s’inscrire dans Responsibility (CSR). At first glance significant development in CSR and une démarche de déve- these efforts have not made any im- sustainability. Although the ‘classic’ loppement durable. pression, or else the public sees them view of businesses is that their social Il est donc important merely as an attempt to disguise what responsibility is to increase their pro- de se pencher sur la (in contrast to the information on fits (Friedman, 1970), other authors responsabilité sociale their websites or in their sustainabili- have focused on other approaches des enterprises (RSE) ty) is revealed by reality. And yet the that allow a different view of busi- dans le secteur finan- leading commercial banks continue cier. nesses and their responsibility for to occupy the top places on the most the potential impact of their activi- prestigious national and internatio- ties. Among these are the ‘social ap- nal sustainability and corporate repu- proach’, which states that businesses tation indexes (Merco, the Dow Jones are responsible to society in general Sustainability Index or the FTSE4 (Waddock, 2004), the ‘stakeholder Good index) and are the organiza- approach’, which states that busines- tions most actively involved in CSR. ses are accountable not only to their In this context – which could be owners but also to all the interest described as somewhat confused – groups that influence or are influen- the banking sector needs to take a ced by their activities (Freeman, self-critical look at its true role with 1984; Gray, 1995), and the ‘triple L’approche sociale sti- regard to fundamental issues of sus- approach’, which states that the role pule que ces denières tainable development, and pursue ac- played by businesses has four dimen- sont responsables tions that promote sustainability and sions: economic, legal, ethical and pour l’ensemble de la make it second nature to the sector. philanthropic (Carroll, 1991). société, bien au-delà Using such tools as sustainability re- des actionnaires et des This marked development in CSR porting to encourage integration of clients. Une autre and the concept of sustainable deve- approche concerne les the concept of sustainable develop- lopment has resulted in numerous quatre dimensions du ment into the functioning and goals definitions. However, considering rôle des entreprises of such institutions, rather than as the literature, the most common de- financières : écono- a reputation-enhancing or PR tool, finition of sustainable development mique, juridique, could be a first step towards bringing is the one in the Brundtland Report éthique et philanthro- about change in this area. (1987): ‘the kind of development pique. Corporate social that meets the needs of the present responsibility: without compromising the ability of some key ideas future generations to meet their own neds’ (UNWCED, 1987: 43). The re- However, in order to start thin- port already took account of socioe- king in this direction, we need to un- conomic development and respect

CHANGING FRONTIERS OF ETHICS IN FINANCE 363 for environmental issues, as stated As I mentioned earlier, the popu- at the 1992 Rio Summit. One of the larization and widespread use of such L’évolution de la most commonly used definitions in terms as CSR has set off a similar de- RSE et le concept Spain was provided by the Spanish bate on the various kinds of sustai- de développement Accounting and Business Manage- nability. In the literature we can find durable ont donné lieu à de nombreuses ment Association (AECA), which distinctions ranging from Dobson définitions, mais la describes CSR as ‘a voluntary com- (1996), who distinguishes between plus courante reste “le mitment by businesses to the deve- three conceptions of sustainability développement qui lopment of society and protection of (critical natural capital, irreversibility répond aux besoins du the environment, based on its social and natural value) to Van Marrewi- présent sans compro- make-up and responsible behaviour jk (2003), who develops a model of mettre la capacité des towards the individuals and groups corporate sustainability with five di- générations futures à they interact with.’ fferent levels of ambition (the levels, satisfaire les leurs”. which are presented as a continuum, Les définitions du Despite this consensus on their terme durabilitlé sont definition, the various definitions of are ‘compliance-driven’, ‘profit-dri- elles aussi nombreuses such terms as CSR or sustainable de- ven’, ‘caring’, ‘synergistic’ and ‘holis- et il est primordial de velopment have given rise to an ex- tic’), and Ayuso et al. (2002), who distinguer la durabi- tensive and controversial literature distinguish between three dimen- lité “faible” de celle on the subject. Thus, although the sions in sustainable development “forte”. Tel est le point term has become commonplace in (environmental, social and economic de départ de cette most corporate discourse, its inter- sustainability). We can thus see that étude. pretation clearly continues to vary. there are very different conceptuali- zations of the term ‘sustainability’, CSR in the business depending on whether the emphasis sector: weak is on environmental, social or econo- sustainability versus mic values. However, there is a domi- strong sustainability? nant current of thought which, rather than focusing on ways of ‘looking at’ Just as numerous definitions of sustainability, considers the distinc- the term ‘sustainable development’ tion between ‘weak’ and ‘strong’ sus- have emerged since it was first coined, tainable development. Especially in we can also find an interesting variety the light of such studies as those by of definitions of ‘sustainability’ in the Tregidga . (2011) or Azcárate academic literature. The distinction et al et . (2011), we can distinguish bet- between ‘weak’ and ‘strong’ sustaina- al ween weak sustainability, in which bility, on which many authors have the three dimensions of sustainable based their work, is in my view an development are seen as related but important one. This distinction can largely separate (figure 1), and strong also be seen as the starting point for sustainability, in which the economy this paper, and hence for the propo- is perceived as part of, rather than sed reflection on the use of CSR by separate from, society and the envi- businesses in general, and companies ronment, while recognising that the in the banking sector in particular.

BANKING, ETHICS AND SUSTAINABILITY 364 economy depends on these dimen- the same direction, have coined the sions not only for its success but for term ‘managerial capture’ to refer to S’il existe différentes its very existence (figure 2). the process whereby businesses select conceptualisations du the meaning and implications of sus- terme durabilité, selon Figure 1: Weak sustainability tainable development (Azcárate ., que l’accent est mis sur et al les valeurs environne- 2011; for more detailed studies of this, mentales, sociales ou see also Adams, 2004 or Larrinaga and économiques, il y a Bebbington, 2001). In this way, busi- un courant de pensée nesses commit themselves to activities dominant qui consi- designed to reduce current levels of dère la distinction unsustainability, but mainly focus on entre faible et forte. eco-efficient activities that they can La durabilité dite faible more easily control, involve techno- lie les trois dimensions du développement logical solutions and do not require durable que sont Source: Tregidga, Milne & Kearins them to change their current business l’économie, la société (2011) practices. This is the situation known et l’environnement. in the literature as weak sustainability, Mais le point commun Figure 2: Strong sustainability and it is due to the ambiguous defini- qui les unit est de tion of sustainable development. faible ampleur et non majoritaire. A l’inverse, At the opposite extreme is strong la durabilité forte sustainability, which challenges the présente l’économie status quo with a commitment to pre- comme un élément serve all living beings, which means central intimement lié reassessing or even abandoning the à la société et à l’envi- current model of economic growth as ronnement, avec une the dominant goal and accepting, as interdépendance totale suggested by such authors as Azcárate des trois dimensions. et al. 2011 (see also Gray and Bebb- Source: Tregidga, Milne & Kearins ington 2007), that we are a long way (2011) from sustainability. Using this classification of the con- The reality of current practice cept of sustainability, most recent stu- seems to show that most businesses dies conclude that, although busines- and organizations adopt a minimalist ses’ conceptions of sustainability vary, view of CSR, which could also be la- most of them come closer to weak belled ‘weak sustainability’. Indeed, sustainability. For example, Springett sustainability statements or repor- (2003) argues that, although company ting, which are among the fundamen- managers may feel confused about tal tools in CSR strategies and their sustainable development, they genera- application, have been accused from lly subscribe to a weak, eco-modernist the outset of being a typical instance version of it. Some authors even go of management capture, especially in further and, in different words but in sectors that have come into disrepu-

CHANGING FRONTIERS OF ETHICS IN FINANCE 365 te, including some areas of industry And, even though it has been the or finance, and the banking sector in subject of a fierce and controversial de- Les récentes études particular. bate on its implications for sustainabi- montrent que la lity and business practice (Azcárate et plupart des structures Sustainability reporting, al. 2011; Correa and Moneva, 2011), financières analysées a key, strategic CSR pratiquent le modèle the international consultancy KPMG’s de la durabilité faible. concept: what can International Corporate Responsibility lead to change? Reporting Survey 2011 is quite clear as Ever since the beginnings of sus- to the success of the initiative: ‘When Les enterprises s’en- tainability reporting there has been a we last reported in 2008, the Global gagent alors dans des succession of proposals or frameworks Reporting Initiative’s (GRI) Sustaina- activités éco-efficaces, bility Reporting Guidelines were al- mais qui restent axées for reporting by institutions of various ready gaining widespread adoption as sur des solutions tech- kinds. However, this development ap- nologiques facilement peared to have reached its peak with the de facto global standard for CR re- contrôlables. De ce fait, the birth of a new global framework, porting. Today, the GRI has undenia- les pratiques commer- the Global Reporting Initiative (GRI).1 bly extended its hold on this position, ciales demeurent elles Indeed, current reporting models are with 80 percent of G250 and 69 per- inchangées. inextricably linked to the GRI, a pio- cent of N100 companies now aligning La réalité de la pratique to the GRI reporting standards.’2 actuelle montre que la neering initiative in the development plupart des entreprises of a framework for sustainability re- Despite this data, and when it see- et organisations se porting that is now used by busines- med that CSR reporting practice had contentent d’une vision ses throughout the world. In 2000 the reached its culmination with the GRI minimaliste de la RSE, GRI drew up its first guidelines, based and its further development, the topic assimilable au modèle on the ‘triple bottom line’ concept coi- of sustainability has given a further de la durablité faible. ned by Elkington in 1997, which re- boost to the debate about which represents the three aspects of sustaina- porting practices are most likely to encourage sustainable development. In Le Global Reporting ble development: economic, social and environmental. August 2010, the Prince’s Accounting Initiative (GRI), mis 3 en place depuis l’année for Sustainability Project and the GRI 1 The Global Reporting Initiative (GRI) is 2000, est une étape an organization whose purpose is to encou- 2 Global Fortune 250 (G250): the 250 biggest importante dans le rage all kinds of organizations to draw up companies in the world; N100: the 100 big- registre du repor- sustainability statements. The GRI has pro- gest companies in each country. ting durable. Il est duced a comprehensive framework for this, 3 The Prince’s Accounting for Sustainability désormais adopté de which is widely used around the world. The Project was launched by His Royal Highness manière généralisée framework, which includes sustainability the Prince of Wales in 2004. It works with avec 80% des grandes reporting guidelines, sets out principles and businesses, investors, public-sector bodies, indicators that organizations can use to mea- NGOs and academics to highlight the need compagnies qui sure and draw attention to their economic, to integrate the design and presentation of l’appliquent. environmental and social performance. The reports, and to develop practical guidelines GRI is a non-profit organization that includes and the necessary tools to integrate sustaina- numerous interest groups. It was set up in the bility into decision-making and reporting pro- United States by Ceres and the United Nations cesses in order to create a strong, sustainable Environment Programme (UNEP) in 1997. In economy. To date, over two hundred public- 2002 it moved its offices to Amsterdam, where and private-sector organizations have been its secretariat is currently located. involved in the project.

BANKING, ETHICS AND SUSTAINABILITY 366 jointly announced the establishment ‘business as usual’. In this connec- of an International Integrated Repor- tion we can learn a great deal from Un nouvel élan fut ting Committee (IIRC). The purpose the banking sector, as one of the key donné en août 2010 of the IIRC is to create a globally ac- sectors in the present context, an avec l’arrivée d’un cepted accounting framework for sus- agent that is closely involved in the nouvel organisme, l’International tainability – and one that can bring IIRC itself and one of the sectors that Integrated Reporting together financial, environmental, so- is most active in applying CSR strate- Committee (IIRC), cial and governance information in an gies and reporting. axé sur un examen ‘integrated format’ and that can beco- radical de la présenta- me a more useful tool for helping bu- The banking sector tion de l’information sinesses produce transparent, truthful and its contribution financière. Un cadre information and so enhance their con- to sustainable comptable mondiale- tribution to sustainable development development ment reconnu pour sa durabilité, qui peut (www.theiirc.org). One of the main currents of aider les enterprises This proposal states that busines- thought in the field of social and dans leur démarche de ses need a framework that can bring environmental sustainability is transparence. together the various, currently dis- highly critical of the concept of CSR, Pour les entreprises, connected, sources of information maintaining that, although it has c’est un outil permet- into a coherent, integrated whole and traditionally been linked to certain tant de montrer leur social and environmental concerns capacité de creation de demonstrate an organization’s ability valeur et de résultats to create value now and in the futu- and commitments, it is tied to such en interaction avec re. Business reporting must thus set a aspects as corporate governance, la durabilité. Mais le new course by bringing together infor- innovation, image, reputation or regard autocritique mation that can explain the creation of competitive advantage. Although reste nécessaire pour value and results, in interaction with this applies to businesses in gene- savoir si ce nouveau sustainability, the environment and ral, the financial sector would seem modèle stimule vrai- corporate governance. If this can be to deserve special attention in the ment le développement present context, for several reasons: durable. done, we may be on the verge of a new opportunity to improve sustainability 1. As indicated earlier, it is a sec- in the business sector. tor that was deeply involved in the In the light of this new proposal, financial crisis of 2007-2008, a crisis all those involved must now take a that many authors believe was due to self-critical look at whether this new a series of socially irresponsible be- model really does help to boost sus- haviours, such as lack of humanity tainable development and allow real and values, a short-term economic change and a step forward in favour approach, management capture, and of sustainability – or, as a first rea- misunderstanding and misuse of de- ding of the proposal might suggest, mocracy (Correa and Moneva, 2011). the key aspects of sustainability are 2. The financial sector plays a pushed into the background in fa- fundamental, and often underesti- vour of such concepts as creation mated, role in sustainable develop- of value or results, under the motto ment. At first glance it might seem

CHANGING FRONTIERS OF ETHICS IN FINANCE 367 that the financial industry is not It can thus be said that banking exposed to major social or environ- institutions are responding perfectly Le concept de RSE est ment risks, since it consists of ser- to what society expects of them as critiqué par certains vice companies, ‘clean’ businesses regards information. Indeed, thanks car il reste étroite- to their CSR practices and, above ment lié à la gouver- that simply distribute money (De la nance, l’innovation , Cuesta, 2006). Yet if we consider, for all, their reporting tools, the leading la compétitivité et la example, financial agents’ discretio- commercial banks continue to occu- réputation. La crise de nary powers when managing money py the top places on the most pres- 2007 découle en effet and selecting investments, we can see tigious national and international directement de com- that financial institutions do not just sustainability and corporate reputa- portements sociaux distribute resources from one agent tion indexes (Merco, the Dow Jones irresponsables. to another, but assume both finan- Sustainability Index and the FTSE4 La gestion des flux Good index), which list businesses financiers, notamment cial and non-financial (ethical, social en matière d’investis- or environmental) risks when trans- whose conduct stands out when it sements, restent très ferring funds, and make decisions as comes to corporate governance, ethi- secrète et les déci- to the use of the money, which may cal, social and environmental issues. sions prises, quant à be more or less sustainable according Even if we look at the aforemen- l’utilisation de l’argent, to circumstances. Thus businesses tioned accounting models and gui- ne sont pas toujours such as banks understand that CSR delines (of which the GRI is the most inscrites dans une cannot be confined to intervening in démarche durable. prominent), there is even a sectoral financial flows by managing finan- adaptation for the financial sector in Outre la gestion des cial risks appropriately, but must the GRI, which was established in risques financiers, la go further, attempting to assess and 2000 in collaboration with a group RSE doit inclure la manage other kinds of ethical, social of banks and insurance companies in gestion des risques and environmental risks and, in the order to create sustainability repor- sociaux, éthiques et same way, offer products and servi- ting guidelines, by providing both environnementaux. ces that contribute to more human managerial indicators (policies and Les informations relatives à la RSE development of the planet. activities) and operational ones (the sont de plus en plus 3. Despite the chequered back- results of policies and activities) for transparentes, à l’instar ground, the high degree of censure this sector in particular. des banques espagnols and even demonization of the ban- However, as many authors have qui publient doréna- king sector around the world, CSR stated, this may not be enough; vant leur déclaration information in banking institutions and, in response to demands from de durabilité, soit la réponse à ce que la may actually be more transparent society, well-considered CSR must société attend d’elles en than in other sectors of the eco- go beyond mere philanthropy and matière d’information. nomy. Indeed, in Spain (more than involve genuine, profound involve- in other European countries) there ment. There must be an integrating has in recent years been a boom in concept of CSR, whose social dimen- such information, and the percenta- sion needs to include not only the ge of banks that publish sustainabili- business’s philanthropic activities, ty statements is significantly higher but also working conditions and than in other areas of the economy. integration of social concerns and

BANKING, ETHICS AND SUSTAINABILITY 368 respect for human rights throug- Yet recently, in a new step hout the business’s value chain and, towards sustainability, the major of course, throughout its range of financial businesses and corpora- La GRI a notamment products and services. Transparen- tions have been working on a new permis la mise en place challenge in the field of sustainable de rapports de durabi- cy and credibility are thus the two lité en fournissant des essential values that are required in development: Integrated Reporting, indicateurs de gestion such practices and reports; but, in a framework presented as a substan- managériale mais aussi the present circumstances, we can- tial improvement in favour of sustai- de fonctionnement not ignore the fact that there is still nability. opérationnel. much room for improvement. In the light of this new proposal, La RSE doit aller au the first thing we must do is appeal delà de la démarche Conclusions: what for foresight at a moment as impor- philanthropique et bé- can be done? néficier d’une véritable tant as the emergence of a new frame intégration profonde. Banks need to accept that they of reference that could steer business Transparence et cré- are not doing things the right way – practices in various directions in the dibilité sont devenues or, at least, that is what the public years to come. essentielles dans cette now thinks. If we analyse in detail Unfortunately, one of these di- volonté d’amélioration the sustainability sections on the qui a encore du che- rections could be to push sustai- min à parcourir. websites of Spain’s leading banks nability even further into the bac- and, above all, if we read their CSR kground and so put an end to the reports, we find no mention of the battle that has been fought in various news that Spaniards have constantly areas ever since sustainability repor- been hearing in recent years. The ting was first developed. Indeed, the banks’ statements refer to their com- first criticisms of this new proposal Les banques doivent pliance with the Global Compact or see Integrated Reporting simply as a admettre qu’elles ne the Ecuador Principles, their codes new marketing strategy that leaves font pas les choses de la meilleure manière of conduct and their initiatives to no room for sustainability. possible, car il y a combat corruption, their new So- However, and this may be the la théorie et les soit cially Responsible Investment pro- crux of the matter, another direction disant engagements ducts; and this is what is published that business practice could take is d’un côté, et la réalité in most sustainability reports. But, to use this new Integrated Reporting d’un autre. Là réside as we have seen, the purpose of all framework as a way to finally make le véritable paradoxe this may simply be to impress their entre ce qu’est la RSE sustainability a real and logical part et ce qu’elle devrait boards of management or the inves- of the business and financial sec- être. tment community with their listing tor, and make it second nature to on the main corporate reputation in- the world’s leading businesses – and dexes, or with their results. And this specifically the financial sector, one seems to have been the pattern in of the sectors with the greatest im- recent years: businesses on the one pact on, and implications for, society hand, and reality on the other. And and its development – by enabling here lies the true paradox between them to reassess the whole concept what CSR is and what it should be. of CSR.

CHANGING FRONTIERS OF ETHICS IN FINANCE 369 The world’s leading banks are for other businesses and organiza- L’information inté- now helping to draw up this new tions. grée est une véritable accounting framework; and this is Perhaps the time has come for nouvelle étape vers where banking and financial institu- le développement banking institutions to see the crisis tions, as agents with a particular in- durable. Elle appelle as an opportunity, force themselves à la clairvoyance car terest in understanding the concept to review their precepts in favour elle pourrait orienter of sustainability and CSR, and hence les pratiques commer- as experts on the subject, have an of sustainability – and so help bring ciales vers une autre opportunity to provide a benchmark about change.• direction à l’avenir.

References Adams, C. (2004). The ethical, CIS (2012). Barómetro Enero social and environmental reporting- 2012. Retrieved from www.cis.es/cis/ performance gap. Accounting, Au- opencm/ES/1_encuestas/estudios/ver. diting & Accountability Journal, jsp? 17 (5). CIS (2013). Barómetro Enero AECA (2004). Marco Concep- 2013. Retrieved from www.cis.es/cis/ tual de la Responsabilidad Social opencm/ES/1_encuestas/estudios/ver. Corporativa, Asociación Española jsp? de Contabilidad y Administración de Empresas Correa-Ruiz, C. & Moneva-Aba- día, J. M. (2011). Special Issue on Ayuso, S. & Fullana, P. (2002). Social Responsibility Accounting and Turismo sostenible. Barcelona: Ru- Reporting in times of sustainability bes Editorial downturn/crisis. Revista de Conta- bilidad – Spanish Accounting Re- Azcárate, F., Carrasco, F. & Fer- view, 14. nández, M. (2011). The role of integrated indicators in exhibiting bu- De la Cuesta, M. (2006). Respon- siness contribution to sustainable sabilidad Social del Sector Bancario: development: a survey of sustainabi- su contribución a un desarrollo más lity reporting initiatives. Revista de sostenible. Papeles de Economía, Contabilidad – Spanish Accounting 108 Review, 14, special issue Dobson, A. (1996). Environment Carroll, A. B. (1991). The pyra- sustainabilities: an analysis and a ty- mid of corporate social responsibility: pology. Environmental Politics, 5 toward the moral management of or- (3). ganizational stakeholders. Business horizons El Mundo (2007). Resumen 2007. Retrieved from www.elmundo. CIS (2011). Barómetro Febrero es/resumen/2007/ 2011. Retrieved from www.cis.es/cis/ opencm/ES/1_encuestas/estudios/ver. El Mundo (2008). Resumen jsp? 2008. Retrieved from www.elmundo.

BANKING, ETHICS AND SUSTAINABILITY 370 es/resumen/2008/ KPMG (2011). KPMG Interna- tional Survey of Corporate Respon- El Mundo (2009). Resumen sibility Reporting 2011. Retrieved 2009. Retrieved from www.elmundo. from www.kpmg.com es/resumen/2009/ Larrinaga-González, C. & Bebb- El Mundo (2010). Resumen ington, J. (2001). Accounting chan- 2010. Retrieved from www.elmundo. ge or institutional appropiation? A es/resumen/2010 case study of the implementation of environmental accounting. Critical El Mundo (2011). Resumen Perspectives on Accounting, 12(3), 2011. Retrieved from www.elmundo. 269-92 es/resumen/2011/ Springett, D. (2003). Business El Mundo (2012). Resumen conceptions of sustainable develo- 2012. Retrieved from www.elmundo. pment: a perspective from critical es/resumen/2012/ theory. Business Strategy and the Environment, 12. Freeman, R. E. (1984). Strategic Management: a Stakeholder Ap- Tregidga, H. M., Milne, M. J. & proach. Boston: Pitman Kearins, K. N. (2011). Sustainable Development as a Floating Signi- Friedman, M. (1970). The social fier: Recognising Space for Resis- responsibility of business is to increa- Launceston: The 10th Aus- se its profits, tance. New York Times Ma- tralasian Conference on Social and 13, 32-33, 122, 126 gazine, Environmental Accounting Research, 5-7 December 2011 Gray, R. (1995). Accounting and the what....? Can the grey men go green?. Human Ecology Review, UNWCED (1987). Our Com- winter/spring, 24-29 mon Future. Geneva: United Nations World Commission on Environment Gray R. & Bebbington, J. (2007). and Development and the Commis- Corporate sustainability: Accountabi- sion for the Future lity and the Pursuit of the Impossible Dream, Handbook of Sustainable De- Van Marrewijk, M. (2003). Con- velopment, Atkinson G., S. Dietz & cepts and definitions of CSR and cor- E. Neumeyer (eds). London: Edward porate sustainability: between agency Elgar and communion. Journal of Business Ethics IIRC (2011). Discussion Paper ‘Towards Integrated Reporting: Waddock, S. (2004). Parallel uni- Communicating Value in the 21st verses: companies, academics, and Century’. Retrieved from www. the progress of corporate citizenship. theiirc.com Business and Society Review

CHANGING FRONTIERS OF ETHICS IN FINANCE 371 Why even good people are likely Wto do bad things in finance – it’s not the people that are flawed, it’s the culture

Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013

Finalist

Krzysztof Osesik This paper analyses the current ethical shortcomings of the finan- Poland state of ethics in finance, and especial corporate culture, and the paper Associate, PwC*audit cially banking institutions. The focus concludes with some final remarks. department, Warsaw will be on identifying the factors that are conducive to unethical practices. What is ethics and I will argue that, although financial why is it important? scandals are ultimately triggered by Ethics is basically the science of individuals, these should not bear what is right and wrong. However, the entire blame – for the prevai- there is no generally accepted deling work culture at many financial finition of the term. When asked, institutions is flawed, and directly people tend to confuse ethics with encourages and rewards unethical their own feelings, religions, legal behaviour and practices. This means principles or social norms (Andre & that the system will face even more Velasquez, 2013). For the purpose of turmoil before long. this analysis, I will define ethical be- The paper begins by discussing haviour in finance as ‘acting in a way the definition and importance of that promotes and strengthens trust * The views expressed herein are those of ethics in business relations. It then and confidence in mutual relations’. the author and do not explains why ethical behaviour can- Ethical behaviour is all about hones- necessarily reflect those not be ensured by more financial ty and integrity. Its main objective is of the Organization he is affiliated to. regulation, and how too many rules to promote the common good within can actually undermine ethical stan- society. In business, it means stri- dards. The third part analyses the ving for ‘win-win situations’. Ethical

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 372 standards do not allow abuse of per- regulation will only be damaging, as sonal privilege through such things more effort is put into abiding by the as asymmetrical information, strong rules at the expense of operational bargaining power or legal loopholes. effectiveness and ethical behaviour. Le texte se concentre sur les institutions ban- Ethical principles are of funda- In a recent paper written for caires et en particulier mental importance in finance. This central bankers, Bank of England sur l’identification des is because the financial sector is un- executive director Andrew Haldane facteurs propices aux typical. First, unlike many other in- said ‘Modern finance is complex, pratiques non éthiques. dustries, it offers intangible, highly perhaps too complex. Regulation Il s’agit d’expliquer complex products whose quality pourquoi le comporte- of modern finance is complex, al- ment éthique ne peut cannot be immediately verified by most certainly too complex ... As pas être garanti par customers. Second, many financial you do not fight fire with fire, you plus de règlementation services are by their very nature do not fight complexity with com- financière et comment provided over a long period of time. plexity ... [C]omplexity ... requires plus de procedures Some government bonds or mortga- a regulatory response grounded in et règles nuisent aux ge loans have maturities of 20 years simplicity’ (Haldane & Madouros, normes d’éthique. or more. Both factors mean greater 2012). He proved his point by com- uncertainty for the parties involved. paring the size of various pieces of The most efficient risk-mitigating legislation designed to overhaul the factor is thus mutual trust, which in system. The 1933 Glass-Steagall Act, turn must be rooted in high ethical adopted in response to the Great De- standards. As the next section will pression, ran to a mere 37 pages, but Dans le cadre de cette show, in the absence of compliance secured overall financial stability for analyse, le terme de with ethical principles, more regula- seventy years. In contrast, the 2010 comportement éthique, tion can do little to boost confidence Dodd-Frank Act, intended as a legis- dans un contexte in financial markets. financier, peut être lative countermeasure to the current défini comme une crisis, occupies no fewer than 850 action qui encourage A jigsaw puzzle of ethics pages, with some 400 more to come et renforce la confiance and legal compliance in the form of implementing guide- dans les relations Today’s financial regulators seem lines. The Basel I agreement, signed mutuelles. Tout repose to believe that systemic stability can in 1988, was only 30 pages long. By sur l’intégrité et l’hon- only be achieved by more regula- the time Basel II was signed in 2004 nêteté, l’objectif étant the volume had increased tenfold, to le bien commun au tion. The fact that market confiden- sein de la société, soit ce can also be boosted by promoting more than 300 pages. The most re- une situation win-win ethical values appears to have been cent agreement, Basel III, signed in en affaires. overlooked. The prevailing ideolo- 2010, runs to over 600 pages, almost gy is more – and ever more detailed twice the size of its predecessor. It – regulation. Yet this may actually is not just the length of these docu- make things worse. Kaptein (2012) ments that is cumbersome, but also has argued that there is an optimum their detail. As Haldane says, ‘this amount of regulation for every or- degree of complexity also raises se- ganization. Beyond that point, extra rious questions about the robustness

CHANGING FRONTIERS OF ETHICS IN FINANCE 373 of the regulatory framework, given many rules will undermine ethical Les principes éthiques its degree of over-parameterization’ standards, as people consult legisla- sont fondamentaux (Haldane & Madouros, 2012). tion rather than their own conscien- dans la finance. La qualité des produits, ces when judging what is right and Preliminary remarks wrong. souvent très com- on ethics in finance plexes, ne peut pas être On the other hand, the solution immédiatement vérifiée In this connection it is also im- is not to get rid of the entire regula- par les clients, tout portant to realize that ethical prin- tory framework. Lack of regulations comme les services ciples cannot be enforced by legisla- fournis pendant de and supervisory mechanisms can tion. ‘Fencing organizations in with une longue période indeed have destabilizing effects, as de temps. Il en résulte procedures, systems and structures the sudden rise and fall of the deri- une grande incertitude, provides no guarantee that people vatives market has made clear. Ins- la confiance mutuelle will do the right thing’ (Kaptein, tead, it is a matter of striking the devenant le facteur de 2012). Ethical standards stem from right balance between too little and diminution des risques values and incentives that are fos- too much. Regulation is an impor- le plus éfficace. tered at the workplace. Many com- tant stabilizing factor, but should be panies confuse acting ethically with Le fait que la confiance kept to the necessary minimum. Re- legal compliance – which are not the du marché puisse gulation can hardly promote ethical être stimulée par la same thing. To understand this, take standards; but too much regulation promotion de valeurs the simple question of whether sla- will certainly undermine them. éthiques a été negli- very or racial segregation were ethi- The following part of the paper gée. Dans tout sytème, cal even when they were legal. discusses whether people are inhe- trop de regulation, Today, because of the bloated rently good or bad. This is a crucial au delà de la quan- regulatory framework, companies tité optimale, devient issue, as different measures will be pay far more attention to being legal préjuduciable. Il ne needed to ensure compliance with than they do to being ethical. Banks’ faut pas combattre la ethical standards depending on compliance departments employ complexité avec de whether people are naturally good la complexité. Une hundreds of lawyers, but hardly any or bad. The paper will then examine réponse réglementaire banks have hired ethical advisors. whether only ‘bad people’ in the fi- fondée sur la simplicité And extra regulation is counterpro- nance industry were responsible for est nécessaire. ductive for two other reasons. First, the recent wave of scandal and fraud. it can never be complete, for there will always be gaps, grey areas and Les principes éthiques Are people inherently ne peuvent pas être loopholes that can be exploited by good or bad? imposés par la legis- those who are aware of them. Se- lation. Les standards cond, as numerous research results According to classic economic éthiques proviennent have shown, more regulation actua- theory and its homo oeconomicus des valeurs et incita- lly reduces people’s ability to think model, individuals derive their uti- tions encouragés sur critically about their own actions. lity from consumption of material le lieu du travail. De They simply accept the measures goods. They are driven by ratio- nombreuses enterprises and procedures imposed on them nal expectations and self-interest. confondent action (Katz-Navon, T. et al., 2005). Too The happiness of a nation can then

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 374 éthique et conformité simply be measured by adding up like Hobbes, he blamed violence and légale. Une réglemen- people’s individual utilities. This conflicts on the corrupting influence tation complémentaire theory ignores the possibility of sy- of the external environment, rather est contre-productive nergies between individuals, and than people’s egoism and self-inter- car elle n’est jamais est. He also argued that people could, complète et réduit le assumes that people can only increa- regard critique sur ses se their utility at other people’s ex- and should, increase their happiness propres actions. pense. Since emotions are irrelevant by cooperating with others. and cannot be a source of happiness, The question of whether people there is no room for charity or vo- are naturally good or bad has exer- Il ne faut pas pour luntary work. People can be just as cised philosophers’ minds for centu- autant réduire la règle- happy on a desert island as they can ries. However, the results of recent mentation et les méca- among their families and friends. If nismes de supervision, research on young children suggest qui pourrait créer des this theory is correct, it follows that it is more likely that people are na- effets déstabilisateurs. people should be inherently bad and turally good rather than bad. Ha- Il s’agit de trouver le untrustworthy. With limited, scarce mlin, Wynn and Bloom (2007) had juste milieu entre pas resources, the easiest way for them shown that children as young as assez et trop. to increase their utility is to take six months old are able to uncons- La partie suivante se away what already belongs to others. ciously judge people on the basis of concentre sur le carac- Nor do they have any interest in their behaviour, distinguish right tère intrinsèquement contributing to the common good from wrong and, faced with a choice, bon ou mauvais des gens. or well-being. This approach is con- have a preference for what is right. sistent with the views of the English Other research, by Felix Warneken philosopher Thomas Hobbes, who and Michael Tomasello, has shown L’utilité des indivi- believed that people were extremely that children aged 18 months dis- dus, guidés par des egoistic and self-interested, and that play a tendency towards altruistic attentes rationnelles in the absence of external authority behaviour. Even where the people et leur intérêt per- there would be permanent conflict in need were strangers and there sonnel, dépend de was nothing to be gained by helping la consommation de and war. biens matériels. Depuis A completely different view them, the children chose to help que les émotions ne was advanced by Aristotle and the them in the vast majority of cases sont pas jugées comme French philosopher Jean-Jacques (Warneken & Tomasello, 2006). pertinentes ni source Rousseau. According to Aristotle, de bonheur, il n’y pas Good or bad? In finance achieving eudaimonia – happiness de place pour la charité it doesn’t matter et le bénévolat. Les or self-fulfillment – required people individus ne seraient not just to display and practice vir- However, if we accept that people donc pas dignes de tue and excellence; external factors are basically good, i.e. are not purely confiance, mais très such as health, beauty and social self-interested and can cooperate egoïstes et centrés sur ties were also important. People li- with others in accordance with so- eux-même. ving on their own, in isolation from cial norms, where have all these fi- others, could never achieve eudai- nancial scandals come from? Could monia. As for Rousseau, he believed it be that the financial industry that people were naturally good; un- specifically attracts those few ‘bad

CHANGING FRONTIERS OF ETHICS IN FINANCE 375 people’, or those with a tendency to nts describe him as ‘very personable Selon une autre vision, behave unethically? and witty’, as well as ‘funny and en- l’épanouissement To analyse this, we need to look tertaining’. Blankfein appears to be personnel repose sur la much-loved at the company – ‘he is vertue et l’excellence, at the biographies of several people mais aussi sur des fac- who were behind some of the biggest just terrific (…) you will love him’, teurs externes comme recent ethical meltdowns in the fi- said one of the executives (Pressler, la beauté, la santé et nancial sector. Enron’s last CEO, 2011). It is remarkable how someo- les liens sociaux. Le Kenneth Lay, was raised in a rural fa- ne with such personality traits can bonheur serait donc mily and his father was a Baptist pre- run a company whose culture is des- inaccessible à ceux qui cribed as ruthless and nasty. sont renfermés sur eux acher. Before joining Enron he was a même. Les individus navy officer and, during his time as A much more suitable person seraient donc bons et CEO, he made contributions to cha- would surely be someone like Le- leur bonheur repose- rities and cancer treatment centres. hman Brothers’ last CEO, Richard rait sur la cooperation He was a sociable and likable person. Fuld – nicknamed ‘the gorilla’ becau- avec les autres. ‘The employees loved him’, said one se of his confrontational style of management. In a public speech about Les récentes études senior executive. There was nothing traders who were short-selling Le- sur de jeunes enfants to suggest he would become respon- font état de prédisposi- sible for one of the largest corporate hman Brothers stock, he said ‘what tions naturelles plutôt scandals in America. It is almost as if I really want to do is reach in, rip bonnes que mauvaises. Lay had two quite different personas. out their heart and eat it before they 1 L’entraide se fait de ‘Many … are struggling to reconcile die.’ He inspired great loyalty, but manière spontanée the two images of Ken Lay. The first mostly through fear. ‘Those closest Le milieu financier atti- to him slaved like courtiers to a me- rerait les exceptions, was a personable, civic-minded mul- dieval monarch, second-guessing his ceux qui se comport- timillionaire who took the lead in ... ment de manière non charity after charity ... The latter re- moods’ (Oliver & Goodwin, 2010). éthique. igned over a company ... that spaw- Another example is Kweku Ado- ned an atmosphere of arrogance and boli – a UBS rogue trader whose greed ...’ (Goldberg & Flood, 2002). excessive risk-taking lost the Swiss Il est nécessaire de se bank $2.3 billion. Given his back- pencher sur la vie de A similar story can be told about plusieurs personnalités Lloyd Blankfein – a Harvard Law ground, he was rather an unlikely impliquées dans les ré- School graduate, and CEO of Gold- person to behave in this way. He cents scandals éthiques man Sachs since 2006. Yet during his came from an affluent family; his au sein d’institutions tenure Blankfein has done little or father was a senior UN diplomat. financières, à commen- nothing to alter the company’s infa- At his prestigious secondary school cer par Kenneth Lay, Adoboli was one of the brightest mous culture (Smith G., 2012). His dernier CEO d’Enron. students – with a particular aptitude Un homme très appré- former boss said ‘Blankfein was enfor mathematics and logic. In his fi- cié, mais à la double dowed with an unusual combination nal year he became ‘head boy’ of the personnalité. of humility and self-awareness, two school. Later on, he graduated with traits not normally associated with honours from the University of Not- hugely successful Wall Street executives’ (Cohan, 2011). Other accou- 1 www.youtube.com/watch?v=GZCmWkQuyPc

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 376 tingham in computer science and Focus on a single goal L’histoire de Lloyd management (Russell, 2012). At One important factor that triggers Blankfein, CEO de his trial, people who had met him Goldman Sachs depuis many unethical practices in finance described him as an intelligent, ho- 2006, est similaire. Un is the sector’s extreme focus on a sin- nest, generous and dependable per- homm très apprécié au gle goal – this year’s returns. Virtua- son (Croft, 2012). sein d’une enterprise lly the whole organization is centred dont la culture est Yet his actions were not very décrite comme impi- around generating higher turnover. different from those of another toyable et rude. Banks are said to have been ‘focused rogue trader, Nick Leeson, whose on revenues and not on other aspects reckless trading lost Barings Bank of performance’ (The Economist, Richard Fuld, CEO $1.4 billion and led to its collap- 2013). Pressure to achieve budgeted de Lehman Brothers se. Unlike Adoboli, Leeson grew plans made some banks intentiona- et Kweku Adoboli, up in a working-class family, ne- lly mislead their clients and jeopar- tous deux au parcours ver graduated from a universi- dize long-term relationships. For pourtant remarquable, sont d’autres exemples ty, and finished his education at example, Barclays was found to be très pertinents. Il en secondary-school level, with only ‘focused on revenue at the expense va de même pour Nick limited qualifications. His teachers of its clients’ (Mustoe, 2013). Gold- Leeson, dont les agis- considered him a poor student and man Sachs admitted it had misled its sements ont conduit a poor mathematician (AETN UK, investors in failing to disclose rele- à l’éffondrement de la 2013). As for his personality, he is vant information. On the plus side, Barings Bank. said to have been manipulative and however, the bank made billions out deceitful to those around him. Lee- of these unethical transactions with La culture d’entreprise, son described himself as cynical its own clients (Nasiripour, 2011). qui prévaut au sein des and inconsiderate.2 Such practices are widespread institutions financiers, across the industry. One former serait en partie res- Why is it so difficult to banker writes that a common ex- ponsable des pratiques pression now is ‘“IBG, YBG” – “I’ll financières déloyales. act ethically in finance? be gone, you’ll be gone” (…) long- L’un des facteurs The previous section has shown term consequences don’t matter; all générant ces méfaits that apparently good people, as well that counts is this year’s kill.’ The est l’objectif unique de as bad people, engage in unethi- rendement propre au three most infamous rogue traders cal financial practices, regardless secteur. – Leeson, Kerviel and Adoboli – all of their background, education defended themselves by saying that or personality. I would argue that the banks encouraged them to take Les pratiques visant à this can largely be blamed on the on more risk in order to boost po- privilégier ses intérêts corporate culture that prevails at tential profits, and that this was au depend des clients financial institutions. Below I iden- sont très répandues au standard practice at their banks. tify and discuss the most pronoun- sein de ces institutions. ced aspects of this culture that lead In the scientific world, such En terme scientifique, utter devotion to a single purpo- un tel dévouement to unethical behaviour in finance. se is known as ‘tunnel vision’. It dans un seul but se 2 www.youtube.com/watch?v=xfdtK-B_c7c has been experimentally shown

CHANGING FRONTIERS OF ETHICS IN FINANCE 377 nomme “tunnel vi- that too much emphasis on a sin- paper is a modest attempt to recon- sion”. La concentration gle goal impairs people’s ability to cile capitalism and ethics, something sur un unique objectif judge situations critically and draw many have argued is no longer possi- nuit à la capacité de the right conclusions. ‘The focus ble. Capitalism is the best economic jugement critique. on a goal then becomes a fixation, system mankind has so far developed, Le système actuel de and other important things fall by for it increases productivity and crea- valeur bancaire n’a aucun avenir s’il reste the wayside. Just as with tunnel vi- tes opportunities for all. However, en l’état. sion the rest is dark, does not cou- financial institutions need to broa- nt and is not seen’ (Kaptein, 2012). den their spectrum of objectives in Le problème ne vient The current banking value sys- order to perform their intended role pas des banques tem, with its overreliance on mone- in society. In a business environment dirigées par l’argent tary aspects, has no future. To un- where there is so much emphasis on mais des efforts que les derstand this, we must realize how achieving a single goal, ethical stan- institutions financières detached financial institutions and dards are likely to be pushed aside. concentrent sur cet unique objectif qu’il financiers have become from the real economy. In an infamous inter- Intrinsic motives are faut atteindre: la maxi- superseded by bonuses misation des prévisions view, one trader said of the current de revenus. crisis ‘We do not care that much Some of the best-paid jobs in the Il s’agit d’une tentative, about the economy (…) Our job is to world are in banking and finance. vaine peut-être, de make money (…) Personally I have Average salaries for first-year analysts réconciliation entre le been dreaming of this moment for at investment banks are $100,000 capitalisme et l’éthique, three years. I go to bed every night a year, and the managing director alors que l’environne- and I dream of another recession’.3 is paid $400,000 or more (Rapoza, ment actuel des affaires At Goldman Sachs clients were alle- 2013). However, these are only ave- tend à ignorer les gedly referred to as ‘muppets’, and at rage figures across the industry – the standards éthiques. internal meetings no attention was biggest firms pay much more than that. Of the nearly 30,000 people Les métiers du secteur paid to how the bank could help its financier et ban- clients, but rather how it could make employed at Goldman Sachs, almost caires figurent parmi money out of them (Smith G., 2012). a thousand were paid $1 million or les mieux payés au In my view, the problem is not more in 2008. In 2009 the average monde. La célèbre ten- so much that banks are driven by individual bonus at the same bank dance psychologique money. It is rather that financial was estimated at $675,000 (Quinn, 2009). During his trial, rogue trader “effect d’éviction” est institutions are entirely focused on ici très présente, les Jérôme Kerviel revealed that he had achieving a single goal – maximizing motivations intra- performed risky transactions in the revenue forecasts. In the capitalist sèques étant progressi- hope of receiving a large bonus – he system it is natural for businesses to vement dominées par had expected to net €600,000 for his pursue higher sales; but our world celles extrinsèques. 2007 results (Benedetti-Valentini, has become too complex and inter- Le sens de la moralité, 2008). Wall Street bankers grew so connected for us to concentrate all l’égalité et la contri- accustomed to large remunerations bution à la société ont our energy on a single goal, with litt- that in 2009, amid huge losses and été remplacées par les le or no regard for other aspects. This multi-billion bailouts with taxpayers’ hauts salaires et autres primes. 3 Goldman Sachs Rules the World’, www.you- money, they granted themselves a to- tube.com/watch?v=CTE6nXyKSnQ tal bonus of $18.4 billion (Shnayer-

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 378 son, 2009). about an atmosphere of ‘inflated A well-known phenomenon in egos’. A comment by Goldman Sachs psychology is the ‘crowding-out CEO Lloyd Blankfein that bankers effect’, whereby intrinsic motives are are doing ‘God’s work’ has been re- L’analyse de l’image de peatedly criticized, and condemned soi et des egos déme- gradually pushed aside by extrin- (Phillips, 2009). According to an surés est importante à sic motives for taking a particular considérer dans le cas action. In the case of bankers’ huge internal Barclays report, ‘a few inde pratiques finan- salaries, monetary rewards may well vestment bankers seemed to lose a cières déloyales. Les have suppressed such intrinsic mo- sense of proportion and humility’ employés de banque tives as a sense of morality, equality (Treanor, 2013). A feeling that you perdent progressive- or contribution to society. In other are not bound by the rules leads to ment le sens de la pro- words, financiers might in all cons- disregard for normal standards, and portion et l’humilité. cience prefer to be involved in more has surely led to some of the unethi- Plusieurs raisons socially beneficial projects – but their cal practices at financial institutions. expliquent cette decisions will be affected by the pros- tendance: La grande There are at least four sources of taille des institutions pect of large bonuses. such exaggerated self-esteem. First, financières, l’efficacité This phenomenon has been re- many of these institutions are ‘too des lobbies du secteur, searched by David Greene, who offe- big to fail’; this gives them an upper le train de vie luxueux red his students a reward for stud- hand in relations with regulators and de nombreux employés ying harder. However, once he took the general public, who have to pay et la dépendence de the reward away, the students stu- close attention to what banks say and nos vies au secteur died less than they had done to start do. Second, the financial sector has financier qui gère tout. with (Greene, Sternberg & Lepper, one of the largest and most effecti- 1976). Essentially, their efforts were ve lobbies. For example, in the early driven by the reward rather than by 2000s they proved very effective at the wish to study in its own right. By making sure the derivatives market the same token, bankers are driven remained unregulated. In 2011 the by their bonuses rather than by what US financial sector spent nearly $500 they do, and why. million on lobbying (Opensecrets, 2011). Third, high levels of remune- Self-image and ration and luxurious lifestyles have inflated egos convinced many that their privileged Another important factor when status is justified. Finally, all of our analysing the sources of unethical lives are affected by finance, but only practices in finance is self-image, a few of us really understand it. It is or what has been called the Galatea only the bankers that actually know effect. The theory is that people’s the sector inside-out, and this gives ideas about themselves can greatly them a sense of power and authority. affect their actions and attitudes. As one trader famously said, ‘gover- Bank employees are seemingly often nments don’t rule the world – Gold- 4 convinced that they are not bound man Sachs rules the world.’ by society’s normal standards. One 4 Goldman Sachs Rules the World’, http://www. former investment banker has talked youtube.com/watch?v=CTE6nXyKSnQ

CHANGING FRONTIERS OF ETHICS IN FINANCE 379 Here it is also worth mentioning in fact constant time pressure has a contrary phenomenon known as much the same effect as the tunnel L’effet Pygmalion the Pygmalion effect. This concerns vision mentioned earlier: it impairs est un phénomène how individuals are perceived and people’s ability to judge situations contraire, qui repose from a different perspective. An ex- sur la perception expected to behave by others. Ac- des autres et leurs cording to the 2013 Edelman Trust periment conducted by John Darley attentes en matière de Barometer, financial services have and Daniel Batson has shown that comportement. Les been the least trusted sector for three people tend to focus so much of services financiers sont years in a row (Edelman, 2013). The their energy on deadlines that they ceux qui inspirent le problem is that if the general public fail to assess situations properly and moins confiance. Selon thinks bankers are untrustworthy respond in the right way (Darley & cette théorie, si les there is – according to the theory – a Batson, 1973). gens pensent que les banquiers ne sont pas higher likelihood that they actually Banks are known as places where dignes de confiance, will be. Other people’s expectations you need to put in a lot of working alors la probabilité lead them to act accordingly. For hours. According to one former bank est forte pour qu’ils le example, the Pygmalion effect has employee, ‘You do not know how deviennent. played a part in many recent ac- hard you can work, short of slavery, counting frauds. One reason why unless you have been an investment La pression du temps financial statements at HealthSouth banker (…) It is not merely the est un facteur impor- or Enron were falsified was to meet tant qui explique hours, but the extreme and unrelen- aussi les pratiques non market analysts’ high expectations ting time pressure’ (Smith Y., 2010). éthiques. Il nuit à la (Associated Press, 2006). Another Normally, a typical working week capacité de prendre example is the Greek government, is 70-80 hours (Comstock, 2010); du recul et de juger which asked Goldman Sachs to help when necessary, however, this can de manière objec- it conceal the true size of its debt increase to 100 hours or more. tive. Dans certaines (Balzli, 2010). If the Greeks had not banques, la semaine de expected Goldman Sachs to be able Internal competition travail comprend 70 à 80 heures et parfois to help, they would have never ap- Another element of corporate jusqu’à 100 heures. proached the bank, and the bank culture at financial institutions that would never have had the opportu- is conducive to unethical practices La très forte compé- nity to act unethically. is extremely intense internal rivalry. tition interne est un Research has shown that mid-level autre facteur expli- Time pressure competition can be very useful in quant l’avènement de pratiques déloyales. A fourth element conducive to the workplace; but too much rivalry Trop de rivalité interne unethical practices at financial insti- has been found to prompt people to incite les gens à tricher tutions is time pressure. Tight sche- cheat and bend the rules. This es- et à contourner les dules are often beneficial, as they pecially holds true in environments règles, la course aux make people work harder and more where winner-takes-all reward sys- primes ne faisant efficiently. However, working under tems are applied. When people are qu’accentuer cette constant deadlines with no time to faced with the prospect of failing tendance. reflect on what you are doing comes to secure the first prize, their ethi- at a cost. This may seem strange, but cal standards are likely to be cha-

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 380 llenged and indeed compromised. recognition and build self-esteem.5 Jobs in finance are known to be There are also at least three ex- Les institutions finan- highly competitive. According to an ternal reasons for fierce competition. cières entretiennent independent report on the culture at The first is that a large number of fi- cette compétitivité via Barclays, ‘winning at all costs comes nance and economics graduates enter the labour market each year. Since fi- des méthodes d’éva- at a price: collateral issues of rivalry, luation éreintantes et nance offers above-average salaries, arrogance, selfishness and a lack of extrêmement difficiles. many seek careers in this sector. The La forte remuneration humility and generosity’ (Treanor, second reason is that finance is a very n’est plus le moyen 2013). Enron’s culture was also ba- homogeneous environment. Finan- d’acquérir des biens de sed on constant conflict and com- ciers’ personalities, work cultures, consommation mais petition. The company developed une donnée essentielle skills and abilities are very similar; de sa propre image the most gruelling and harsh eva- almost the only differentiating factor avec la reconnaissance luation systems in the US, and each is experience. This makes compari- comme objectif ultime. year 10-15% of employees were fired son and internal replacement easier. because of their low performance Moreover, since corporate cultures grades (Thomas, 2002). In financial are almost identical across the industry, it is easy to recruit people institutions future employment is from another companies. The third seldom guaranteed. Managers hold factor that boosts internal rivalry is constant feedback sessions, and the the fact that employees’ results are poorest performers are quickly fired. easily comparable in terms of reve- Trois raisons externes At the same time, most banks pu- nues generated for the company. expliquent cette blish motivational rankings of their constante compétition: best employees. Moreover, internal Lack of true diversity le secteur attire tou- hierarchy – the ‘corporate ladder’ or strong individuals jours plus d’étudiants, il est très homogène au – is used to entice employees with A final challenge to ethical stan- niveau du profil de ses prospects of quick promotion. Bank dards is that working environments at employés, et en fin les employees tend to be strong-willed financial institutions are very homoge- résultats des employés and career-oriented. The rules for neous. Companies impose strict rules sont très facilement being promoted are usually laid out and regulations on their employees to comparables. clearly in internal documents, so that ensure similar attitudes and thinking people are in no doubt about what patterns. Goldman Sachs employees were strictly forbidden to talk to the is expected of them. What makes press, could not party in public in internal competition even fiercer is groups of more than twelve, and were that many financiers no longer just told what kinds of clothes were and see their annual remuneration as a were not acceptable at work (Com- means of meeting their consumption stock & Wachtel, 2011). At Lehman and living requirements, but as a key 5 ‘Ethical risks: why do good people end up part of their self-image. They pur- doing bad things?’, http://www.youtube.com/ sue higher bonuses in order to win watch?v=XtFiHb_c6n4

CHANGING FRONTIERS OF ETHICS IN FINANCE 381 Brothers, allegedly, people were fired only a slight exaggeration to say that Le manque de per- because they wore the wrong clothes everybody graduated from a top busi- sonnalités fortes et de and were told which charities to sup- ness school, passed CFA exams, lives véritable diversité, qui port.6 Employees are expected to show a luxury life, is money-oriented and caractérise le secteur, only has friends that work at the same est un challenge pour limitless commitment to the company. les standards éthiques. ‘It wasn’t uncommon to ask associates bank. Les enterprises to reschedule their weddings’ (Smith Three separate experiments by Phi- formatent les collabo- Y. 2010). A former intern at Goldman lip Zimbardo (Zimbardo, 2007), Solo- rateurs pour qu’ils pré- Sachs says her internship at the bank mon Asch (Asch, 1955) and Stanley fèrent leur employeur à was ‘deeply upsetting’ and she felt Milgram (Milgram, 1963) have shown leur propre famille. ‘indoctrinated’ (Wachtel, 2011). Yet that people are very liable to adopt the many bankers do not hesitate to talk norms and actions imposed on them Les employés recrutés about their love for the company. It is by their environment, their peer group doivent rentrer dans le as if the institution has actually repla- or a higher authority, without thin- moule pour maintenir ced their families. king much about what these really la meilleure homogé- The first stage in creating and main- stand for. This is especially true of in- néité possible. Chaque taining homogeneity, commitment dividuals who lack self-esteem and see recrutement peut and subordination among employees themselves as a product of their envi- inclure jusqu’à une ronment rather than a driving force. A dizaine d’entretiens is the recruitment process. Top in- junior banker who lets himself be told pour flatter le candidat vestment banks typically only target et le rendre encore plus graduates from a very limited number what to wear and which charities to dévoué à son enter- of schools. The recruiters’ main job support, and cannot even decide his prise. is to assess whether a candidate fits own wedding date, certainly fits this into the corporate culture.7 They also pattern. look for ‘money-mindedness’, as well Ethical standards are more likely to be violated in such a homogeneous Des études montrent as ‘hunger and drive’. Before making que les individus a job offer, top banks will have up to and highly loyal corporate culture, adoptent très facile- ten interviews with the best candida- since everybody is expected to toe ment les normes et tes. This is not so much to learn more the line and not ask too many ques- actions imposés par about them as to make new employees tions. In fact, everything depends leur environnement grateful for the opportunity they have on whether a few top executives can professionnel. been given by being hired, and thus to set a good example, for middle-level Les standards éthiques increase their loyalty and commitment bankers simply adopt the norms and ont tendance à être behaviours that trickle down through plus facilement to the firm. The notion of diversity at the organization. enfreints dans des investment banks is also a myth; it is environnements 6 Lehman Brothers “Terrifying” Culture Ex- Conclusions homogènes avec une posed…’, www.huffingtonpost.com/2010/03/22/ forte loyauté propre à lehman-brothers-terrifyin_n_508594.html The finance industry is a key ele- la culture d’entreprise. 7 ‘Overview of the Investment Banking Ana- ment in getting the economy back on L’exemple donné par lyst Recruiting Process’, http://investment- track. It has never been bigger and les cadres supérieurs bankingjobsguru.wordpress.com/2008/08/22/ more important than today. With its est donc déterminant. overview-of-the-investment-banking-analyst- recruiting-process/ size, however, comes responsibility.

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 382 Financial institutions failed the test will prove a useful contribution. The L’industrie financière of the 2008 financial crisis. Since paper’s final conclusion is that the est un element clé pour then, owing to banks’ stubborn resis- public is often too quick to blame remettre l’économie tance, very little has changed. Every sur pieds. La responsa- individuals, describing them as gre- bilité est devenue une so often yet another story of fraudu- edy, arrogant risk-takers – and over- donnée essentielle. lent practice comes to light. looking the shortcomings inherent La culture d’entre- Banks’ flawed corporate culture in the system as a whole. • prise très critiquable has played a negative role in the re- a joué un role négatif cent crisis, and swift action must be dans la crise récente. taken to remedy it. I hope the above Une action rapide est indispensable pour y diagnosis of its most fragile points remédier. Nous avons tendance à blamer les individus au lieu de s’intéresser aux lacunes References du système pris dans AETN UK (2013). Nick Leeson: Rogue fein came from. Retrieved from mana- son ensemble. Trader. Retrieved from www.crimeandin- gement.fortune.cnn.com/2011/04/21/ vestigation.co.uk/crime-files/nick-leeson- where-blankfein-came-from/ rogue-trader/biography.html Comstock, C. (2010). Goldman Andre, C. & Velasquez, M. (2013). Sachs’s Alison Mass: I Work 70-80 What is Ethics ? Retrieved from www. Hours, I Have 2 Kids, I ‘Non-Profit,’ scu.edu/ethics/publications/iie/v1n1/wha- And I Work Out. Retrieved from tis.html www.businessinsider.com/goldmans- alison-mass-2010-7#ixzz2Ujrc51Dw Asch, S. (1955). Opinions and social pressure. Scientific American, 193, 31-35 Comstock, C. & Wachtel, K. (2011).15 reasons you do not want Associated Press (2006). Enron wit- to work at Goldman Sachs. Retrieved ness: executives fudged numbers. Retrie- ved from www.sptimes.com/2006/02/02/ from www.businessinsider.com/gold- Business/Enron_witness__Execut.shtml man-sachs-job-sucks-2011?op=1

Balzli, B. (2010). Greek debt crisis: Croft, J. (2012). Rise and fall of How Goldman Sachs helped Greece to Adoboli the family man. Retrieved from mask its true debt. Retrieved from www. www.ft.com/intl/cms/s/0/91a2bd5c- spiegel.de/international/europe/greek- 2e9a-11e2-9b98-00144feabdc0.html debt-crisis-how-goldman-sachs-helped- greece-to-mask-its-true-debt-a-676634. Darley, J.M. & Batson, C.D. (1973). html From Jerusalem to Jericho: A study of situational variables in helping Benedetti-Valentini, F. (2008). Ker- behavior. Journal of Personality and viel Losses Erase Promotion Chances for Social Psychology, 27, 100-108 Clerks. Retrieved from www.bloomberg. com/apps/news?pid=newsarchive&refe Edelman (2013). 2013 Edelman r=home&sid=ac7IQ1PTV_yE Blanken- Trust Barometer Reports Financial

CHANGING FRONTIERS OF ETHICS IN FINANCE 383 Services is Least Trusted Industry tification. Retrieved from www.bu- Globally. Retrieved from www.edel- sinessweek.com/news/2013-04-03/ man.com/news/2013-edelman-trust- barclays-report-finds-bank-too-com- barometer-reports-financial-servi- plex-criticizes-pay#p1 ces-is-least-trusted-industry-globally/ Nasiripour , S. (2011). Goldman Goldberg, L. & Flood, M. (2002). Sachs Ripped Off and Misled Clients. The rise of Ken Lay as dramatic as his Retrieved from www.huffingtonpost. fall. Retrieved from www.chron.com/bu- com/2011/04/15/goldman-sachs-le- siness/enron/article/The-rise-of-Ken-Lay- vin-investigation_n_849708.html as-dramatic-as-his-fall-1963106.php Oliver, J. & Goodwin, T. (2010). Greene, D., Sternberg, B. & Lep- Dick Fuld and the fall of Lehman per, M.R. (1976). Overjustification in Brothers. Retrieved from www.direc- a token economy. Journal of Persona- tor.co.uk/ONLINE/2010/11_10_vin- lity and Social Psychology, 34, 1219- ce_cable_responsible_capitalism.html 1234 Opensecrets (2011). Lobbying Hamlin, J. K., Wynn, K. & Bloom, Spending Database. Retrieved from P. (2007). Social evaluation by prever- www.opensecrets.org/lobby/top. bal infants. Nature, 450, 557-560 php?showYear=2011&indexType=c

Haldane, A. & Madouros, V. Phillips, M. (2009). Goldman (2012). The dog and the Frisbee. Re- Sachs’ Blankfein on Banking: Doing trieved from www.bankofengland. God’s Work. Retrieved from blogs. co.uk/publications/Documents/spee- wsj.com/marketbeat/2009/11/09/ ches/2012/speech596.pdf goldman-sachs-blankfein-on-ban- Kaptein, M. (2012). Why good king-doing-gods-work/ people sometimes do bad things: 52 Pressler, J. (2011). It’s Too Bad. reflections on ethics at work. Retrie- And I Don’t Mean It’s Too Bad Like ved from papers.ssrn.com/sol3/pa- ‘Screw ’Em. Retrieved from ny- pers.cfm?abstract_id=2117396 mag.com/news/business/lloyd- Katz-Navon, T., Naveh, E. & blankfein-2011-8/ Stern, Z. (2005). Safety climate in health care organizations: A multi- Quinn, J. (2009). Bankers to receive huge bonuses despite financial dimensional approach. Academy of Management Journal, 48 (6), 1075- crisis. Retrieved from www.telegra- 1089 ph.co.uk/finance/recession/5154915/ Bankers-to-receive-huge-bonuses- Milgram, S. (1963). Behavioral stu- despite-financial-crisis.html dy of obedience. Journal of Abnormal and Social Psychology, 67 (4), 371– Rapoza, K. (2013). How much do 378 Wall Streeters Really Earn. Retrieved from www.forbes.com/sites/kenra- Mustoe, H. (2013). Barclays Re- poza/2013/03/13/how-much-do-wall- port Finds Bonuses Incapable of Jus- streeters-really-earn/

WHY EVEN GOOD PEOPLE ARE LIKELY TO DO BAD THINGS IN FINANCE? 384 Russell, J. (2012). UBS rogue Thomas, C.W. (2002). The rise trader Kweku Adoboli : profile. Re- and fall of Enron. Retrieved from trieved from www.telegraph.co.uk/ www.journalofaccountancy.com/Is- finance/financial-crime/9690390/ sues/2002/Apr/TheRiseAndFallOfEn- UBS-rogue-trader-Kweku-Adoboli- ron.htm profile.html Treanor, J. (2013). Barclays inde- Shnayerson, M. (2009). Wall pendent review: bankers tried to win Street’s 18.4 Billion Bonus. Retrieved at all costs. Retrieved from www. from www.vanityfair.com/politics/ guardian.co.uk/business/2013/apr/03/ features/2009/03/wall-street-bonu- barclays-pay-profits-independent- ses200903 review-salz Wachtel, K. (2011). Hollywood Smith, G. (2012). Why I Am Darling Brit Marling on why she quit Leaving Goldman Sachs. Retrieved banking for film. Retrieved from www. from www.nytimes.com/2012/03/14/ businessinsider.com/brit-marling- opinion/why-i-am-leaving-goldman- sundance-another-world-arbitrage-ri- sachs.html?pagewanted=all&_r=1& chard-gere-2011-7#ixzz1SYrMzOCA Smith, Y. (2010). Indefensible Warneken, F. & Tomasello, M. Man. Retrieved from www.nakedcapi- (2006). Altruistic helping in human talism.com/2010/03/indefensible-men. infants and young chimpanzees. html Science, 311, 1301–1303 The Economist. (2013).Twilight Zimbardo, P. (2007). The Luci- of the gods - special report on interna- fer Effect: Understanding How Good tional banking. May 11- May 17 2013, People Turn Evil. New York: Ran- 16 dom House Trade Paperbacks

CHANGING FRONTIERS OF ETHICS IN FINANCE 385

Part IV

Exploring Avenues for Action 386 387

nline Interbank Funding OOPlatform for social-impact projects

Ethics in Finance, Robin Cosgrove Prize Iberoamerican edition 2012-2013

First Prize ex-aequo

Ángel López The idea of an online Interbank The rise and Ortega Funding Platform (IFP) has emerged development of from the recent growing interest in so- Spain Socially Responsible Economist and foun- cial and ‘impact investment’ businesses, der of the Hervideas which find it hard to obtain funding Investment (SRI) association*, Madrid but are socially very attractive. This has Socially Responsible Investment led to the emergence of alternatives to has gradually developed out of clas- traditional funding, mainly promoted sic financial theory. The first changes on the Internet, which seek to support were the result of demands by va- such projects through donations, cash rious religious groups which, starting rewards or interest rates that are gene- in the United States in 1920s, called rally lower than those available on the for more ethics in investment, with market. At the same time, traditional prior selection of assets based on a banking has reached a historic turning number of criteria. It was against this point: its behaviour is now increasingly background that the Pioneer Fund – challenged on ethical grounds, and it usually considered the first ethically needs to innovate in response to this. inspired investment fund – was esta- This paper proposes a new Interbank blished in Boston in 1928. Funding Platform that will put banks in This was the first attempt to take * The views expressed closer touch with Socially Responsible account of ethical motives, and even- herein are those of Investment (SRI) and so have a greater tually social and environmental ones, the author and do not social impact by funding a larger num- in investment by businesses and indi- necessarily reflect those ber of projects.. viduals. And during the 1960s, 1970s

ONLINE INTERBANK FUNDING PLATFORM FOR SOCIAL-IMPACT PROJECTS 388 of the Organization he is and 1980s, in response to the Viet- to input from institutional investors, affiliated to. nam War and South African apar- which account for 94% of such in- theid, the idea arose on both sides vestment, whereas the other 6% co- of the Atlantic that investment was a mes from the retail market. One of Depuis quelques good way to put pressure on busines- Spainsif’s challenges for the future années, les entreprises ses with regard to social issues (Eu- (2012) is to attract more SRI inves- sociales et l’inves- rosif, 2012). tment from the retail market. tissement d’impact The number of assets managed This growth has led to the market suscitent de plus en by SRI investment funds has been plus d’intérêt. becoming diversified and the defini- growing from year to year (Vigeo, tion of SRI becoming more complex. Le comportement de la 2012), rating agencies such as KLD Of the existing definitions,1 we will banque traditionnelle and Eiris have proliferated, and SRI keep to the one provided in the analy- est de plus en plus re- indexes have been created, including sis by a Eurosif Committee of Experts, mis en question en ce the Dow Jones DJSI World and DJSI which in 2011 defined seven different qui concerne l’éthique, STOXX indexes, and FTSE4Good. strategies that would fit into a broader c’est pourquoi dans This has resulted in more and more definition of this type of investment, le contexte actuel elle investment portfolios being evalua- pourrait tirer avantage in turn identifying those related to res- en favorisant l’innova- ted according to Environmental, So- ponsible investment, and specifying tion sociale. cial and Governance (ESG) criteria, which ones would be considered true rewarding businesses that perform SRI strategies (Spainsif, 2012). Une Plateforme better. 1 de Financement According to data on the Euro- See the United Nations Principles for Res- ponsible Investment (PRI) at www.unpri.org/ Interbancaire(PFI) pean market published by Eurosif permettrait d’encoura- or the European Fund and Asset Management ger le financement de (2012) this growth is essentially due Association (EFAMA) at www.efama.org grand nombre de projets ayant un impact Table 1. Responsible Investment Strategies social. 1. Investment in thematic funds Au cours de la dernière 2. Selection of ‘best in class’ investment strategies décennie, nous assis- tons à une augmenta- 3. No investment in securities tion de l’Investissement 4. Filter based on international ESG standards Socialement Respon- 5. Inclusion of ESG factors in financial analysis sable (ISR) ; de plus en plus de portefeuilles 6. Active dialogue, shareholder activism and voting on tiennent compte des sustainability issues questions environne- 7. Impact investment mentales, sociales et de gouvernance d’entreprise ( ESG) . Source: Spainsif Report, 2012. (Strategies considered as SRI are in blue)

CHANGING FRONTIERS OF ETHICS IN FINANCE 389 The most interesting strategy as 2012 Spanish Social Economy Busi- regards the proposed IFP is ‘impact ness Conference, this sector employs investment’. Eurosif (2012) defines 2.4 million people in Spain. L’ISR a évolué et est this as investment by businesses, or- devenu plus complexe This has coincided with a boom et diversifié, générant ganizations and funds with a view to in such impact investment that see- ainsi de nouvelles generating a social and environmen- ks to fund bodies in the social sector, stratégies pour investir tal impact as well as economic re- social businesses and entrepreneurs, dans une entreprise turn, in both developing and develo- and the social economy in general. socialement respon- ped countries. Such investment seeks At the same time, the European sable. a social or environmental impact that Union is endeavouring to promote is accompanied by a financial return such activities. In 2011 the European Les investissements at least equal to the capital invested Commission, through the Social d’impact cherchent (Ruíz de Munain and Martín, 2012) Business Initiative,3 proposed the à générer un impact so- or the savings generated.2 Since the creation of a ‘European Social Entre- cial et environnemental crisis erupted in 2007, Spain has seen preneurship Fund’ label to identify positif tout en assurant a process of innovation among busi- investment funds carrying out social une rentabilité écono- nesses and entrepreneurs, leading to investment in Europe (Ruíz de Mu- mique, avec un retour nain and Martín, 2012). sur investissement. greater awareness of social issues. One reason for this is that the tradi- The actors that fund such busi- tional social economy has seen a fall nesses and projects are summed up in government contributions owing in the table 2. to budget cuts. According to the Even though crowdfunding may 2 For example through social impact bonds: if not be considered impact investment a business achieves a given social impact that in the true sense, it is included here. saves the government money, the latter will Some platforms and projects offer repay the capital plus an agreed rate of interest (Narrillos, 2012). 3 ec.europa.eu/internal_market/social_business/ index_en.htm Table 2. Type of actors

TYPE OF ACTOR EXAMPLES IN SPAIN Microfinanciers MicroBank, Microfides Bodies and initiatives that support Moment Project entrepreneurs / tenders Public bodies Fundación ICO, ENISA Credit cooperatives Coop57 Ethical banks Fiare, Triodos Bank SRI funds / social venture capital Fundación Creas, ISIS capital Banks’ social projects / foundations BBVA, Caixabank crowdfunding Goteo

Source: author’s own list

ONLINE INTERBANK FUNDING PLATFORM FOR SOCIAL-IMPACT PROJECTS 390 shares of the potential profits, or People read these stories, and if they a rate of interest (X.net, 2013), but are interested in making a loan they in most cases there are donations in decide how much they want to con- Les projets en quête de return for recognition or products tribute. financement qui ont recours au crowd- derived from the project. Neverthe- The money is channelled through funding tireraient less, this paper will not be confined local microfinancing bodies that have avantage de la PFI. En to impact investment, for I belie- identified the people who need the effet, généralement ce ve that projects launched through loans. This means that the borrowers’ genre de projets est crowdfunding may benefit the IFP use of the money is closely supervi- plus difficile à financer, and so reach projects which by their sed. Throughout the duration of the leur rentabilité éco- very nature require more complica- loan, the lender can also be sent up- nomique n’étant pas ted funding. assurée. dates on the loan and how it is pro- However, it is general practice gressing. At the end of the agreed pe- Trois initiatives ont to receive interest in return for in- riod the loan is repaid, and the lender servi d’inspiration pour vestment. In its annual survey of can then decide whether to reinvest la PFI : la plate-forme philanthropic investment (2013), the money in another loan or else en ligne de microcré- the European Venture Philanthropy withdraw it. 90% of lenders decide to dits Kiva, la plate- Association found that in 2011 there reinvest. forme de financement collectid Goteo et was increased interest in investment 2. Goteo (www.goteo.org). Goteo l’initiative Tú éliges : tú that generated a social return as a is one of the leading crowdfunding decides (Vous choisis- priority while accepting a financial platforms in Spain. It specializes in sez : vous décidez) de return, whereas in 2010 the empha- promoting investment in social, cul- Banca Civica. sis had been on projects that genera- tural, scientific, educational, tech- ted a social return without a financial nological or environmental projects one. La diversité des com- that seek to generate new opportunities to improve society and enhance munautés de crowd- Learning initiatives funding permet à shared goods and resources. l’investisseur de mieux for the Interbank Funding Platform What can we learn from Goteo filtrer le type de projets and crowdfunding? susceptible de l’inté- This section identifies three ini- resser. L’inconvénient Goteo seeks funding and eco- réside dans le fait que tiatives that have inspired the propo- nomic support for initiatives who- beaucoup de ces plate- sed Interbank Funding Platform. se goals are valuable to society as a formes et communau- 1. Kiva (www.kiva.org). Kiva is whole and are hard to fund through tés ne sont pas viables the first online microloan platform traditional channels. à long terme. for lenders and microentrepreneurs. The return to lenders may be What can we learn from Kiva? symbolic, in the form of recognition, Kiva is of interest to the IFP be- or else material rewards that increase cause of its philosophy. Kiva draws in value in proportion to the amount attention to entrepreneurs, explai- lent. ning who they are, why they want Funding through a wide variety money and how much they need. of crowdfunding communities is use-

CHANGING FRONTIERS OF ETHICS IN FINANCE 391 ful, for it helps to filter types of pro- this initiative is that anyone in Nava- jects that may be of greater interest rre – not just clients of the bank – can to particular people. The observed help decide where the money will go. drawback is that many of these plat- What can we learn from the forms and communities do not prove ‘You choose, you decide’ initiative? viable in the long term, for several L’initiative Tú eliges: Caja Navarra brings projects with reasons: tú decides (vous choi- a high social impact to the attention sissez : vous décidez) • A small number of projects. If of the people of Navarre, who usua- permet de découvrir a platform has only a few projects, it lly know nothing about them. This des projets d’impact is harder to earn enough money to makes the bank’s clients, and the rest social, sensibilisant make the activity profitable. Also, the ainsi les clients et la of society, more aware of SRI. As al- fewer the projects, the fewer the po- société en général à l’ ready mentioned, one of Spainsif’s ISR. La revitalisation tential clients. priority challenges (2012, p. 19) is to du marché de détail • A small niche of investors. The attract more SRI investment from the constitue le principal more varied the communities are, the retail market, which has a more con- défi de l’ ISR. fewer people will be aware of the va- servative profile and is unaware of rious projects. SRI products. This also shows a com- • Communities drying up. Those mitment to projects that have a posi- who fund projects in communities tive social and environmental (rather Alors que nous pou- involved in specific themes are un- than just economic) impact, as well vons constater que le likely to have the capacity to fund all as the need for traditional banks to client est de plus en the projects concerned (X.net, 2012). take greater account of social issues. plus enclin à chercher • Difficulty in attracting large d’autres alternatives An Interbank Funding pour gérer son argent amounts of money, especially if the Platform for social- (par le biais de la expected impact of the projects is Banque Éthique), la long-term (X.net, 2012). impact projects banque espagnole tra- 3. Banca Cívica (Civic Bank): you In the wake of the financial cri- ditionnelle n’encourage choose, you decide (www.cajana- sis that erupted in 2007 and is still pas encore suffisam- varra.com/tu-eliges/que-es). Caixa- being felt in many countries – inclu- ment le financement ding Spain – in 2013, there has been de projets ayant un Bank, acting through Banca Cívica impact social. (which has emerged from an asso- a growing interest in the funding of ciation of several Spanish banks), has social businesses and initiatives. As launched an initiative called Tú eli- we have seen, the number of initiati- ges, tú decides (‘You choose, you de- ves to promote SRI is increasing, and cide’). For example, one of the banks, there are many different ways of fun- Caja Navarra, has decided that anyo- ding projects. ne over 18 in the northern province Despite all this, and aside from of Navarre can choose a social pro- isolated initiatives, Spain’s traditio- ject to which the bank will contribu- nal banks are not doing enough to te ten euros a head – a total of 5.14 encourage such funding. This is a million euros. The novel thing about matter of increasing concern to their

ONLINE INTERBANK FUNDING PLATFORM FOR SOCIAL-IMPACT PROJECTS 392 clients, who are looking for alterna- presuppose greater opportunities tive ways of managing their money.4 to invest in the social economy and What is more, 88% of people in Spain social-impact projects – but they are doubt the credibility of banking ins- just a small proportion of the large titutions (Random, 2012). number of emerging initiatives. The Les nouvelles techno- Added to this loss of clients and new technologies, especially the In- logies, en particulier credibility are the bankruptcies of ternet and social media, have drawn internet et les réseaux Spanish savings banks due what is attention to a greater number of sociaux , ont permis la widely perceived as mismanagement, projects and facilitated the spread diffusion d’un grand mortgage foreclosures (and the resul- of information about them. It seems nombre de projets so- ting human tragedy of eviction), and we humans tend to consume large ciaux. Par ailleurs, ces the preference shares scandal.5All amounts of information and spread mêmes technologies, whatever bits of it we like. permettent d’établir de this has increased the pressure on plus en plus de filtres traditional banks to evolve, innovate The drawback is that the Internet pour contrôler l’excès and adapt so that they can repair the offers us so much information and d’informations. damage to their public image. so many services that we end up needing filters. Evidence of this can be Increase in alternative found in the shift from thematic si- kinds of funding, tes and blogs to personal and social and segmentation bookmarks, news aggregators, social media, applications such as Fli- Nous pouvons of the market pboard and the revolution created observer une tendance In his study of consumption and by mobile phone interfaces (such à l’équilibre entre consumer choices (2004), the Ame- as HTC’s recent BlinkFeed ) which l’abondance d’informa- rican psychologist Barry Schwartz tions -nécessaire pour filter information so we only get to drew an interesting conclusion: a fournir des contenus see what we want to see. Ultimately, large number of choices adversely personnalisés à un what people want is to be fully in- affects consumers’ ability to choose, public diversifié - et formed and yet not be overwhelmed for they need more time to gather in- une réduction de with content, which has to be rele- l’information fournie à formation, which implies a cost that vant and easily accessible. l’utilisateur, permettant may not be outweighed by the resul- ainsi un gain de temps ting well-being. What we are moving towards et d’attention. is a balance between an abundance This is a relevant factor, for the of existing information (which is initiatives presented in this paper necessary in order to offer perso- 4 Evidence of this can be seen in the growing nalized content to a varied public) number of people moving over to the Banca and a reduction in the information Ética (‘Ethical Bank’) – in 2012, according to displayed to users (to reduce the data supplied by Financiación Ética y Solidaria amount of time and attention they (FETS): www.fets.org/, the figure doubled to more than 100,000. have to devote to it). The same thing 5 Many Spanish financial institutions sold people happens when we want to find out participaciones preferentes (‘preference shares’) about social investment opportuni- and informed them about the potential returns ties on the Internet. Platforms and – but failed to mention the associated risks.

CHANGING FRONTIERS OF ETHICS IN FINANCE 393 options are increasing so fast that vest some of their money or profits in the market is becoming segmented. such products. This may be a good thing, as everyone can go to the platform most sui- Which activities? ted to what they would like to fund; The activities to be funded will but on the other hand it is becoming depend on where they take place. The more difficult to spread information developed countries, and specifically about what is available. Meanwhile, Europe, are promoting social inno- many businesses and projects con- vation initiatives. In 2013 the Euro- Grace à la PFI, les tinue to approach traditional banks, pean Commission has defined social banques traditionnelles which treat them no differently innovation as the development and dont les clients ne sont from other applicants for loans pas aussi familiarisés implementation of new ideas to satis- – and so they do not get funded. avec la banque éthique fy social needs and create new social pourraient offrir sim- relationships and partnerships. These plement de nouvelles The reason for the IFP are responses to the pressures of so- options de placements The IFP can help social projects cial demand, which affect the process en accord avec des and businesses because of: of social interaction. Social innova- critères environne- 1. The growing interest in impact tion is designed to improve human mentaux, sociaux et de well-being, and the innovations are gouvernance d’entre- investment social in both their ends and their prise (ESG) ainsi que 2. The rapid expansion in social means. Not only are they good for so- l’accès à des projets entrepreneurship and social busines- ciety, but they also increase people’s classés investissements ses, their influence and their contribu- ability to act. The priority goal is to d’impact ou sociaux, tion to employment projets qui de par leurs promote social change and create caractéristiques impli- 3. The difficulty in funding many shared economic and social value. cites ont difficilement of these projects The European Commission’s accès au financement. Eu- 4. The growth in alternative kinds rope 2020 strategy defines the type of of investment, leading to segmenta- growth that it seeks for Europe over tion of the market the coming decade, in order to achie- 5. The failure of traditional banks ve a smarter, more sustainable and to respond to all this, at a time when more integrating economy. A num- their public image is declining. ber of key areas have been identified: The IFP would enable traditional employment; research, development banks, whose clients are not so fa- and innovation; climate and energy; miliar with ethical banking, to offer education; and poverty and social clear and simple investment options inclusion. The social innovation and based on ESG (Environmental, Social shared value strategies have a great and Governance) criteria and access deal to do with these five priority to projects listed as social and impact areas. investment projects which, by their In developing countries our refe- very nature, have little access to fun- rence is the Inter-American Develo- ding. This would allow people to in- pment Bank, whose Opportunities

ONLINE INTERBANK FUNDING PLATFORM FOR SOCIAL-IMPACT PROJECTS 394 for the majority6 programme has economic impact. identified five sectors for intervention • Those that have a high social im- to achieve growth. The focus is on pact and generate economic savings. inclusive businesses and latent deve- These can only yield economic benefits Les évaluations de lopment opportunities at the ‘base of if one of the parties agrees to pay the in- l’impact social per- the pyramid’. The five sectors are fi- terest on the profits generated by the sa- mettent d’identifier et nance, housing, education, nutrition vings. Examples include social impact de rendre viables des and health. bonds and the Peterborough prison projets sociaux dont project in the United Kingdom.8 le retour économique The point here is that the propo- est plus difficile à sed platform has a broad spectrum of • Welfare projects whose viability is monétiser puisque la fundable projects, in both developing more questionable in both the long and valeur sociale génère and developed countries, but that the the short term, but that are necessary to des économies sur le social-impact projects should have a ensure social stability. long terme. clear purpose. The actors involved in the IFP are summed up in the table 3. Types of projects By the very nature of social pro- How the IFP works jects, some will be easier to monetize The idea is to set up an online plat- than others, and this will affect their form for identified actors to join. This De par le grand viability. The platform should there- will create a multidirectional link in nombre de clients dont fore offer both economically viable support of projects that generate a so- les banques tradition- projects and ones that have a major cial impact. nelles disposent, elles social impact, but whose economic In accordance with the table, the joueraient un rôle return is uncertain in the absence of projects to be funded can come through fondamental dans la in-depth analysis. Social impact as- two channels: plate-forme de financement de projets à sessments should therefore be exten- • projects selected by banking ins- impact social. ded and the savings that will be ge- titutions; nerated by long-term projects made • projects selected by collaborating visible. Social impact bonds and so- bodies. cial impact measurement techniques are in line with this.7 The value of the IFP lies in its potential to give traditional banking ins- There are thus three kinds of pro- titutions a leading role, since they have jects: clients who may be interested in fun- • Those that have a social and an ding such projects. The platform can help people become aware of the pro- 6 www.iadb.org/en/topics/opportunities-for- the-majority jects and hence the possibility of inves- 7 ROI (Social Return on Investment) is beco- ting in them without having to spend ming one of the main techniques for measu- too much time gathering information. ring the social impact of projects, monetizing the social impact generated for each euro 8 www.socialfinance.org.uk/sites/default/files/ invested. SF_Peterborough_SIB.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 395 The facilities that banking insti- 2. Bank deposits that are invested tutions can provide thus include in- in such projects, with interest rates forming clients on the various ways lower than market rates. of investing in or donating to social- La PFI contribuerait 3. Helping clients invest a certain à faire connaître les impact projects, letting them know proportion of their money in projects projets d’impact social, the opportunities they have to parti- that are more difficult to fund: cipate directly in the projects that can et de par là même elle • by donating or investing some of promouvrait l’inves- be funded through the platform, and the interest provided by the banking tissement tout en filtering the projects according to the générant un gain de types that are likely to be of interest to institution; temps en recherche their clients, e.g. the type of sector or • by investing a small percentage d’information relative- the type of compensation they wish to of their earnings in such initiatives; ment important. receive. • by pursuing a bank policy of in- The IFP is the nucleus, but inves- vesting in such initiatives, for exam- tors and bank clients do not have to be ple by investing additionally in inves- Les fonds éthiques in direct contact with it, thus simpli- tments made by their clients.9 d’investissement, les fying their investment decisions if the dépôts bancaires, 4. True IFP: offering people al- banks make a selection in accordance le client direct, les ternative forms of investment or do- PFI, les institutions with their clients’ interests. nation and facilitating investment associées et l’État Once the projects are selected, the through banking institutions that are constituent la palette selected amount of money is chan- part of the platform. de possibles acteurs nelled to the various projects. These 5. Collaborating bodies: gathering pour la levée de fonds can get started as soon as the required de projets sociaux. funds through their networks and amount is collected, as in crowdfun- making people more aware of pro- ding. jects in other networks. In addition, the funded projects 6. Government: supporting such must show investors the social impact initiatives by: that is being generated with the inves- • paying interest on the savings ted resources through periodic updates and measurement of the results generated for the government; achieved. • granting tax breaks; • spreading the risk by participa- How investment ting with a percentage of public funds. funds are gathered • providing public guarantees for There are various ways of gathe- such projects. ring funds: 1. Ethical investment funds. This does not mean investment funds that 9 Examples include businesses that double use filters to manage an investment the value of their employees’ investments in projects, or the more recent instance from the portfolio, but ones that invest in so- Goteo crowdfunding platform, Capital Riesgo: cial-impact projects. goteo.org/service/resources

ONLINE INTERBANK FUNDING PLATFORM FOR SOCIAL-IMPACT PROJECTS 396 Conclusions ve information and reduce the time people need in order to make choices As argued above, the idea of the (which is considered the main barrier La PFI permettrait platform is to centralize efforts in in reaching clients). non seulement de support of projects that generate a Ultimately, the proposed platform partager le risque entre greater social impact. Many such pro- un grand nombre d’ac- is an innovative tool designed to in- teurs, mais également jects have a questionable economic volve the main actors and encourage de regrouper l’infor- return, and innovations are needed change in traditional banking insti- mation concernant les in funding so that they can get off the tutions, so that they will finance this projets sociaux. Ceci ground. type of project and at the same time permettrait d’améliorer The platform’s greatest potential make the general public aware of op- la qualité de l’informa- lies in spreading risk over a wide portunities for such investment and tion tout en réduisant range of actors and concentrating le facteur temps (pour how it can benefit economic develop- le choix), considéré information about such projects ment and society in general. • comme le principal in a global platform that can impro- obstacle lorsqu’il s’agit de capter des clients. References CEPES (2012). La economía social Narrillos, H. (2012). Economía en España. Retrieved from www.ce- Social. Madrid: Ecobook pes.es/publicacion_cepes=93 Random (2012). Credibilidad de European Commission (2010). Eu- la banca española. Random rope 2020. Retrieved from ec.europa.eu/ commission_2010-2014/president/news/ Ruíz de Munain, J. L. & Martín, J. documents/pdf/20100303_1_es.pdf (2012). Mapa de inversiones de im- pacto. Madrid: Fundación compromi- European Commission (2013). so y transparencia Guide to social innovation. Retrieved from ec.europa.eu/regional_policy/ Schwartz, B. (2004). The paradox sources/docgener/presenta/social_in- of choice, why more is less. New York: novation/social_innovation_2013.pdf HarperCollins Spainsif (2012). La Inversión So- Eurosif (2012). European SRI Stu- cialmente Responsable en España. dy. Retrieved from www.eurosif.org/re- Retrieved from www.spainsif.es/sites/ search/eurosif-sri-study/sri-study-2012 default/files/upload/publicaciones/spa- insif_informe_2012_web.pdf Hehenberger, L. & Harling, A. (2013). European venture phi- Vigeo (2012). Green, Social and lanthropy and social investment Ethical Funds in Europe. Retrieved 2011/2012. European Venture Phi- from www.vigeo.com/csr-rating-agen- lanthropy Association cy/en/green-funds-2012

JP Morgan (2011). Insight into X.net (2012). Experiencias de Impact Investment Market. Global Crowdfunding en el Estado español Impact Investing Network y Cataluña. Retrieved from whois--x. net/img/crowdfunding_cast.pdf

CHANGING FRONTIERS OF ETHICS IN FINANCE 397 Table 3. Actors involved in the IFP

Actor ACTIVITY VALUE TO THE IFP Independent • Managing the platform • Centralizing social investment options to increase body • Centralizing and drawing attention to the various the impact projects to be funded, with support from banks and • Channelling money more directly towards the collaborating bodies projects • Pooling the interests of banks, investors and pro- • Spreading awareness of SRI moters • Sharing risks between citizens, banks and the go- • Providing information on the need to fund each vernment project • Certifying the value of the projects • Providing information on the state of the various projects being funded Banking • Offering clients investment and/or donation al- • Reducing the risks of projects by sharing them institutions ternatives for the projects in the platform among various bodies and investors • Making its clients aware of SRI and promoting it • Renewing perceived commitment to society at a among them time of tension • Including new projects in the platform • Banking innovation: new products and services in response to social change

Project • Demonstrating the social value that their projects crea- • Opportunities to generate positive social change promoters te (as a condition for taking part in the platform) • New opportunities to generate employment and • Providing information on how their projects continue work in sectors that would not normally be conside- to develop when funding comes to an end red profitable Govern- • Using public funds to reduce the risk involved in • Saving costs on programmes through early inter- ment certain projects, in an innovative form of public- vention to avoid social problems that may arise private partnership • Increasing tax revenues through increased emplo- • Guaranteeing the viability of projects through yment and reduction in social welfare benefits measures to encourage enterprise • Facilitating compliance with the goals of the Eu- rope 2020 strategy for the EU and its member states Collabora- • Bodies that spot projects to invest in. The range is • Promotion: making their own network/organiza- ting bodies very wide – for example, they may be established tion more visible crowdfunding networks or non-profit bodies that • Possibility of obtaining more funds for projects that carry out projects or work with microentrepreneurs wish to develop • Networking by offering the platform additional services Investors/ • Investing in projects offered by the platform • Clients commit themselves to the development of donors •Types of investment: initiatives that enhance social cohesion, improve opportunities and reduce inequality -Direct investment, with greater focus on more committed investors, who themselves select the pro- • They receive an economic as well as a social return, jects of most interest to them or other kinds of material reward or gratitude -Indirect investment: using preselected parame- • Greater individual and social happiness through ters, the bank will allocate the money to similar pro- the act of giving jects and ones that it considers of value to the client or of greater social value

ONLINE INTERBANK FUNDING PLATFORM FOR SOCIAL-IMPACT PROJECTS 398 399

our un marché du crédit aux PPparticuliers plus éthique : l’introduction d’une composante conjoncturelle anticyclique dans le coût du crédit

Ethique en Finance, Prix Robin Cosgrove Édition Globale 2012-2013

Finaliste

1 Fabien Hassan Économie et cycles les tendances à l’œuvre ». Ces fluc- France tuations de l’économie peuvent être Élève à l’Ecole La science économique n’atteint comprises comme des risques. Or le Normale Supérieure que rarement le stade de la certitude. rôle de la finance est justement de de la rue d’Ulm*, Mais s’il est une chose certaine, c’est gérer et de distribuer le risque. Le Paris. que l’économie connait des cycles. point de départ est donc le suivant : la distribution du risque représenté En 1926, dans Les vagues longues de par les fluctuations de l’économie la conjoncture, Nikolaï Kondratiev est-elle équitable ? proposait l’une des premières ana- Dans le fonctionnement actuel lyses des cycles de long terme. Mais du système financier, ce sont les per- en plus de ces tendances de long sonnes les plus vulnérables qui su- terme, l’économie est sans cesse tra- bissent le plus violemment les cycles, versée par des perturbations. Selon parce qu’elles n’ont pas le capital né- un autre grand économiste des an- cessaire pour se protéger en période nées 1920, Irving Fisher, « Il y a tou- de récession. Cet article propose une * Les opinions exprimées solution simple à ce problème : faire dans cet article sont celles jours d’innombrables cycles, longs peser sur le prêteur une plus grande de l’auteur et ne reflètent et courts, grands et petits, conçus pas nécessairement celles partie des risques associés aux cycles de son institution. comme des tendances (de même économiques. En apparence, c’est que de nombreuses tendances non 1 Fisher, I. (1933). La théorie des grandes dé- cycliques), chaque événement his- pressions par la dette et la déflation. In: Revue torique étant la résultante de toutes française d’économie, Volume 3 N°3, 1988.

POUR UN MARCHÉ DU CRÉDIT AUX PARTICULIERS PLUS ÉTHIQUE 400 Economics is always un renversement total, qu’aucune crédit immobilier, de façon rentable about cyclical move- banque ne serait prête à accepter. En pour les banques. Il est ensuite pos- ments. Periods of weak réalité, grâce à l’ingénierie financière, sible d’imaginer comment adapter ce growth and recession il est tout à fait possible d’envisager type d’outils dans différentes situa- are therefore to be expected. un tel fonctionnement du marché du tions de crédit. crédit, sans mettre en péril ni la ren- Les limites éthiques tabilité des prêteurs, ni la stabilité du du fonctionnement système financier. actuel du marché du L’objet de cet article est donc crédit aux particuliers de militer pour l’introduction d’une composante conjoncturelle anticy- Si vous devez 100 livres sterling clique dans le coût du crédit. Autre- à une banque, vous avez un pro- ment dit, il s’agit de faire varier la blème ; mais si vous lui devez un somme payée mensuellement par million de livres, c’est la banque l’emprunteur en fonction de l’état qui a un problème (John Maynard de l’économie. Quand survient une Keynes)2 récession, les emprunteurs, en parti- Le crédit aux particuliers a fait culier les plus vulnérables, disposent l’objet d’une attention croissante ainsi d’un temps supplémentaire au cours des dernières années. Les pour reconstituer leur solvabilité, prêts immobiliers ont joué un rôle par exemple en retrouvant un em- fondamental dans la constitution ploi. En résumé, cet article a pour de la bulle dont l’éclatement a pro- but : voqué la crise financière de 2008 ; • d’alerter sur le caractère inéqui- et les prêts à la consommation sont table du crédit lorsqu’il fait porter à accusés de contribuer au dévelop- l’emprunteur le risque économique pement du surendettement chez • de proposer un mécanisme qui les particuliers. Ce phénomène de rendrait le crédit plus juste en dépla- surendettement prend une telle am- çant le risque sur la banque prêteuse pleur qu’il existe à l’Assemblée Na- • de démontrer la faisabilité de ce tionale française un groupe d’études mécanisme en expliquant comment parlementaire dédié uniquement une banque peut augmenter sa ren- à ce sujet. Ainsi, l’encadrement du tabilité tout en supportant un risque credit-revolving en France vise à en apparence plus élevé. protéger les personnes considérées Le fonctionnement actuel du cré- comme incapables de gérer ce type dit aux particuliers est éthiquement de mécanisme financier. Cette régu- critiquable, comme le prouve l’étude lation par la prévention est utile, des conséquences du retournement mais nous nous concentrerons ici du marché immobilier aux Etats- sur les prêts effectivement accordés. Unis depuis 2006. La solution pro- 2 Il s’agit en réalité d’un vieux proverbe que posée est l’introduction d’une com- Keynes a cité à plusieurs reprises, et qui lui a posante anticyclique dans le coût du été attribué par la suite.

CHANGING FRONTIERS OF ETHICS IN FINANCE 401 The role of finance is Dans un prêt, il y a deux risques : le LIBOR fait porter la totalité du to manage and share • Le risque interne ou risque de risque économique à l’emprunteur. risk, so recession tends contrepartie, lié à l’emprunteur lui- D’autant que si le LIBOR n’avait pas to hit the poor hardest. été manipulé à la baisse en 2008, In view of this inequa- même : est-il solvable, est-il hon- il aurait probablement augmenté, lity, we propose an an- nête… entrainant une hausse du coût des ti-cyclical component • Le risque externe ou risque prêts de millions de foyer dans le in credit instruments économique : en cas de retourne- - short term loans to monde, au beau milieu d’une réces- ment de la conjoncture, un emprun- individuals could be sion économique. Certes, les taux repaid over a longer teur a priori solvable peut devenir d’intérêt sont en principe liés à la period. This would insolvable. Pour la banque, ce risque situation macroéconomique, mais : enable lenders to main- se traduit à l’actif par une déprécia- • la variation des taux d’inté- tain profitability whilst tion des prêts. Au passif, le risque rêt comme le LIBOR obéit aussi à pursuing more ethical externe peut provoquer une hausse d’autres facteurs, et l’ampleur des va- actions, assuming a de son coût de financement. commitment to equity riations ne correspond pas toujours and strong risk mana- Actuellement, comment fonc- à celle qui serait nécessaire pour gement. tionnent les prêts immobiliers ? exercer une influence significative Certains pays européens pratiquent sur les coûts d’emprunt ; essentiellement les prêts à taux fixe. • surtout, le taux LIBOR, qui Dans d’autres pays, les taux sont le bénéficie de la plus grande liquidité, plus souvent variables. Dans ce cas, a été utilisé pour indexer des prêts ils sont le plus souvent indexés sur dans différentes régions du monde. des indices qui ne font aucun sens Dans le choix d’un taux variable, la pour les emprunteurs. Pour ne don- banque accorde plus de poids aux ner qu’un exemple, les taux de nom- contraintes des marchés financiers breux prêts immobiliers sont calculés qu’au sens économique du taux re- à partir du LIBOR (voir par exemple tenu. sur ce lien3 une offre de crédit sur le site de FreddieMac, un organisme Le rapport inégal entre public de crédit immobilier améri- prêteur et emprunteur cain, qui a connu une quasi-faillite en Avec ce type de prêt, la banque, 2008). Faisons abstraction des révé- qui est l’acteur le plus puissant, ne lations récentes sur la manipulation porte que le risque interne. La tota- de ce taux. L’élément important est lité du risque externe est transmise que le LIBOR est un taux interban- au client, alors même que l’absorp- caire : il exprime le coût de l’argent tion et la dispersion du risque consti- pour la banque qui, avec de tels prêts tuent le cœur du métier du banquier. est ainsi assurée contre l’évolution Cette inégalité est permise unique- du prix de sa «matière première». ment par la puissance de négociation Cela implique qu’un prêt indexé sur de la banque face aux particuliers. Il 3 Consultable sur : www.freddiemac.com/sell/ est vrai que lorsqu’une entreprise fait factsheets/liborarms.htm face à des difficultés économiques,

POUR UN MARCHÉ DU CRÉDIT AUX PARTICULIERS PLUS ÉTHIQUE 402 Lenders have great les créanciers bénéficient en général et elle n’aura peut-être jamais accès power over individual de «covenants», des clauses parti- à la propriété immobilière. Macro- borrowers. Financial culières dans les contrats, qui leur économiquement, il est inefficace innovation has greatly permettent de déclarer la déchéance d’exclure ce type de personnes du cré- improved risk management for market du prêt pour tenter de récupérer une dit, car cela réduit la consommation, finance, but small partie ou la totalité de leur argent. alors même qu’il peut s’agir de «bons borrowers hardly Mais en pratique, le plus souvent, payeurs» qui auraient remboursé. benefit from that inno- les banques négocient avec les entre- Une étude de 20105 montre qu’entre vation. prises des délais, des remises, qui 1997 et 2006, la titrisation des prêts permettent de ne pas accroître leurs immobiliers a renforcé le rôle joué par difficultés et réduire leurs capacités le score FICO dans la décision d’ocde remboursement. Les clauses dites troyer un prêt.6 Au lieu de prendre de «retour à meilleure fortune» visent en compte la situation individuelle ainsi à suspendre le remboursement des emprunteurs, les banques se sont d’un prêt jusqu’à l’amélioration de la de plus en plus contentées de calcu- situation d’une entreprise. Les parti- ler mécaniquement des scores FICO. culiers ne bénéficient pas de cette clé- C’est le paradoxe de l’innovation fi- mence, parce que, comme Keynes l’a nancière actuelle : elle se concentre en parfaitement exprimé, les gros clients aval, rendant le fonctionnement des bénéficient structurellement d’un trai- marchés de plus en plus complexe, tement préférentiel. mais elle aboutit en amont, au stade Une autre composante du mar- de la relation client, à des décisions de ché du crédit aux particuliers peut plus en plus élémentaires. s’avérer inéquitable. Il s’agit du calcul La crise du marché immobilier de scores, comme le FICO, le plus américain depuis 2006 fournit une répandu aux Etats-Unis. Pour déci- excellente illustration du caractère der si vous pouvez bénéficier d’un potentiellement inéquitable du mar- crédit, la banque vous demande votre ché du crédit. situation et, à partir des informations 5 recueillies, calcule ce score de crédit. Rajan, U., Serut, A. & Vig, V. (2010). The Failure of Models that Predict Failure: Distance, Pour le FICO, 50% du résultat dépend Incentives and Defaults. Consultable sur : ssrn. de votre historique de paiement.4 En com/abstract=1296982 théorie, c’est parfaitement normal, 6 La titrisation des prêts est une technique il faut bien que la banque détecte les qui consiste à regrouper différents prêts dans un package unique, et à revendre ce produit mauvais payeurs, pour réduire l’aléa sous la forme de titres qui en représentent une moral. Mais si une fois dans sa vie, une certaine quotité. La principale conséquence personne fait défaut car elle a souffert est que l’organisme prêteur ne conserve pas les prêts accordés. Selon Rajan et al. (2010), de la conjoncture économique, cette cela incite les prêteurs à octroyer les prêts personne mettra des années avant de uniquement en fonction de critères standar- pouvoir obtenir un nouveau crédit, disés, comme le score FICO, pour faciliter la revente, au lieu de prendre en compte l’inté- 4 www.myfico.com/crediteducation/whatsi- gralité de l’information disponible sur l’em- nyourscore.aspx prunteur.

CHANGING FRONTIERS OF ETHICS IN FINANCE 403 The property finance Conséquences du L’ampleur des saisies immobi- crisis in the USA in lières implique, comme le montre recent years placed retournement du marché 8 immobilier américain: une étude de Mian, Rao et Sufi millions of individual (2013), que notre système finan- borrowers in extreme La finance, c’est la dette : sa cier fait porter les risques sur les difficulty. It was inequitable that the création, sa gestion, sa circulation. plus vulnérables. Au lieu de parti- impact of the risk fell Or si la finance prétend atteindre ciper à une distribution plus effi- mainly on the most l’éthique, elle ne doit pas oublier cace du risque, la finance le déplace vulnerable section of que la dette est un mécanisme ex- des personnes les plus riches vers the population. trêmement violent. Pour illustrer les personnes les plus pauvres. En cette violence de la dette, prenons effet, à l’échelle de la société, ce l’exemple d’une personne ayant sont les plus riches qui épargnent, acheté une maison en 2006, pour et les plus pauvres qui empruntent. 100 000 euros, dont 70 000 euros Si l’on fait abstraction de la banque, Two solutions are de dette. Cette personne détient au qui n’est qu’un intermédiaire finan- given to reduce the départ 30 000 euros dans la valeur cier, ce sont donc les personnes les risk to the poor: first, de sa maison. Supposons, comme plus riches qui saisissent les biens to impose limits to cela a été le cas aux Etats-Unis pen- immobiliers afin de préserver la over-indebtedness, but dant la crise, que les prix chutent valeur de leurs actifs. Par ailleurs, that tends to reduce de 30%. Cette personne perd toute Mian et al. (2013) démontrent que further the access of sa richesse. Et sa situation est pire les victimes de la crise immobi- the poor to finance; lière sont aussi ceux qui consom- the second traditional encore si son apport initial est ment le plus en proportion de leur solution consists of a moindre. C’est toute la puissance revenu : c’est cette caractéristique direct intervention for de l’effet de levier qui se retourne qui expliquerait la baisse de la debt relief. But this is contre l’acheteur de la maison. La consommation et l’ampleur de la morally ambivalent banque qui a octroyé le prêt pos- as all debt should, in crise économique à laquelle nous sède toute la richesse restante et les principle, be regarded sommes confrontés depuis 2008. pertes sont portées par l’emprun- as repayable. Mais même en faisant abstra- teur. Si cette personne ne paye pas tion de cet argument macroécon- son crédit, la banque peut saisir la mique, il faut insister sur l’injustice maison. que représente la saisie d’une mai- Entre 2007 et fin 2011, la crise a son, la fragilisation d’une famille, provoqué la saisie d’environ quatre en raison d’une baisse temporaire millions de logements aux Etats- des prix de l’immobilier. En par- 7 Unis. Pour les personnes expul- tant de ce constat, il faut s’inter- sées, les difficultés s’enchaînent roger sur les moyens de rendre alors : il faut retrouver un logement, plus éthique l’octroi de crédit aux la stabilité de la famille est mise à personnes les plus vulnérables. l’épreuve, les frais s’additionnent. 8 Mian, A., Rao, K. & Sufi, A. (2013). House- 7 Forbes www.forbes.com/sites/morganbren- hold Balance Sheets, Consumption, and the nan/2012/12/01/the-foreclosure-crisis-isnt- Economic Slump. Disponible sur : papers.ssrn. over-just-yet/ com/sol3/papers.cfm?abstract_id=1961211.

POUR UN MARCHÉ DU CRÉDIT AUX PARTICULIERS PLUS ÉTHIQUE 404 This paper suggests prudence. Ethiquement, cela pose un a different approach Les deux solutions traditionnelles et problème évident. En 1936, alors que where banks modify la France du Front Populaire mettait their lending policies leurs limites en place les premières mesures d’aide to avoid concentrating Avant de présenter une solution, the impact of recession aux débiteurs en difficulté, le très des mécanismes alternatifs doivent on those most vulne- réactionnaire juriste Georges Ripert rable. être présentés. Le premier mécanisme écrivait une chronique célèbre inti- est la prévention du surendettement, tulée ironiquement « Du droit de ne par exemple en mettant en place des pas payer ses dettes ». L’objection mesures interdisant aux banques de morale à l’aide aux personnes suren- prêter à des ménages déjà fortement dettées ne date pas d’hier… Elle re- endettés, ou d’utiliser des taux va- pose toujours sur le même argument riables ou évolutifs qui masquent le : une personne s’engage lorsqu’elle coût réel du prêt vis-à-vis de particu- signe un contrat, il lui appartient liers qui ne maîtrisent pas le langage d’en comprendre l’intégralité, et de financier. Sans remettre en question faire face à ses responsabilités. Que ces mesures, il faut insister sur un l’on soit convaincu ou non par cet ar- défaut majeur : elles reviennent à gument, il faut admettre qu’il consti- interdire ou à limiter l’accès au cré- tue un obstacle politique majeur, et dit pour les plus pauvres. Faire de qu’il est très difficile de former un l’adage « on ne prête qu’aux riches » consensus sur des programmes d’ef- un programme de finance éthique est facement de dettes. Aux Etats-Unis tout de même discutable. Le second mécanisme est l’aide depuis 2008, le parti républicain aux personnes surendettées, par a pu consentir à des réductions de des mécanismes de faillite person- taux d’intérêt, mais il s’est opposé à nelle, ou la renégociation forcée des toute mesure qui aurait pour effet de prêts immobiliers. En 1933, dans le réduire le montant du principal de la cadre du New Deal, l’Amérique de dette des particuliers. Roosevelt avait ainsi mis en place la L’approche suivie dans cet article Home Owners’ Loan Corporation est différente. Imaginons une banque (HOLC), pour refinancer les mé- qui souhaiterait adopter une dé- nages et éviter la saisie de leurs mai- marche éthique et éviter d’entrainer sons. Si la volonté de venir en aide une partie de ses clients dans l’enfer aux personnes en difficulté financière de la dette et des saisies immobilières semble louable, ce type de mesures à chaque fois que l’économie connait soulève un problème d’aléa moral : des difficultés. Comment une telle les ménages sont alors incités à s’en- banque peut-elle modifier son ap- detter déraisonnablement, puisque proche du crédit aux particuliers, l’Etat, et donc le contribuable volera à pour éviter de concentrer les effets leur secours en tout état de cause. Et des récessions sur les personnes les les ménages raisonnables sont donc plus vulnérables, tout en préservant indirectement sanctionnés pour leur sa rentabilité ?

CHANGING FRONTIERS OF ETHICS IN FINANCE 405 Thus the terms of terme. Comme pour les Etats, il faut credit should include La solution proposée: l’introduction distinguer les déficits structurels et clauses that automati- les déficits conjoncturels. cally vary or adjust the d’une composante amount of repayment conjoncturelle dans le La proposition avancée par Mian in a given period in crédit aux particuliers est donc simple : le coût du crédit the light of the current doit varier inversement par rapport à economic situation. Pour aller vers l’avant, et éviter la conjoncture économique. Quand que de profondes récessions éco- l’économie va mal, la charge de la nomiques ne résultent de l’endet- dette des ménages est automatique- tement excessif des ménages, nous ment diminuée, ce qui leur permet In order to be effective devons mettre en place des méca- de faire face aux difficultés. De plus, and have the required nismes qui réduisent automatique- ce mécanisme permet d’éviter une psychological impact, ment la valeur de la dette restant the variable amount chute de la consommation, qui au- à payer, lorsque l’environnement should be at least rait pour effet d’aggraver la situation 10 per cent of the économique global est suffisam- économique. La suite de cet article rate of the loan. The ment négatif. Il reste encore beau- vise à élaborer et à démontrer la fai- remainder of the paper coup de points à éclaircir avant sabilité de cette idée ; tandis que l’en- explains the feasibility de mettre en œuvre une politique cadré 1 (en fin de texte) démontre of implementing this spécifique. Mais en pratique, il est les différents avantages que présente proposal. tout à fait faisable de repenser les cette idée sur le plan éthique, en fai- clauses des contrats de dette en in- sant référence à différentes théories troduisant des paramètres pour les de l’éthique économique. récessions économiques. (Atif Mian, Université de Princeton, devant le Tout d’abord, il ne suffit pas d’une Sénat américain).9 correction marginale de la charge de la dette en phase difficile, il faut que Une banque qui souhaite déve- la réduction soit significative dans lopper une approche éthique du cré- le budget d’un ménage moyen. En dit doit veiller à ne pas faire peser un 2010, selon les chiffres de l’INSEE, poids déraisonnable sur ses clients les ménages français propriétaires lorsque la croissance ralentit. Bien dépensent en moyenne 8100 euros sûr, cela ne suffira pas à «sauver» par an pour leur logement, hors les ménages durablement insol- charges et hors énergie, soit 675 eu- vables. Mais cela permettra d’éviter ros par mois. Considérons, de façon un effet de cliquet qui condamne au un peu arbitraire, que la variation du surendettement ceux qui auraient prix du crédit doit être d’au moins pu redresser leur situation à moyen 10% pour être perçue comme subs- 9 Mian, A. (2011). Testimony On ‘Consumer tantielle. En effet, la composante Protection and Middle Class Wealth Building in psychologique joue aussi, il faut que an Age of Growing Household Debt’, Before The les ménages ressentent l’allégement Financial Institutions and Consumer Protection Subcommittee, United States Senate. Dispo- du poids de leur dette et adaptent nible sur : www.gpo.gov/fdsys/pkg/CHRG- leur comportement. Ce seuil de 10% 112shrg74143/pdf/CHRG-112shrg74143.pdf implique qu’en phase économique

POUR UN MARCHÉ DU CRÉDIT AUX PARTICULIERS PLUS ÉTHIQUE 406 Finance enterprises difficile, un ménage qui payerait 675 du calcul pourraient être aisément have at least two ways euros par mois pour son emprunt ne affinées. to cover external eco- payerait plus que 607 euros, soit un Dans l’exemple présenté dans le nomic risk. The first gain significatif mais raisonnable de tableau ci-contre, les mensualités is to invest in counter-cyclical actions, pouvoir d’achat. d’un emprunt immobilier varient se- such as gold, which lon le taux de croissance de l’écono- tends to augment in Exemple mie (voir encadré, en fin de texte). value in periods of Techniquement, il existe diffé- L’introduction d’une composante economic crisis. The rentes façons de mettre cela en place. anticylique est donc techniquement second consists of La plus simple repose sur le méca- faisable, et éthiquement souhaitable. diversification. Banks Mais pour que cette proposition soit can spread their expo- nisme du crédit à taux variable, dont sure both in time and le taux serait indexé sur la crois- réaliste et acceptable, encore faut-il space and hedge their sance. qu’elle soit financièrement suppor- risks, preserving their table par les banques et organismes Tableau 1 : Exemple pour revenue. These tech- de crédit. niques enable banks to une maison à 100 000 euros maintain their returns Un modèle économique on investments even in Croissance Coût total Mensualité rentable poor economic times. du crédit Contrairement à un particulier -2% 21 494 € 1 012 € ou à une petite entreprise, une institution financière dispose de moyens +3% 52 011 € 1 267 € pour se couvrir contre le risque When a finance enter- économique, ou risque externe. Là prise re-possesses pro- encore, la présentation est simplifiée perty, this has an extre- car le but n’est pas d’entrer dans les mely negative effect Exemple pour une maison à 100 détails techniques. not only on individuals 000 euros, payée sur 10 ans, avec un concerned but also on Quand une banque vend un pro- taux i = g + 6%, où g représente la the external economy duit financier A sur les marchés, elle and on property prices croissance, supposée constante sur prend un risque. Pour se couvrir in the region. Introdu- toute la période. contre ce risque et conserver une cer- cing a counter-cyclical L’exemple ci-dessus est som- taine neutralité, elle achète en prin- component would have maire, mais il est possible d’affi- cipe un produit B dont la valeur varie the effect of contri- ner considérablement. Le capital exactement comme celle du produit buting to the preven- vendu. On dit que le produit B acheté tion of such negative remboursable, la maturité du cré- consequences and dit, le taux d’intérêt sont autant de réplique le produit A vendu. C’est ce ameliorating the gene- variables sur lesquelles jouer. Il est que désigne le mot anglais de «hed- ral economic situation aussi envisageable de faire varier ces ging». L’idée est simplement d’appli- in a period of crisis. paramètres à l’intérieur d’une four- quer ce mécanisme au crédit au par- chette, par exemple en posant que le ticulier. taux d’intérêt ne peut pas descendre Dans leur portefeuille, les banques en-dessous d’un seuil donné. Une détiennent toute une gamme d’actifs fois acquis ce principe, les modalités contra-cycliques, comme l’or. En ef-

CHANGING FRONTIERS OF ETHICS IN FINANCE 407 It is not possible in fet, la valeur de l’or augmente quand son bien et sous-investit, et parce que such a short paper to le cours des actions baisse, donc la vente se fait dans des conditions go into all the details of quand l’économie va mal. Il existe spécifiques, la banque devant payer such a counter-cyclical donc différents moyens de gagner de des frais de garde et d’assurance… mechanism. Each party 10 is free to determine the l’argent en phase difficile, ce qui per- De plus, toutes les études montrent degree of risk against met d’ailleurs aux spéculateurs dits que les saisies ont tendance à ampli- which it may seek to bear de parier sur les récessions et fier les chocs immobiliers en faisant protect itself, so flexi- autres mauvaises nouvelles écono- baisser le prix des maisons proches bility is important. miques. des maisons saisies. Finalement, les En plus de ces techniques de phénomènes de crise immobilière marché, l’autre moyen de couvrir le sont amplifiés par les comportements For example, in the property market, it risque contracyclique est la diversifi- des prêteurs. Chacun essaye de récu- is possible to index cation interne à la banque. Il est pos- pérer son argent en saisissant les mai- the costs of credit to sible d’ajuster symétriquement le coût sons, ce qui provoque une nouvelle the prevailing produ crédit à la hausse en période de chute des prix et de la solvabilité des perty prices. Another croissance, comme dans l’exemple du ménages, et entraîne de nouvelles example in more tableau 1. Ce «surplus» peut ensuite saisies… Ce sont les externalités né- rural areas would be to aider à passer les périodes difficiles. gatives associées aux faillites et aux compose a more local saisies. model to counteract A cette diversification temporelle the more immediate peut s’ajouter une protection géo- Introduire une composante anti- shocks such as the graphique : si la banque prête à des cyclique limiterait les effets de ces closure of a factory and emprunteurs situés dans différents cercles vicieux auto-entretenus, et resultant unemploy- pays dont les situations économiques améliorerait donc globalement la si- ment hike. ne sont pas corrélées, elle réduit son tuation économique. risque. Généralisation à Un effet positif sur d’autres types de crédits An almost indefinite l’économie dans Tout au long de cet article, la variety of schemes are son ensemble imaginable, assuming composante anticyclique n’a pas été that these would not Jusque-là, il s’agit essentiellement précisément définie. Cette omission permit borrowers d’un jeu à somme nulle. En période est volontaire : libre à chacun de themselves deliberately de récession, les emprunteurs payent déterminer le risque contre lequel to provoke conditions moins, mais la banque se couvre sur il souhaite se protéger ou offrir une in which their bor- les marchés, et grâce à sa stratégie de protection. Voici toutefois quelques rowing costs would be reduced. gestion des risques. En réalité, l’effet propositions. économique global est positif si l’on Sur le marché de l’immobilier déjà prend en compte les externalités as- évoqué, une possibilité consiste à in- sociées au défaut d’un emprunteur. dexer le coût du crédit sur les indices Quand une banque saisit un bien de prix tels que les Dow Jones Real immobilier, elle ne récupère en géné- Anti-cyclical credit 10 Par ex. : Campbell, J., Giglio, S. & Pathak, P. ral que 50% de la valeur de ce bien, instruments constitute (2011). Forced sales and house prices. Ameri- car le futur expulsé n’entretient plus can Economic Review 101(5): 2108–2131

POUR UN MARCHÉ DU CRÉDIT AUX PARTICULIERS PLUS ÉTHIQUE 408 a limited innovation, Estate Indices. Quand le prix des risque est trop fort de créer des inci- which couple an assu- maisons diminue, les emprunteurs tations à quitter son emploi et à rester rance mechanism with au chômage. a loan or credit. ne perdraient plus leur richesse aussi violemment, malgré l’effet de levier Conclusion They would permit qui fait porter toute la réduction de la a more fair economy valeur de leur bien sur leur capacité à La philosophie antique, Aristote which would lessen the récupérer les sommes qu’ils ont appor- en particulier, définissait une société impact of risks from tées ou déjà remboursées. Mian lui- juste comme une société dans la- economic recessions même propose d’utiliser des indices quelle chacun remplit sa fonction. La on those with the least de prix locaux, par exemple à l’échelle fonction de la finance n’est-elle pas de negotiating power. répartir le risque de façon optimale ? In order for finance du county pour les Etats-Unis. En un sens, le crédit anticy- to fulfil its social En zone rurale, l’économie d’un function and share risk village et de ses alentours dépend clique est une innovation limitée, qui equitably, financial bien souvent d’un gros employeur, consiste uniquement à coupler un engineering should be l’usine locale. Il est alors possible de produit assurantiel à un crédit. Mais placed at the disposal prendre en compte une composante ce couplage devrait être offert systé- of those most vulne- « économie locale ». Par exemple, matiquement, car l’immense majorité rable. si une usine ferme dans un rayon de des particuliers ne dispose ni du capital, ni de la compétence financière The main point is that 30km, le coût de mon emprunt dimi- the length of loans nue pendant 3 ans, durée qui permet nécessaire, pour mettre en place ce should be variable in la reconversion de l’usine et la reprise montage soi-même. times of recession. This de l’économie locale. Cela permet- L’économie serait alors plus so- permits a more ethical trait d’éviter le schéma bien connu lide, et surtout plus juste, car elle fe- approach than is offe- du déclin local et de la désertification rait peser le risque sur ceux qui l’ont red by simple egalita- en zone rurale : une usine ferme, le volontairement souscrit, au lieu de le rianism, the liberta- déplacer vers les personnes les plus rianism of Nozick, the repreneur met du temps à créer de liberal egalitarianism nouveaux emplois ; entre temps la vulnérables. of Rawls, or the welfare meilleure partie de la main d’œuvre Le système financier doit cesser model of Sen. retrouve un emploi et déménage, de concentrer les risques liés aux les services publics se dégradent, et cycles économiques, que personne There are many diverse finalement le site industriel n’est plus ne semble pouvoir parfaitement pré- ideas about economic viable. dire, et encore moins prévenir, sur ethics. This paper is Il existe tout de même une li- ceux dont le pouvoir de négociation based on the idea that the inclusion of an mite majeure à l’inventivité que l’on est le plus faible. Il est temps d’uti- anti-cyclical compo- pourrait déployer pour créer ce type liser le degré de sophistication qu’a nent in credit agree- de crédit : pour lutter contre l’aléa atteint la finance grâce aux mathéma- ments would constitute moral, il faut éviter que les emprun- tiques, et de mettre ces innovations a contribution to ethics teurs aient un moyen de provoquer aux services des populations les plus in finance. eux-mêmes la baisse du coût de l’em- vulnérables. Un mot d’ordre s’impose prunt. Ainsi, une mise au chômage ne : inventons le hedging du pauvre ! • doit pas déclencher cette baisse, car le

CHANGING FRONTIERS OF ETHICS IN FINANCE 409

Encadré : En quoi l’introduction d’une composante conjoncturelle dans le crédit au particulier est-elle plus éthique ? La réponse selon quatre théories11 de l’éthique économique L’égalitarisme absolu Dans cette vision, parfois inspirée d’un marxisme simplifié, est juste tout ce qui tend à ré- duire les inégalités. Le crédit anticyclique est alors éthique car il permet d’améliorer la situation financière de ceux qui sont appauvris par un choc économique.

Le libertarisme de Robert Nozick Pour Nozick (1974)12, l’intervention étatique est injuste, car elle tend à réduire la li- berté individuelle. Si le crédit anticyclique est éthique, c’est parce qu’il permet au marché d’ajuster au mieux les chocs économiques, ce qui rend superflue l’intervention de l’Etat sur le marché du crédit, par exemple pour forcer les prêteurs à renégocier les crédits immobiliers. De surcroit, les particuliers restent libres de choisir d’autres modèles de crédit.

L’égalitarisme libéral de John Rawls J. Rawls (1971) pose deux principes éthiques13. Premièrement, le principe de liberté impose le respect des droits fondamentaux. Là encore, le crédit anticyclique ne porte pas atteinte aux libertés. Deuxièmement, selon le principe de différence, les inégalités ne se justifient que si elles permettent d’augmenter le bien-être des plus défavorisés. Le crédit anticyclique met l’innovation financière au service de la réduction de la pauvreté. Rawls insiste aussi sur la nécessité que chacun bénéficie de chances égales. En évitant que la pré- vention du surendettement ne passe par le refus de l’accès au crédit, le crédit anticyclique favorise l’égalité des chances.

L’économie du bien-être d’Amartya Sen Pour Amartya Sen14, l’économie ne doit pas seulement se focaliser sur une utilité abs- traitement définie, mais sur le bien-être et les conditions d’existence des individus. C’est exactement le but du crédit anticyclique : fournir une assurance qui évite l’effondrement du niveau de vie en phase difficile, par exemple en permettant à certains ménages de conserver leur logement, ou de maintenir leur consommation.

11 Ces catégories sont inspirées de : Arnsperger, C. & Van Parijs, P. (2003). Éthique économique et sociale, Paris : Collection Repères (La Découverte) 12 Nozick, R. (1974). Anarchy, State, and Utopia. Basic Books. 13 Rawls, J. (1971). A Theory of Justice. Harvard : HUP. 14 Sen A. (1987). On ethics and economics. Blackwell Publishers.

POUR UN MARCHÉ DU CRÉDIT AUX PARTICULIERS PLUS ÉTHIQUE 410 411

he need to make ethics part of TTfinance: a new dimension in corporate governance in Latin America

Ethics in Finance, Robin Cosgrove Prize Iberoamerican edition 2012-2013

Finalist

Guadalupe Today’s world is governed by financial markets’ closest ally, for it del Carmen modern capitalism, which has led has proved incapable of controlling Briano Turrent us to seek the innovation, ambition such phenomena as tax evasion and Mexico and stimuli that the system has ge- economic crises. An ethical frame of Research professor nerated. Technology and globaliza- reference that will encourage honest at the Autonomous tion have caused profound, dynamic conduct towards society is therefore University of San Luis changes, and the rules of morality urgently needed. Potosí* have been pushed aside. Meeting fi- Although ethical finance has a nancial targets has become the main long history, it is only in the present concern of major businesses and fi- circumstances that its potential as a nancial institutions, at the expense strategy for change and transforma- of social conscience and market in- tion in the business world has started tegrity. The financial scandals and to be appreciated. The declared aim levels of corruption seen in various of ethical finance is to raise aware- parts of the world have revealed a cri- ness not only of economic issues sis of ethics, which in turn has led to but also of social and environmental a loss of trust in capital markets. Ca- ones, and to consider the interests of * The views expressed pitalism has cannibalized countries’ shareholders and the other agents or herein are those of real economies, leading to a concen- interest groups associated with bu- the author and do not tration of wealth among a global eco- sinesses. Hence the proliferation of necessarily reflect those nomic elite and exaggerated growth voluntary codes of conduct and good of the Organization he is affiliated to. in speculation in securities on finan- governance designed to reinforce cial markets. Politics has become the ethical and social principles. At the

A NEW DIMENSION IN CORPORATE GOVERNANCE IN LATIN AMERICA 412 same time, international institutions drawing up regulations and codes of such as the Organization for Econo- corporate governance, so that ethical Atteindre les objectifs mic Cooperation and Development finance will become a topic of debate financiers est devenu la (OECD) and the World Bank, as at regional and local level. principale préoccupa- well as national governments, have tion des entreprises et Ethics in finance and institutions financières. been active in drawing up laws and Les scandales finan- codes of good governance. Yet finan- corporate governance ciers et de corruption cial ethics is still not clearly part of When we hear the word ‘ethics’, corporate governance. ont révélé une crise we think of a set of moral principles de l’éthique, ce qui Despite the progress and growing and values designed to promote jus- a entraîné une perte importance of corporate governance tice and respect among the members de confiance dans les in Latin America, there is an aware- marchés financiers. of society. We can also distinguish ness gap regarding the role and im- Un cadre de référence between acceptable conduct and éthique pour encou- portance of ethical finance as part unacceptable conduct which, in cer- rager un comporte- of good governance in business. In tain situations where ambition is in- ment honnête envers general, the major debates on corpo- volved, can lead us to make wrong la société est donc rate governance by international ins- decisions. Ethics is also centred on urgent. titutions such as the Latin American the old positivist argument about Institute of Corporate Governance ‘being’ versus ‘having to be’. Busi- or the Round Table on Corporate ness ethics has a multidisciplinary L’objectif de la finance Governance have focused on such focus, with roots in philosophy, law, éthique est de susciter matters as the structure of owners- l’intérêt aux questions economics, psychology and political hip, the missions and responsibili- économiques, sociales science. The aim of ethical finance ties of boards of management, and et environnementales. is to curb the unbridled pursuit of market situations. Little attention Malgré l’interven- selfish interests, setting limits to the has been paid to ethical finance. tion d’institutions gains that businesses may seek to internationales comme This paper will discuss the im- l’OCDE et les gouver- achieve or increase (Ghosh, Ghosh portance of making ethics part of and Zaher, 2011). Even though busi- nements, avec l’élabo- finance, as a strategic dimension of ness ethics has been extensively de- ration de lois et codes corporate governance in the emer- de bonne gouvernance, bated over the past 35 years, we are ging countries of Latin America. In l’éthique financière ne now facing a global crisis of ethical this connection it will propose a set fait encore partie de la awareness. Priority must therefo- of good ethical practices in finance gouvernance d’entre- re be given to promoting an ethical that can be applied to every sector prise. economic environment based on Ce constat s’applique of the economy, and will attempt healthy markets, a fair negotiating aussi à l’Amérique to answer the following questions. latine, où l’importance How do we ensure ethical conduct environment and efforts to increase accordée à la finance in finance in the emerging coun- trust and integrity. éthique reste faible. tries of Latin America? And how is Corporate governance has be- compliance with financial ethics to come a competitive tool in present- be measured in the Latin American day organizations. Its purpose is region? The paper is also an appeal to restore trust in markets, which to the institutions responsible for has been undermined by financial

CHANGING FRONTIERS OF ETHICS IN FINANCE 413 agents’ unethical conduct. Money and supervised. Its main goal is the laundering, manipulation of accoun- voluntary adoption of better corpo- ting data, the housing bubble, high rate practices that enhance the effi- Ce texte se concentre salaries for senior executives and ex- ciency of the organizational structu- sur l’importance d’inté- ponential growth in the derivatives grer l’éthique dans la re and improve the decision-making finance, comme dimen- market have been contributing fac- process. It focuses on effective su- sion stratégique de la tors in the recent financial scandals pervision, business efficiency and gouvernance d’entre- that have damaged the reputations the responsibility of management prise dans les pays and integrity of such major banking towards interest groups. The most émergents d’Amérique institutions as HSBC, Barclays, JP- common aspects of corporate gover- latine. C’est aussi un Morgan, Citigroup, Deutsche Bank nance are (1) membership and per- appel aux institutions and Bankia. At the same time, the formance of boards of management, en charge des règle- current financial crisis in Europe has ments et codes pour (2) shareholders’ rights, (3) conflicts que le sujet fasse partie been largely attributed to the misbe- of interest, (4) hostile takeovers and du débat au niveau haviour of the banking sector. That (5) transparency of information. Yet local et régional. is why various international institu- financial ethics is not yet a standard tions have been actively involved in part of codes of corporate gover- drawing up regulations and codes of nance, but has been confined to the good governance, in order to bring occasional, voluntary adoption of a Le terme «éthique» this critical situation, and what has code of ethics or conduct and the implique un ensemble been termed the ‘casino economy’, de principes et valeurs exercise of due diligence and loyal- under control. morales visant à ty by board members. Due diligence promouvoir la justice means acting in good faith and in et le respect entre les The proliferation the best interests of society, while membres de la société. of codes of good loyalty concerns the confidentiality Au niveau des affaires, governance in the world of corporate information. il s’agit d’une approche multidisciplinaire, avec In recent years there has been Corporate governance is essen- des racines dans la a substantial increase in codes of tially based on three disciplines: philosophie, le droit, good governance. By mid-2008, for law, administration and finance l’économie, la psycho- example, 196 codes of better corpo- (Ryan, Buchholtz and Kolb, 2010). logie et les sciences rate practice had been drawn up in The legal aspect concerns the im- politiques. a total of 64 countries, including in plementation of contracts between La gouvernance the Latin American region (Aguilera the shareholders in a business. The d’entreprise vise à res- and Cuervo-Cazurra, 2009). Codes taurer la confiance sur administrative aspect has recently les marchés, affectés of corporate governance are strate- focused on matters relating to direc- par une conduite des gic guides to business management tors’ membership of different boards, financiers contraire à and an effective substitute for weak management of institutional inves- l’éthique. legal regimes, especially where there tors, the consultancy role of CEOs, is inadequate protection for minori- remuneration of executives and its ty shareholders. relationship to the business’s envi- ‘Corporate governance’ refers to ronmental performance. Finally, the the ways in which businesses are run financial aspect has focused on em-

A NEW DIMENSION IN CORPORATE GOVERNANCE IN LATIN AMERICA 414 pirical studies that have attempted advised to manage their own ethics. Les codes de gouver- to link up the dimensions of corpo- Ethics in finance could initially be nance d’entreprise sont rate governance on company results boosted by make it an integral part des guides straté- and topics related to ethics and trust of laws and codes of corporate go- giques de la gestion in markets, conflicts of interest and vernance, and it would be useful if de l’entreprise et un substitut efficace pour independence when making deci- businesses were to issue an annual les régimes juridiques sions. Today’s corporate governance report on their financial ethical per- faibles. needs to include an ethical financial formance towards society. Interna- Les aspects les plus framework that can make businesses lly, businesses could focus on ins- courants de la gouver- more aware of social issues. titutionalizing ethical values among nance d’entreprise sont their staff. This could be reflected in la performance du ma- The ethics of corporate ethical management and program- nagement, les droits des governance mes or strategies to promote ethi- actionnaires, les conflits cal finance. One way to do this is to d’intérêts, les OPA According to Rossouw (2009), hostiles et la transpa- ethics in corporate governance adopt a code of ethical finance. rence de l’information. means the ethical values that shape The current state of L’éthique financière, and guide good governance in both elle, n’est pas encore un ethics in finance and legislation and business – in other élément standard des corporate governance codes de gouvernance words, it reflects the values that di- in Latin America d’entreprise. rect and guide the system of corporate governance. Although most co- Minority shareholders in La- Alors que la gouver- des of good governance emphasize tin America are poorly protected, nance d’entreprise the importance of supervisory me- and squeeze-outs are a major pro- repose essentiellement chanisms (boards of management blem (Chong and López-de-Silanes, sur trois disciplines, le and support committees, accoun- 2007). Legal and good governance droit, l’administration ting practices, risk management and mechanisms are often inefficient or et la finance, elle doit non-existent, and this has led these inclure un cadre finan- corporate transparency), very few cier éthique pouvant include instruments that can mea- countries to strengthen their insti- rendre les entreprises sure and monitor the organizations’ tutions and adopt voluntary codes plus conscientes des ethical performance. Although co- of good governance. Despite the enjeux sociaux. des of corporate governance recom- corporate governance mechanisms Très peu de règles mend that businesses adopt a code adopted in the region, we still find de gouvernance of business ethics, ethical finance is concentration of ownership and par- concernent la perfor- not yet part of corporate governan- tial government ownership of busi- mance éthique des ce, at least in the Latin American organisations en Amé- nesses, powerful elites or influential rique latine. region. families that have significant control Ethics can be manifested at two over businesses’ capital, and scant Pour promouvoir la levels. The first is the basic approach protection for minority sharehol- finance éthique, il fau- to ethics in the various corporate ders. Over the past decade, corpo- drait adopter un code governance regimes. The other is rate governance has become a much qui lui serait intégrale- the governance of corporate ethics, more prominent issue in emerging ment dédié. whereby businesses are required or Latin American countries such as

CHANGING FRONTIERS OF ETHICS IN FINANCE 415 Argentina, Brazil, Chile and Mexico. and declaring an unswerving deter- It was after the OECD published its mination to comply with them in the principles in 1999 that these coun- regular course of business, to train Depuis 10 ans, la gou- tries drew up their own regulations company staff in civic ethics and so- vernance d’entreprise est devenue un enjeu and codes of good governance. The cial responsibility, as part of a ma- très important dans les stated aim of these is to promote jor educational effort at all levels of pays émergents d’Amé- transparency and efficiency in mar- the community, and to set up ethics rique latine. kets, protect and facilitate the exer- committees within the company, in J’ai analysé les codes de cise of shareholders’ rights, guaran- order to identify and settle conflicts bonne gouvernance des tee fair treatment of shareholders, that arise between employees and quatre pays émergents les plus importants acknowledge the rights of stakehol- officials. The document does not d’Amérique latine, pour ders, ensure the dissemination of mention the adoption of a code of d’identifier leurs carac- corporate information and guaran- conduct. téristiques de l’éthique tee businesses’ strategic orientation Brazil’s Code of Best Corpora- des affaires. and effective supervision of manage- te Governance Practices includes ment and shareholders by boards of a corporate governance dimension management. Ethics in finance is not dealing with conduct and conflicts En Argentine, le code included in the principles published of interest. It refers to a series of de bonnes pratiques de by the OECD as an essential part of topics related to ethics, with a re- gouvernance prévoit good governance. I have therefore commendation to adopt a code of notamment de nom- analysed the codes of good gover- conduct applicable to directors and breux points relatifs à nance in Latin America’s four most l’éthique dans le cha- employees, suppliers, sharehol- important emerging economies, pitre consacré à la lutte ders and interest groups. The code contre la corruption. identifying the following features of of conduct should also specify the business ethics. company’s environmental and so- Argentina’s Code of Best Gover- cial responsibilities. The ethical nance Practices for Organizations features of the code mainly concern Au Brésil, le même code concerne surtout une prescribes that the supervisory com- compliance with laws and payment dimension de gouver- mittee, together with legal advisors, of taxes, transactions with related nance d’entreprise por- must assess the effectiveness of the parties, appropriate use of company tant sur la conduite des company’s programme for detecting assets, conflicts of interest, use of affaires et les conflits and preventing infringements of the insider information, policy on trade d’intérêt. law and its own code of ethics. As rein company shares, legal and arbi- gards social responsibility, it recom- tration processes, prevention and mends the adoption of environment handling of fraud, questionable pa- policies, protection of intellectual yments made or received, receipt of property, policies to combat bribery gifts or favours, donations, political and social investment policies. The activities, right to privacy, nepotism, policies to combat bribery contain the environment, discrimination in the most important ethical features, the workplace, sexual or moral ha- such as promoting ethical standards rassment, safety at work, exploita-

A NEW DIMENSION IN CORPORATE GOVERNANCE IN LATIN AMERICA 416 tion of adults and child labour, re- it comes to business ethics, and es- lations with the community, and use pecially ethical finance. Although Le Chili ne dispose pas of alcohol and drugs. the Brazilian code is the most detai- d’un code de bonne led in this regard, Brazil has no me- gouvernance, mais Chile does not have a code of s’appuie sur des lois good governance, but relies on stric- chanisms to ensure compliance. plus strictes. Mai il n’y ter laws such as the New Corpora- existe pas de disposi- te Governance Act (Act No. 20382) Proposal for a new tions claires concernant or the Share Acquisition (Public ethical finance l’éthique des affaires. Offers) Act. The former act does not dimension in Latin America’s codes of Au Mexique, le code require businesses to adopt a code of de pratiques exem- ethics or conduct. Section 61 stipu- corporate governance plaire encourage les lates a major prison term for anyone The purpose of this paper is to en- entreprise financières spreading false or tendentious infor- courage the inclusion of ethical finan- à élaborer leur propre mation in order to mislead the stock ce as part of corporate governance in code de déontologie market, with an increased penalty et les principes de res- legislation and codes of good gover- for those whose function, position, ponsabilité sociale des nance, and at the same time to pro- entreprises. activity or relationships may give pose a financial ethical performance Les codes et règlements them access to insider information. index that displays businesses’ ethical actuels des quatre However, there are no clear provi- commitment and awareness to the pays doivent donc être sions on business ethics. market. The proposal is based on the renforcés s’agissant de Finally, Mexico’s Code of Best l’éthique des affaires et work of Choi and Jung (2008), which surtout de l’éthique de Corporate Practices states that the identifies the following basic features la finance. duties of the board of management of corporate ethical performance: (1) include encouraging the company commitment by senior management L’objectif de ce texte est to draw up its own code of ethics to emphasize the importance of ethics d’encourager l’inté- and principles of corporate social in business, (2) ethical conduct based gration de la finance responsibility. For its part, the su- on a formal, normative philosophy éthique dans le cadre pervisory committee is responsible de la gouvernance within businesses, (3) a disciplinary d’entreprise, via la for verifying compliance with the system that severely penalizes unethi- législation et les codes code of ethics and the mechanisms cal conduct; (4) a code of ethics, (5) de bonne gouvernance, for disclosing unlawful conduct allowing employees to report unethi- et en même temps de and protecting whistleblowers. The cal conduct anonymously, (6) deve- proposer un indice de code recommends that every busi- loping a programme of ethical edu- performance éthique ness should have a document laying relatif à l’engagement cation, training and workshops in down rules of conduct for board éthique et la prise de the workplace to improve employees’ conscience du marché. members. However, it does not state ethical standards, (7) devoting a subs- general guidelines for such codes of tantial proportion of the business’s conduct. profits to philanthropic causes, (8) We may conclude that the pre- the existence of an independent, offi- sent codes and regulations in all four cial department of ethics, (9) giving countries need to be reinforced when employees help on matters relating to

CHANGING FRONTIERS OF ETHICS IN FINANCE 417 business ethics via an open commu- based on previous literature and the Je propose que la nication line or channel, (10) setting Argentinian, Brazilian, Chilean and dimension de la finance up an ethics committee, and (11) de- Mexican codes of good governance. éthique soit incluse veloping and implementing a system It is recommended that the index be dans les codes latino- américains de la bonne of ethical assessment by an indepen- applied to those responsible for finan- gouvernance et de la dent body that is external to the bu- cial management in both industrial législation, avec un siness. and banking/financial businesses in indice visant à amélio- Rossouw (2009) acknowledges Latin America. Besides making ethi- rer et mesurer la perfor- that social standards may informa- cal finance an integral part of corpo- mance des entreprises lly influence corporate conduct. In rate governance, it is also vital that en matière de finance businesses and banking institutions éthique. particular, ethics in corporate governance is determined by the ethi- quoted on the stock market report Il est également essen- cal values and practices adopted by annually on compliance. Each item tiel que les entreprises the society in which the business is on the index is assigned a value of 1 if et institutions bancaires operating. The internal and external it is adopted and published by the bu- établissent un rapport dimensions of corporate governance siness, and 0 if it is not. The index is annuel sur la confor- therefore need to be in line with pre- based on the comply-or-explain prin- mité. vailing social and cultural standards. ciple, like the corporate governance practices set out in the codes. Details Il est devenu nécessaire Fernández (2004, p. 13) identifies the of this proposed ethical finance di- de promouvoir et me- importance of and need for an ethical surer le comportement framework in financial activity and mension in codes of good governance éthique des décideurs in businesses’ corporate governance, and codes of conduct for businesses financiers, et d’encou- and states that ‘financial activity has are set out in Figure 1. rager les entreprises et an undeniable and irreplaceable ethi- institutions à s’engager cal dimension’ – failing which its very Conclusions pleinement dans un existence would be jeopardized. processus de finance This paper has mentioned the ab- éthique. In view of all this, and in the abs- sence of an ethical finance dimension ence of ethical awareness in markets, in codes of corporate governance, as La transparence des this paper proposes that an ethical fi- reflected in the increase in corrup- entreprises est un outil nance dimension be included in Latin tion indexes and financial scandals stratégique pouvant American codes of good governance in major businesses. This has affected encourager la pratique and legislation. The index comprises integrity and trust in markets around de la finance éthique, the world, triggering an ethical cri- car une plus grande nineteen items designed to enhance transparence contribue and measure businesses’ performan- sis in the financial sector. Hence the à lutter notamment ce in matters of ethical finance. This concern to promote and measure contre la corruption. is then divided into five sub-indexes: the ethical behaviour of financial L’intégrité et la institutional commitment; establis- decision-makers. The purpose of the confiance sont des hment and operation of a financial proposal to include an ethical finance principes devant faire ethics committee; transparency and dimension in codes of good gover- partie des mécanismes measures to combat corruption; envi- nance and legislation on Latin Ame- actuels de gouvernance ronmental issues; and a system for as- rican stock markets is to encourage d’entreprise. sessing financial ethics. The index is businesses and institutions to commit

A NEW DIMENSION IN CORPORATE GOVERNANCE IN LATIN AMERICA 418 themselves to ethical finance. clusion in codes of good governance Les organismes et insti- Annual publication of the ethical and legislation, but that the index tutions doivent devenir finance index on markets and among should become a frame of reference plus conscients, socia- when making decisions on whether lement et éthiquement, interest groups will also compel busi- afin d’atténuer la crise nesses to improve and increase their to invest in ethical or unethical bu- actuelle de l’éthique commitment to society. This paper sinesses, assessing the social value of financière. has suggested a first step towards an businesses and deciding what incenti- ethical finance rating for the Latin ves business should receive from go- American region, and it is hoped that vernments. In other words, it should this will be further developed and become a valuable, informative ele- adapted in various contexts. ment for owners and managers of We may conclude that corporate businesses and institutions, giving all transparency as a dimension of cor- companies an incentive to improve porate governance is a strategic tool their ratings. Corporate governance that could encourage the practice of is a major defence against unethical ethical finance. Greater transparency conduct. Integrity and trust are prin- helps to curb corruption, promote ciples that could become part of the accountability by business mana- current mechanisms of corporate gers and disclose the most tangible governance. There is a need for busi- unethical activities to the outside nesses to become more ethically and world. The main contribution of the socially aware, in order to alleviate paper should not just be to propose today’s crisis of financial ethics. • an ethical finance index and its in-

References

Aguilera, R. & Cuervo-Cazurra, Ghosh, D., Ghosh, D. & Zaher, A. A. (2009). Codes of Good Governan- (2011). Business, ethics, and profit: ce. Corporate Governance: an In- are they compatible under corporate ternational Review, 17(3), 376-387 governance in our global economy?. Global Finance Journal, 22, 72-79 Choi, T. H. & Jung , J. (2008). Ethical commitment, financial perfor- Rossouw, G. (2009). The ethics of mance, and valuation: an empirical corporate governance: global conver- investigation of Korean companies. gence or divergence?. International Journal of Business Ethics, 81, 447- Journal of Law and Management, 463 51(1), 43-51

Fernández, J. (2004). Finanzas Ryan, L., Buchholtz, A. & Kolb, R. y ética: la dimensión moral de la (2010). New directions in corporate actividad financiera y el gobierno governance and finance: implications corporativo. Madrid: Universidad for business ethics research. Business Pontificia Comillas Ethics Quarterly, 20(4), 673-694

CHANGING FRONTIERS OF ETHICS IN FINANCE 419

Figure 1. Ethical finance index as a new dimension of corporate governance A) Institutional com- B) Ethics committee C) Transparency and measures mitment to combat corruption 1. Promoting ethical 6. Establishment of a fi- 9. An anonymous, open com- standards and complian- nancial ethics committee munication channel for repor- ce with them 7. Clear details of the ting unethical financial conduct 2. A formal and norma- committee’s functions 10. A training programme on tive philosophy based on and role financial ethics and social res- financial ethics 8. Appointment of an ex- ponsibility 3. The business’s finan- ternal inspector or rating 11. Policies to combat bribery cial and fiscal responsi- agency 12. Policies on use of assets bilities 13. Conflicts of interest 4. A disciplinary system 14. Legal and arbitration pro- to deal with unethical cesses conduct 15. Prevention and handling of 5. A code of financial fraud ethics/conduct D) Environmental issues E) System for assessing financial ethics 16. Environmental policies 20. Internal system for periodic review 17. Policies and procedures for protecting of the effectiveness of the programme intellectual property 21. Development and implementation 18. Social investment policies of a system of ethical assessment by independent third parties 19. Profits devoted to philanthropic causes Source: My own index, based on Choi and Jung (2008) and the four countries’ codes of good governance

A NEW DIMENSION IN CORPORATE GOVERNANCE IN LATIN AMERICA 420 421 Primum non nocere (first do Pno harm): can the principles of medical ethics be applied to finance?

Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013

Finalist

Joanna Givens Ethics can be defined as the prin- mis-selling of derivatives and fixing United Kingdom ciples that govern a person’s or a of interest rates to manipulation of Banker, Barclays*, group’s behaviour. Normative ethics commodity markets. The prolifera- London is the branch of ethics concerned tion of peer-to-peer lending sites, with what makes an action right or cooperatives and credit unions de- wrong. monstrates consumers’ wish to move Finance professionals frequently away from the financial companies face ethical decisions and questions they no longer trust. of right and wrong, and must cons- If the finance industry is getting tantly balance risk versus reward and it wrong, who has been getting it outcomes for clients, the firm and right? With politicians cheating on themselves. Recent events suggest their expenses, journalists tapping that the finance industry has not private phone lines and even our been getting these ethical decisions sports heroes turning out not to be right. We are currently experiencing who we thought they were, who is a financial crisis on an unpreceden- setting the right example? ted scale, worldwide growth has An Ipsos Mori poll conducted in * The views expressed stalled, governments are printing the UK in 2013 found that physicians herein are those of an extraordinary amount of money, were the most trusted profession, the author and do not and confidence in finance profes- with 89% of respondents saying that necessarily reflect those sionals is at an all-time low. Record they would trust physicians to tell the of the Organization he is affiliated to. fines have been paid by banking ins- truth. The figure for bankers was just titutions for offences ranging from 21%; more worryingly, it had fallen

CAN THE PRINCIPLES OF MEDICAL ETHICS BE APPLIED TO FINANCE? 422 Les professionnels from 29% in 2011. Trust in financial sufficient to help them make better de la finance doivent professionals is being eroded.1 choices. Currently, it is investment constamment trouver banks that bear the brunt of the criti- un équilibre entre le If we take this public percep- cism and are taking much of the bla- risque et la récom- tion of truthfulness as a yardstick me for the financial crisis. This paper pense, les revenus pour for ethical behaviour, perhaps the les clients et ceux pour finance industry could learn from will therefore focus on that area of l’entreprise et pour the medical profession. In the me- the financial world. eux meme. La côte de dical sector, the study of ethics is confiance des finan- significantly more developed than in Autonomy ciers est à un niveau the financial sector. A widely accep- The first principle, sometimes historiquement bas. ted framework for biomedical ethics considered primus inter pares, Dans le milieu medi- is the four principles plus attention is autonomy. This is the notion cal, qui inspire plus to their scope of application intro- that patients have the right to con- confiance, la question duced by Beauchamp and Childress trol what happens to them, free of de l’éthique est beau- in Principles of biomedical ethics coercion or coaxing. In practice, coup plus développée (1978). this places an obligation on medi- et le secteur financier The four principles are auto- cal practitioners to fully explain to pourrait s’en inspirer. patients the benefits and potential Les quatre principes nomy (respect for the rights of the presents sont l’autono- individual), beneficence (do the risks of any proposed treatment, so mie, la bienfaisance, la most good), non-maleficence (do that they can give informed consent. non-malfaisance et la no harm) and justice. These four Physicians must be able to commu- justice. Chacun de ces principles are deemed prima facie: nicate in language that patients un- principes sera évalué each of them is mandatory unless it derstand, as well as listen to patients pour voir comment les conflicts with another one, in which and their concerns. The other aspect financiers peuvent les case we must choose which one to of autonomy is respect for patients. appliquer au quotidien. abide by. This framework provides The classic case study used in medical ethics is a Jehovah’s Witness L’autonomie implique a simple and understandable means que les patients/clients of assessing moral dilemmas faced who refuses a blood transfusion. The peuvent contrôler ce by medical practitioners. I would physician may believe that a blood qui leur arrive grâce à argue that all ethical questions can transfusion is the most effective une communication be answered with reference to these course of treatment, but so long as adaptée des médecins four pillars, and that this framework the Jehovah’s Witness has unders- qui respectent avant can be applied to other sectors2 – a tood the available options and the tout leurs choix. risks involved, the physician must Appliqué au monde de theory that will be tested in this pa- respect his or her wish not to have la finance, l’autono- per. I will evaluate each of the four mie implique que les principles in turn, discussing how the transfusion. banquiers s’assurent finance professionals can apply them So how does this relate to the toujours de la com- to the judgments they make every finance world? In medicine, phy- prehension de toute day, and whether this framework is sicians must explain the risks and la transaction par les rewards of medical treatment; in fi- clients et évitent la 1 Ipsos Mori, Trust in Professions, 2013 and 2011. 2 nance, we are dealing with the risks vente abusive. Gillon, R. (1994). Medical ethics: four principles plus attention to scope, BMJ, 309:184. and rewards of complex financial

CHANGING FRONTIERS OF ETHICS IN FINANCE 423 products. Both scenarios involve a trade mid-market price must be pro- potentially vulnerable party relying vided to clients, and scenarios must Les réglementations on the advice of a person with signi- also be supplied on request. This is mises en place depuis ficant influence. If we apply the au- to ensure that clients are aware of all la crise ont renforcé la tonomy principle to a financial tran- of the relevant facts so that they can surveillance de l’information devant être saction, bankers have an obligation make an informed decision. Bankers transmise aux clients, to make sure their clients unders- appear not to have abided by the au- afin que ce dernier tand the transaction they will be en- tonomy principle, which this rule is puisse prendre une tering into; there should not be any designed to enforce. decision éclairée. hidden costs or risks that the client Why have bankers failed to res- Les banquiers n’ont does not comprehend. pect their clients and allow them to apparemment pas appliqué cette règle, It is also the banks’ duty not to make informed choices? One key di- motivés par le gain coerce their clients into buying pro- fference between finance professio- de commissions lors ducts or entering into transactions nals and physicians is the incentives d’opérations parfois that they do not wish to. The recent involved. If bankers earn a commis- inutiles. Le corps mis-selling claims demonstrate that sion on each product sold, they may medical n’est généra- bankers have been guilty of selling be tempted to persuade their clients lement pas confronté products that were not properly un- to enter into unnecessary transac- à ce genre de conflits derstood. Clients may have given tions. Such conflicts of interest are d’intérêts. not usually found in the medical La structure d’inci- their consent to these products, but tation serait donc it is questionable whether that con- profession, for physicians do not responsable des actions sent was informed. normally stand to benefit from their contre l’éthique prises Regulations introduced since the patients being treated. par les financiers. crisis have tightened up supervi- In certain circumstances, howe- sion of the information that must be ver, they do; for example, private La notion de bien- plastic surgeons are paid for each faisance consiste à supplied to clients. One of the aims produire une action of the 2010 Dodd-Frank Act is to operation they perform. Indeed, the bénéfique pour les enhance consumer protection. Title plastic surgery industry has recently patients, en minimisant VII of the Act provides a framework been criticized for aggressive marke- les dommages. Une for regulating over-the-counter de- ting techniques, insufficient advice information préalable rivative markets. Its purpose is to and lack of protection for consu- basée sur une evalua- increase transparency in the market mers. In the UK an in-depth review tion des risques est and reduce systemic risks. It is the of some of these practices is now indispensable. being conducted, and may lead to Avec leur rôle crucial responsibility of the Commodity Fu- dans l’économie mon- tures Trading Commission (CFTC) increased regulation and consumer diale, les banques ne to implement part of this framework, protection. doivent apporter que and in this connection it has drawn It would thus appear that the in- des avantages favori- up what are known as the Exter- centive structure may be what causes sant le développement nal Business Conduct Standards professionals to act unethically. Law- global et la croissance. (EBCS). These place pre- and post- makers, too, have recognised this; a trade obligations on swap dealers: proposal to cap bankers’ bonuses at material economic terms and a pre- 100% (or, with explicit shareholder

CAN THE PRINCIPLES OF MEDICAL ETHICS BE APPLIED TO FINANCE? 424 approval, 200%) of their salaries is and minimize harm. With this in currently making its way through the mind, do the beneficence and non- Les résultats poten- European Parliament. We have also maleficence principles help us deter- tiels dans le domaine seen an increase in the level of defe- mine the appropriate course of ac- chirurgical peuevent rred compensation bankers receive, tion in various scenarios? To analyse être comparés aux variations potentielles designed to align bankers’ incentives these principles, I will consider two qui existent dans le cas with those of the bank as a whole. hypothetical situations. d’opérations finan- First, a client approaches a bank cières avec des taux Beneficence and to hedge interest-rate risk on a floa- variables. La probabi- non-maleficence ting-rate loan. If interest rates rise, lité des différents scé- liability increases; if they fall, it de- narios dans ce secteur Beneficence is the notion that peut varier de manière physicians’ actions must benefit creases. In order to hedge this risk spectaculaire et s’avérer their patients. It is difficult to discuss an interest-rate swap may be entered être très défavorable au beneficence without also conside- into, with the client paying a fixed client. ring non-maleficence. In accordan- rate to the bank and in return recei- ce with these principles, physicians ving a floating rate to cover the loan aim to produce a net benefit for their interest. This would appear to bene- La FSA a trouvé de patients while minimizing any harm. fit the client, who is locked into a fi- nombreuses lacunes xed rate and no longer has to worry dans les opérations de In order for physicians’ actions to about moves in interest rates. Howe- vente de swaps aux be beneficial, they must have suffi- PME. Les clients n’ont cient education and training and ver, if interest rates decrease after the pas reçu d’informations they must have empirical evidence transaction is entered into, the fixed assez éclairées pour that they can use to determine the rate the client is locked into will be prendre les bonnes benefits and risks of a course of ac- higher than if the transaction had decisions, ce qui tion. Armed with this information, not been entered into at all. rammène à la notion they can then make an educated When the transaction is first con- d’autonomie. assessment of whether the interven- sidered, neither the banker nor the tion is the best course of action. The client can know which way interest La règle Volcker pré- autonomy principle must then be rates will move. In order to assess voit, pour les banques applied, so that patients can make whether the transaction will yield a d’investissement, their own assessment of the risks net benefit they must consider the l’interdiction d’avoir and rewards. potential moves in interest rates and des pupitres de négo- Banks play a critical role in the the resulting outcome if they do, or ciation pour compte do not, enter into the transaction. propre, qui presentent worldwide economy. They provide des risques trop impor- essential services to clients, ranging We can compare this to a physician tants pour la clientele from simple loans and deposits to advising a patient on the potential et le système financier complex transactions – all of which outcomes of surgery. global. should promote global growth and Where this differs from the me- development when banks are ope- dical scenario is that the likelihood rating correctly. I think everyone of different interest rates can vary would agree that bankers therefore dramatically over time. If medical have an obligation to create benefits research has determined that the

CHANGING FRONTIERS OF ETHICS IN FINANCE 425 survival rate for a particular type of Barclays, HSBC, Lloyds and RBS are surgery is X%, that figure is unlikely now going through a review process to change between the surgery being and providing redress to clients to Une preuve supplé- discussed and being carried out. If the whom these products were mis-sold. mentaire de réglement patient is comfortable with that level appliquant l’implémen- The FSA found the following exam- tation des principes de of risk, the surgery can take place. ples of ‘poor sales practice’: bienfaisance se trouve However, when a client is hed- • Poor disclosure of exit costs; dans les directives ging interest-rate risk, the likelihood • Failure to ascertain customers’ propres à Bâle III. of the various scenarios may change understanding of risk; Parmi les causes de dramatically after the transaction la crise financière • Non-advised sales straying into has been entered into. For exam- figurent les prêts hypo- advice. thécaires subprime ple, a client that entered into a ten- originaires des Etats- year GBP interest-rate swap in July Although in a different econo- Unis et la méthode de 2007 would have paid a fixed rate mic climate the interest-rate hedging répartition des risques. of 5.96% in exchange for the 3-M might have yielded a net benefit, the LIBOR. Five years later, on 31 July FSA found that clients were not gi- 2012, following the financial crisis ven sufficient information to make and the subsequent decrease in in- an educated decision. This brings La justice peut être terest rates, the 3-M LIBOR stood at us back to the need to abide by the divisée en trois catego- autonomy principle; bankers can ries appliquées à la me- just 0.74375%; the client would be dicine: la distribution paying 5.96%, but would have paid advise their clients on the poten- équitable des resources significantly less had no swap been tial outcomes and how likely those limitées, le respect des entered into at all. In July 2012 the outcomes are, but must also draw droits des individus et five-year swap rate was 0.96%; this attention to the fact that these likeli- celui des lois morale- would mean the client would have hoods may change. Clients can then ment applicables. to pay 5% in order to terminate the make an informed decision. transaction and go back to paying the As a second example, let us 3-M LIBOR. From this we can con- consider proprietary trading desks Pour voir si les clude that, although in 2007 it might within investment banks. Their pur- principes de la justice have made sense to assume the tran- pose is to generate profits and create peuvent s’appliquer saction would yield a net benefit, in shareholder value by investing and à la finance, il faut se the long term the client would have taking risks. However, in doing so demander si les finan- been better off not hedging his or her they put the bank’s capital at risk, ciers ont des revendi- interest rate risk at all. cations concurrentes and may erode shareholder value. auxquelles ils doivent In 2012, Britain’s Financial Ser- The Volcker Rule introduced un- allouer des resources. vices Authority (FSA) announced der the Dodd-Frank Act stipulates La question essentielle that it had found significant failings that investment banks are no longer est de savoir quand in the selling of swaps to small and allowed to have proprietary trading et où s’appliquent les medium-sized enterprises (SMEs).3 desks. This type of speculation has obligations morales. been judged to pose such a risk to 3 FSA agrees settlement with four banks over interest rate hedging products, FSA press release, the financial system that it must be 29 June 2012 prohibited. The risk to customer de-

CAN THE PRINCIPLES OF MEDICAL ETHICS BE APPLIED TO FINANCE? 426 posits, and the potential shockwaves were packaged into. The purpose of in the financial system, outweigh the article 122a is to ensure that the in- possible benefits from proprietary terests of the original lender and the trading. In the past, the banks them- investors in securitization are alig- En examinant la portée selves decided how much of such ned. Lenders must always have what du principe de l’écono- trading to undertake. Limits and is known as ‘skin in the game’. This mie, les questions phi- controls were in place to monitor the gives them an incentive to ensure losophiques semblent level of risk being taken and conclu- that the products they originate and moins complexes dans de whether it was appropriate. sell yield a net benefit and minimize la finance que dans le harm, as they also risk being harmed milieu medical. Again it would seem that regulations have been introduced to enfor- if the products fail. ce banks’ adherence to ethical principles. Not trusting banks to weigh Justice Partant du principe up the risks and benefits properly, The fourth principle, justice, can que les hedge funds regulators have taken that decision be subdivided three categories when et banques d’investis- away from them. applied to medicine: fair distribu- sement sont experts dans leur domaine, les We see further evidence of regu- tion of scarce resources, respect for banques n’ont pas à lations implementing the beneficen- people’s rights and respect for mo- considerer les prince and non-maleficence principles rally applicable laws (Gillon, 1994). cipes de bienfaisance in Capital Requirements Directive This principle raises ethical ques- en faisant des affaires IV (CRD IV), part of the European tions about the allocation of resou- avec eux. Commission’s implementation of rces. Consider an expensive new Basel III. Article 122a states that drug. Should everyone have the same investors in securitization will face access to it? How are such drugs to be Les banques ont-elles punitive capital charges if the origi- allocated between competing claims? l’obligation de fournir nator does not retain a 5% economic Should they be given to those that un bénéfice pour la interest in the structure. can pay the most for them, or to tho- société et l’économie se with the greatest need, or should globale ou doivent- Among the causes of the financial elles uniquement servir crisis were the model whereby sub- they be distributed equally? les intérêts de leurs prime mortgages were originated in In considering whether the justice clients et investisseurs? the US and the method of risk distri- principle applies to finance, we can Elles doivent en tous bution. The ‘originate-to-securitize’ ask whether financiers have compe- les cas ne nuire à model meant that the originator of ting claims to which they must alloca- aucun parti. the loan no longer cared whether or te resources. In the context of corpo- not the borrower defaulted, for once rate finance or investment banking, the loan was securitized the origina- this principle does not seem relevant. tor was not at risk. Taking this a step Whereas in medical ethics the debate further, there were even situations in continues on whether need trumps which the originator could stand to ability to pay, in finance it appears profit from defaults on loans through to have been settled. Those who can shorting of the securities the loans pay get access to the resources. If cor-

CHANGING FRONTIERS OF ETHICS IN FINANCE 427 porations need to raise funding in the hedge funds are experts in their fields, capital markets, it is simply a ques- so that banks do not have to abide by tion of supply and demand; if they the beneficence and non-maleficence are willing to pay what the investors principles when doing business with demand, they can raise the funding. them. It is not banks’ responsibility Des règlements ont également été intro- Conversely, if there are many inves- to provide them with the information duits pour minimiser tors wishing to buy the same bond, that would usually be given to other les éventuels dom- the investor willing to pay the highest counterparties, as they can determi- mages en renforçant price will be the purchaser. ne for themselves whether they need la situation des fonds this information – and, if so, they can propres des banques. Scope calculate it themselves. Bâle III traite aussi de Once again we find that regulators la liquidité des banques As well as the four principles, we en introduisant un must also consider their scope. When have attempted to answer these ques- ratio de couverture de and where exactly do the moral obli- tions for us. The aforementioned Ex- liquidités. gations apply? This may seem a fairly ternal Business Conduct Standards, Les différentes mesures obvious question for healthcare pro- drawn up to supervise the informa- visent à s’assurer que fessionals, who have an obligation tion supplied to clients, are very clear les banques peuvent to provide benefits and minimize about their scope. Transactions bet- resister aux chocs et harm to the patients in their care. But ween swap dealers and major swap maintenir la stabilité things can get more complicated. For participants do not fall within it. du système financier. example, patients’ autonomy must be A second question we can ask respected – but what if the patient is about the scope of the beneficence a minor, or mentally impaired? At and non-maleficence principles is what point does a child fall within whether banks have an obligation the scope of respect for autonomy? to provide a net benefit to society In considering the scope of the au- and the economy as a whole – or are tonomy principle, the philosophical only required to provide a net bene- questions that arise appear less com- fit to their clients and shareholders. plex in finance than in the medical Throughout the financial crisis we world. Once provided with sufficient have seen that banks are systemically information, clients in the financial important and that their actions can world should be able to make an au- have dire consequences for the world tonomous decision. It may seem ob- economy. The phrase ‘too big to fail’ vious that the beneficence and non- has entered everyday speech, and it is maleficence principles apply when a now widely accepted that banks have client approaches a bank for financial a duty to provide benefits to their advice – but if hedge funds or other clients and shareholders but, at the banking institutions wish to enter same time, to ‘do no harm’ to the eco- into a transaction, are they entitled to nomy and society as a whole. the same protection? Regulators are in agreement on We may believe that, as market this, and the aforementioned Volc- participants, investment banks and ker Rule is designed to prevent banks

CAN THE PRINCIPLES OF MEDICAL ETHICS BE APPLIED TO FINANCE? 428 from taking risks disproportionate to sues currently facing the sector could the potential benefits. have been avoided if these principles Regulations have also been intro- had been adhered to. Chacun des quatre duced to ‘minimize harm’ by stren- Financial regulators also seem principes étudiés est gthening banks’ capital position. Ba- to believe that these four principles très pertinent pour le sel III, which was drawn up in 2010 are relevant and should be complied monde de la finance, and will be phased in over the next with. In the wake of the financial cri- mais la question est six years, increases from 2% to 7% the sis, a great deal of effort has gone into de savoir s’ils peuvent amount of Tier 1 capital that banks establishing its causes – and identi- être appliqués aux must hold; and ‘systemically impor- fying the practices that need to be questions éthiques tant financial institutions’ are requi- stopped if we are to make our way qui se posent dans ce red to hold an additional amount on out of it. domaine. Bon nombre top of this. The definitions of which des problèmes du sec- In assessing the four principles I assets can form part of Tier 1 capital teur auraient pu être have found that many of the regula- évités avec une telle are also stricter. In addition, Basel III tions introduced, or soon to be intro- addresses the liquidity of banks by application, selon les duced, can be directly linked to them. régulateurs financiers. introducing the liquidity coverage ratio. Banks must be able to withstand In adopting the Dodd-Frank Act, a 30-day stress scenario by holding US regulators have recognised that enough liquid assets to cover poten- clients’ autonomy is important and tial cash outflow during the stress pe- was not being properly respected. To De nombreux règle- riod. The net stable funding ratio has address this, they have introduced rements ont donc été mis also been established; this focuses gulations to protect clients and their en place, en particulier on longer-term liquidity, measuring rights more effectively. Regulations aux Etats-Unis, afin de long-term stable funding against the have also been introduced to make garantir l’autonomie sure that in future banks do more et la protection des liquidity profiles of the assets being clients. funded. Capital requirements are good than harm. I will not discuss Les discussions sur also increased for counterparty credit whether the regulators’ actions are l’éthique progressant, risk arising from derivatives and re- sufficient to achieve these objectives, on peut espérer que pos. All these measures are designed but I highlight them as evidence that les débats à venir to ensure that banks can withstand the four principles can provide a fra- améliorent encore la shocks, and to maintain stability in mework for the finance industry. situation actuelle, the financial system. As the discussion on ethics in Abordés sous l’angle de finance progresses, we may hope la banque de finan- Conclusion cement et d’investis- that as much thought and debate sement, les quatre Having considered each of the goes into it as in the field of medi- principes évoqués four principles, can these be applied cal ethics. Although this paper has pourraient également to the ethical questions that face approached the topic from a corpo- s’appliquer au domaine the finance world? Do they provide rate and investment banking angle, I de la banque de détail. a framework on which we can base believe that the four principles could our decisions? I would argue that the also be extended to the field of retail principles are very relevant to the fi- and consumer banking. • nance world, and that many of the is-

CHANGING FRONTIERS OF ETHICS IN FINANCE 429

an Design Thinking Help CCEnhancing Empathy in Finance ?

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Third Prize ex-aequo

Through the use of a pioneering ap- Mehta Anshuman Creativity Is a Bad Word United Kingdom / proach called Design Thinking, they India La science économique n’atteint create solutions but only after enga- CEO of Early Stage queWhen used in the context of ging in a deep and empathetic dia- Start-up*, New York. modern-day finance the word crea- logue with end-users. Design Thin- tivity invariably has very negative king transforms their efforts into a connotations. Creative accounting human-centred approach to problem led to the downfall of corporate solving (Brown, n.d.). giants. Creative regulatory and capi- In this paper, we seek innovative tal solutions disguised arbitrage of ideas for ethics in finance through regulators and regulations. Creative the application of the principles of tax solutions blurred the fine line Design Thinking. between tax avoidance and evasion. Creativity, as uttered by a financial Working Thesis service professional, is a very bad At the heart of the arguments set word indeed. forth in this paper is the incontro- But beyond the narrow confines * The views expressed vertible fact that finance in general, herein are those of of finance, there exists a broader and banking in particular, is a people the author and do not definition of the word creativity – a business. Our world is built upon necessarily reflect those creative community of artists and de- the foundations of human relation- of the Organization he is affiliated to. signers, tech innovators and disrup- ships. The hopes and dreams, fears tors who seek new and innovative and insecurities of individuals play solutions to everyday problems. a vital role in modern day finance,

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 430 and will continue to do even in the ced from a system-wide analysis aftermath of the Great Recession. of culture. Ethics do not exist in a The flow of capital, long held as its vacuum. Rather, ethical behaviour traditional focus, is almost inciden- is heavily influenced by the cultural Utilisé dans le tal to this world. Capital is an undis- mores to which individuals are sub- contexte de la finance tinguishable commodity transferred jected. Therefore, any approach that contemporaine, le terme créativité a une from one owner to the next. It is we adopt to reform ethics must also connotation négative, the people that make, or on occa- be able to comment and improve il faut donc se mettre sion break, financial products, ins- upon the culture prevalent in the à la suite des designers titutions and markets. Regardless world of finance. et des artistes qui of how numbers-based, technology- utilisent la créativité centric or money-oriented this world Defining the Objective and pour le plus grand bien becomes, an examination of ethics in Success Parameters de tous. finance is essentially an inquiry into The ultimate objective of this the modern human condition. paper is not to devise an exact code Next, we re-interpret ethics, of ethics for the banking industry. ethical behaviour and ethical dilem- Instead, the objective is to codify the mas with human-centred definitions. approach as a tool of analysis. The La finance en géné- Ethics are a set of values by which an approach must yield unexpected in- ral et la banque sont individual chooses to live. Ethical sights into the industry and support l’affaire de tous. dilemmas are real problems faced by L’Ethique, les Di- clear conclusions that advance the lemmes éthiques et le real people in the real world. Ethical process of reform in order for it to Comportement éthique behaviour is a personal response to a be considered valid. ne peuvent faire abs- unique set of circumstances and sti- traction de la personne muli. Setting the Scope humaine. Notre thèse The working thesis of this paper The initial scope of our study is centrale est que tout is as follows: Any attempt to devise defined as a subset of the world of code d’éthique pour le secteur financier doit a code of ethics in a vacuum, iso- finance – publicly listed, non-go- être conçu en plaçant lated from the inputs of the very vernmental commercial banks. If l’acteur humain au people the code is meant to govern, the application of Design Thinking centre. L’objectif de ce and derived from an idealised state delivers results for this subset, we papier est de struc- of affairs, is bound to fail. The ulti- can incrementally expand its applica- turer une démarche mate consumers of a code of ethics tion to the broader world of finance. pour élaborer un are the all-too-human stakeholders code d’éthique pour of the industry. Therefore, reform A Word on the Author la finance en général, and innovation that seeks to serve et pour la banque en I am a banker by background, particulier. the industry in the future must begin with over a decade’s experience in with the human element at its core. Treasury and Capital Markets roles It must begin with empathy. working primarily with institutio- A secondary thesis, scarcely less nal clients. Late in 2014, I decided important than the first, is that any to take a break from the industry. attempts at reform cannot be divor- During my wanderings in unrelated

CHANGING FRONTIERS OF ETHICS IN FINANCE 431 fields, I came across the concept of returns with diminishing enthusiasm Design Thinking and was imme- to prevent a recurrence of the last diately struck by the simplicity of crisis. its approach and its applicability to If this process sounds familiar, innovation and reform. it’s because this was go-to approach An Introduction to for much of the Great Recession. For Design Thinking the most part, this approach worked well because there were discrete Let us begin by examining problems to be solved. Each crisis conventional problem solving ap- was quickly identified and sized up. proaches and highlight the reasons Political will to impose regulations why these have worked well in the and reform was convened. The glo- past. Following this, we will intro- bal regulatory and policy framework duce the Design Thinking approach. was strengthened like never before. We will explore the critical first step The Dodd-Frank act, liquidity and of beginning with empathy. Finally, leverage restrictions, capital requi- L’approche classique we will set the scene for an empathe- rements, significant fines and bans de résolution des pro- tic evaluation of each of the stake- on errant individuals were just some blèmes fonctionne bien holders in the banking arena, leading quand le problème of the consequences of this will to est concret. Cette into the analysis laid out in Section 3. action. Genuine progress was made. approche n’est toute- Conventional Problem Solving fois plus opérationnelle … But it Breaks Down When We lorsque l’on passe de la Worked Well In the Past… Look To The Future résolution de crise à la Conventional problem solving prévention de crises. However, conventional problem can be largely aggregated into four solving approaches break down major steps. when we seek to shift our focus from • Acknowledge the problem – crisis resolution to crisis prevention. “Something is broken”. Run dia- • We cannot jump into problem gnostics. Gather evidence. Measure solving mode if there is no clearly impact of problem. identifiable problem to solve. • Define the problem – Analyse • There is growing belief that the scale of problem. Identify stakehol- next crisis is hardly likely to take ders. Build consensus. Formalise place where the last one did. We problem statement. are still fighting yesterday’s wars, • Propose solutions – Seek expert almost obsessively so. The unwave- opinion. Draw up alternative courses ring attention to the past blinds us to of action. Identify one course of ac- a build-up of pressure elsewhere in tion for implementation. the system. • Implement & Monitor – IT • The human angle has been Spend. Business re-engineering. Go- missed. Vague, hard-to-decipher live. Run business-as-usual. Monitor codes of behaviour handed down

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 432 from up-on-high have a detached air great success in fields that rely hea- of corporate speak about them. vily on innovation, ranging from as The likely result of applying far back as Edison’s invention of the conventional approaches to innova- light bulb and the grid that carried tion is a collection of academic pro- electricity into the homes of its users posals or regulations disconnected (Brown, 2008), to modern day de- from the real world. As we shift our sign powerhouses like Apple. focus from the past to the future, we Increasingly, Design Thinking must shift our approach as well. The finds application in the broader cor- tendency towards urgency of pre- porate world, as companies seek Le “Design Thinking” ventative action must be replaced by to innovate within constraints and (“esprit design” ou thoroughness of analysis before for- address multi-dimensional solutions pensée créative) est mulating the objective. It is in this (Turnali, 2013). un processus centré autour de la personne shift to the future that the principles Design Thinking is commonly qui a pour but de of Design Thinking become especial- illustrated as a five-step process favoriser l’innovation ly relevant. (Figure 1) (Plattner, 2010). For the à travers 4 étapes : most part, four out of the five steps l’Empathie (identifier So What Is Design Thinking? largely correspond to conventional et comprendre son problem solving. For example, gathe- environnement), la Design Thinking is a human-cen- Définition (définir tred approach to innovation (Brown, ring evidence is to Define a problem; la problématique), n.d.). It draws upon the needs of proposing solutions corresponds to l’Idéation (trouver le users, the possibilities of technology Ideation and Prototyping; and post concept, l’idée qui per- and the requirements for business implementation measurement and mettra de la résoudre), success in order to create new pro- analysis falls under Testing. le Prototype (concevoir un prototype) et le ducts and services that solve for the Crucially, one additional step Test. future. It has been deployed with conducted at the very beginning Figure 1 . The Steps of Design Thinking

(Source: dschool.stanford.edu/redesigningtheater/the-design-thinking-process/)

CHANGING FRONTIERS OF ETHICS IN FINANCE 433 makes all the difference. Design Thin- thise with them. We must expe- king starts with empathy. This step is rience the constraints they face in the vital ingredient; the secret sauce the conduct of their duties and the that places humans and human pro- limitations that hold them back. We blems at the centre of our analysis. must face their pressures and iden- Empathy gives voice to the stakehol- tify the conflicts they must resolve ders, allowing us to view the world without the benefit of hindsight. from their perspective and formulate Only then can we begin to explain objectives accordingly. It is this big the whys and address the unspoken idea of ‘Beginning with Empathy’ that human element. transforms the process into one that Offering empathy to all stake- is multi-dimensional, forward-loo- holders addresses another common king and empowering. complaint – the failings of the system. As we have established, banking is Why Empathise (Or, Do They Si l’on veut essayer a people business. The system is node réformer, on doit Deserve Our Empathy)? explorer et comprendre thing but the nebulous and intercon- pourquoi les individus The importance of ethics in mo- nected web of human interactions agissent comme ils le dern day banking is beyond doubt. that spreads all around the world. font, et pas seulement Bankers are well aware of the miss- Any regulation or innovation that les surveiller et corri- teps of the past and acknowledge targets one particular set of stake- ger leur comportement the values that society expects to see holders is likely to have unintended sur le moment. Nous from those that it entrusts to manage consequences for another set. The- devons nous mettre en its wealth. A lack of awareness is empathie avec eux. refore, any attempts to reform the no longer an issue. Yet hardly a day system must incorporate all stakehol- passes without the emergence of a ders, not just a select few. Holistic new story, investigation or censure reform cannot be accomplished by related to past or current practice. advancing a few at the expense of We reject out of hand the blan- others. ket assumption that the entire in- If we wish to build a more sus- dustry is ethically challenged and tainable industry that benefits so- only the extremely unfortunate get ciety and its stakeholders we cannot caught. So why, when given a choice overrate the importance of empathy. between doing the right thing and An empathetic code that unders- the unethical but profitable thing, do tands and guides the individual is some choose the latter, even at the the only way to future-proof reform risk of apprehension down the line? and prevent relapses in the future. In order to attempt reform, we Only an empathetic code will be must explore and understand why robust enough to enable even a soli- individuals act the way they do, not tary stakeholder to make an impact just monitor and remedy how they through individual action. Empathy go about doing so. We must empa- for all is the only way forward.

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 434 The Process As Much As the early warning indicator that identi- Results fies pressure build-up in the system • Identify the gap between what Design Thinking places a lot of is and what can be; in the process gai- emphasis on process, and with good ning valuable insights into resour- reason. The process yields insights Se mettre en empathie cing, staffing, IT spend and regula- (Plattner 2015). The first step,Empa - signifie que l’on place tory monitoring. l’acteur humain au thise, requires the designer to engage cœur de notre analyse. with end users, observe their beha- Step One – Begin Il faut commencer par viours, watch and listen. It taps into With Empathy identifier chaque ac- human abilities of intuition, pattern In this section, we embark on the teur et créer des grilles recognition and idea generation that first step of a Design Thinking jour- d’observation empa- are often overlooked in conventional ney – Empathise. We begin by pla- thique sur chacun. problem solving (Brown, n.d.). From cing the human element of the ban- these insights arise the ideas and so- king industry, its stakeholders, at the lutions that make a real and lasting core of our examinations. Next, we impact. construct a mind-map that systematically and empathetically explores Properly conducted, we would each stakeholder’s perspective, yiel- expect our own process of examina- ding insights into their motivations tion to yield the following: La “Mind Map” (“topo- and constraints. In the following seg- gramme” ou carte • A bottom-up, not top-down, ments (Define and Ideate), we will re- mentale)1 remplace code of ethics organise the insights gained in Empa- une étude à l’échelle de l’ensemble du secteur • An acceptance of the current thise into common themes, formalise d’activités par les culture as a starting point problem statements and devise inno- expériences vécues par • The treatment of stakeholders vative solutions that reform ethics in l’auteur dans le monde as partners, not untrustworthy de- finance. bancaire et utilise linquents that need stringent poli- les perspectives des Identifying the Stakeholders cing parties prenantes telles We begin by identifying the qu’elles sont rapportées • Avoice given to all stakehol- major stakeholders of the banking par les médias finan- ders; listening just as much to the industry: ciers et populaires et silent ones as the prominent ones • Customers – institutional and les rapports et analyses des régulateurs. Nous • Patient analysis that addresses retail examinerons tour à the complexities of the real world • Rank and file staff tour le cas de chaque • Broad, not narrow perspectives; • Bank Management – senior partie prenante. holistic, not piecemeal analysis (CEO level) and middle • Regulators • An inclusive, participatory • Shareholders code, far easier to internalise than • Taxpayers hollow values • Culture – a disembodied stake- • An adaptive, evolving code that holder, representing the sum total of offers solutions for the future; an shared norms, beliefs and behaviour.

CHANGING FRONTIERS OF ETHICS IN FINANCE 435 The next step is to explore the solve client problems. mini-universe that each of these • Fees lead to transactions, ra- stakeholders inhabit, and unders- ther than the other way around. tand their perspectives on ethics and • Mis-selling scandals abound, ethical behaviour. as banks hide real risks and costs Design Thinking introduces us of complex instruments in opaque to a tool of empathetic exploration legal fine print. called mind mapping (Kelly & Kelly, Rank and File Staff 2013). A mind map is constructed • Fatigue – exhibit symptoms of through a process of observation burnout; industry-wide censure of and interaction. It allows a designer to document human interactions banking as a profession as a result of and emotions in depth, expressing a few bad apples”results in increased and exploring each in turn. Two pressure from oversight functions mind maps are constructed for this (HR and Compliance). paper. Mind Map 1, attached in Ex- • Distrustful of management pro- hibit A, documents what each of the nouncements on culture when the stakeholders may feel about ethical unspoken emphasis is on revenue. behaviour in banking. MindMap • Weary of constant rephrasing 1 replaces an industry-wide study of values and re-interpretation of with the real-life experiences of the firm’s “culture”. author in the banking world and • Face performance pressures – draws on stakeholder perspectives the “do what it takes to win”attitude as reported in financial and popular is pervasive; targets are increased media, regulatory reports and ana- year-on-year regardless of market lyses. conditions. Let us examine each stakeholder • Calendar year evaluation cycle in turn. heaps inordinate pressure to per- Customers form to artificial deadlines, often to detriment of customer interests. • Lack trust in their banking rela- • Cynicism increased by opacity tionships – bankers are seen to serve of reward structures. themselves and their bonus pools. • Complain about lack of price Bank Management transparency in products; exorbitant • Lack of transparency concer- charges for products. ning everyday operations; cannot be • Accuse of front-running and expected to know each individual’s conflicts of interest due to the lack role of transparency in some markets • Does not exercise complete (e.g. dark pools, trading in OTC ins- control – profitable divisions may truments, new issue allocations). be run as personal fiefdoms; acqui- • Sales pitches are misleading, red subsidiaries maintain distinct designed to sell products instead of culture.

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 436 • Prioritisation – other activities – accused of being too close to banks take precedence (e.g. activist share- by politicians and popular press; too holders, board of directors, regula- remote or ignorant by bankers. tors). As the crisis mounted, emphasis moved to survival. Ethics were Shareholders (via Board of considered a luxury afforded only to Directors) “stable and profitable firms”. • Limited personal culpability – • Frustration with lack of clarity rarely face personal criminal liability of the businesses they are meant to or sanctions; can afford to apologise supervise. and move on. • Increased complexity of busi- • Lack time & energy – constant ness lines. fire-fighting takes it toll; global em- • Dysfunctional relationship pires necessitate a jet-set lifestyle with their executives – anywhere and contribute to limited attention between a lack of trust to active col- span. lusion. • “If it ain’t broke...” - reluctance • Conflict of interests with other to look too closely at ‘golden goose’ businesses. divisions that yield valuable revenue • Lack of actual, frontline ban- streams. king experience limits some direc- Regulators tors’ usefulness. • Misaligned risk (incurred by • Transparency – bank level data shareholders during bailouts, re- notoriously difficult to mine and in- duced or withheld dividends etc.) variably out of date. and reward (bonus payouts even in • Banking systems are non-stan- lean years). dardised, leading to multitude of metrics, acronyms and approaches. Taxpayers • Regulators are carefully “ma- • Frustration with seeming lack naged” by those they monitor; to paraphrase Heisenberg’s uncertainty of real reform in banking industry. principle, the act of measurement • Bankers lack remorse – rever- alters that which is being measured. sion of bonus payments; innovation • Whistle-blowing is infrequent in bonus structures (market or one- and only as a last resort. off allowances) to get around pay • Under-resourced, under-staf- rules is common. fed. • Lack of access to real-time in- • Lack frontline industry expe- formation; opaque markets manipu- rience; career “compliance specia- lated by insiders. list” skill-set rapidly out-dated as • Lack of transparency in risks industry practices evolve. taken by bankers that have asymme- • Caught between twin traps tric risk/reward profiles.

CHANGING FRONTIERS OF ETHICS IN FINANCE 437 Culture Ideate • Short-termism abounds – ban- The third step is Ideate. Ideation kers do not consider banking as a is the process of transitioning from ‘calling’; rather a sequence of short- identifying problems to creating so- term contracts. lutions. We “go wide” in brainstor- • Jumping ship heavily incen- ming mode, collecting as many fea- tivised through pay rises, buyouts, sible potential solutions as possible. promotions and sign-on bonuses. The process of ideation is repre- • Lack of multi-year and sented by the end points of each through-the-cycle appraisal empha- branch of Mind Map 2. The emphasises short-termist thinking. sis here is to draw upon the expe- • “Take it and run” approach in rience of the designer and upon the most good years. available technological toolkit. We De l’Empathie, nous Next Steps must create something new by uti- passons au stade de lising all the technological advan- The first step of Design Thinking la définition de la cements of recent years. We must has yielded the desired result. As we problématique et à la strengthen where something works, read through the branches of Mind recherche d’idées. or tear down and reconstruct what Map 1, key themes and trends begin needs to be changed. to emerge. The construction of a single, composite mind map enables Laying Out the Analysis us to abstract out these linkages in The following sections are orga- a way that would not be possible if nised in order to facilitate an easy the analysis were conducted in iso- reading of the analysis. We identify lation. Au stade de la Défi- common themes and for each, draft We are ready to move forward to nition, nous dérivons constituent problem statements. In- de nos observations the next steps – Define & Ideate.. une problématique novative solutions are proposed for susceptible d’action. Define each problem. Ensuite, dans l’Idéa- The second step of Design Thin- We adopt an uncompromising atti- tion, nous réfléchis- king, Define, brings clarity to the tude – which tough questions is no sons et cherchons des process. It unpacks the results of one asking? Which tough decisions idées qui permettront Empathy. The designer reframes the is no one taking to reform ethics in de résoudre la problé- Banking? In other words, as dispas- matique et de conce- empathetic explorations in light of voir un prototype. stakeholder responses and of the sionate, external examiners, can we Nous devons poser des context. The goal here is to create discern problems and solutions that questions dérangeantes meaningful and actionable pro- the industry itself is shying away dont la réponse peut blem statements for which we seek from? être difficile et la solu- solutions in the subsequent stages The questions we frame may tion compliquée. (Ideate, Prototype and Test). We de- be open ended, difficult or without vise a second mind map (Appendix immediate answers. That is to be ex- B) to assist our evaluation. pected. Having come this far, we are

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 438 not interested in the low-hanging • DEFINE PROBLEM – Do staff fruit. Our aim remains to introduce “escape”their past by switching Dans les sections lasting reform. firms? Claw-backs are relatively in- suivantes, pour chaque Let us begin with the most com- frequent and seldom exercised. Banks thème commun identi- fié au stade Empathie, monly identified theme – a reform of actively bid for talent by cashing out sont aggrégés la Défini- the culture itself. vested stock (or replacing it at a simi- tion des problèmes et lar schedule with their own) subver- l’Idéation des solu- Innovation 1 – Reform ting the rationale behind the original tions. the Culture of Banking deferment. How can we hold bankers • THEME – It is beyond doubt accountable to past performance that the culture of banking needs from previous firms? immediate reform. Several stakehol- • IDEATE SOLUTION – The ders identify it as a primary cause for industry-wide personnel network, concern. Let us examine the major mentioned above, solves this pro- problem statements under this broad blem. Even after an individual leaves theme. a firm, s/he does not disappear from • DEFINE PROBLEM – Bankers firm’s payroll. Persistent reward lin- are accused of short-termist, indivi- kages mean an individual will conti- Nous pouvons nue to be paid deferred compen- réformer la culture du dual-centred thinking and decision- secteur bancaire en making. This attitude is seen as the sation by previous employers and exerçant une pression root cause of ‘black-swan’ rogue tra- therefore remain “on the hook”for sur les points sending events. How canwe reform this performance rendered when at the sible. Nous proposons approach? firm. entre autres choses • IDEATE SOLUTION – Careers • DEFINE PROBLEM – The la création à l’échelle in banking are viewed as a frag- psychological toll of a long, hard du secteur d’acti- mented sequence of roles, rather recession on banking staff has been vité d’une surveillance pluriannuelle et multi than an integral journey. We need overlooked. As the Great Recession compagnies de la per- to find a way to encourage long- enters its eighth year, how may we formance ; envisager term planning of careers. Create an alleviate some of the everyday pres- dans le long terme un industry-wide, multi-year, multi- sures felt by the rank and file? système de rétention/ firm persistent performance-trac- • IDEATE SOLUTION – Society rémunération de la king network, thereby encouraging has little sympathy for the ‘overpaid performance indivi- a long-term view of one’s career and bankers’, when in reality the vast duelle ; et réaliser des majority have had a miserable time études sur le burn out not just to the next bonus cycle . The au niveau de toute technology now exists to track indi- of it. Most exhibit classic symptoms l’industrie. viduals through their career paths of burnout, which lies somewhere on even as they move across firms and the Post Traumatic Stress Disorder roles. The knowledge that past per- spectrum. Conduct industry-wide formance will follow an individual analysis of individual behaviour, through her career will act as a checking for symptoms of burnout. strong motivation to do right every Treat the human element of banking time. as just that – human.

CHANGING FRONTIERS OF ETHICS IN FINANCE 439 Innovation 2 – Aligning rewards or penalises an individual Compensation for firm-wide performance. Research has shown that at CEO-level, stock With Risk rewards engender extreme perfor- Considérons à présent la rémunération. • THEME – The process of per- mance (excessive profits or losses) Nous proposons de formance appraisals and rewards has (Hambrick & Sanders n.d.). At lower créer des évaluations remained largely unchanged through levels, it simply creates a disconnect permanentes afin the crisis. This is surprising, given between individual performance and d’alléger les pressions that the misalignment between un- reward. Instead, create direct lin- de fin d’année sur la derwriting long-term risks and asses- kages between an individual’s perfor- performance et nous sing and rewarding annual performance and that of the sub-division suggérons qu’il y ait within which s/he works. Encourage une évaluation des mance is often cited as an incentive employés sur le long for unethical behaviour. divisional level revenue and P&L re- terme. Nous allons • DEFINE PROBLEM – This porting transparency within the firm. également examiner le misalignment encourages unethical Some linkage to aligned divisions lien entre la perfor- behaviour if employee is “under and firm-wide performance can be mance et la rétribution budget”towards end of the year. How retained et voir comment il peut can we alleviate these artificial per- être amélioré. Innovation 3 – formance-year pressures? • IDEATE SOLUTION – Conduct Increasing Management performance appraisals on a more Accountability frequent basis (e.g. quarterly). Ove- • THEME – The ultimate accoun- rall reviews, whilst still backward tability for a firm’s performance lies Nous encourageons looking, should be conducted on a with its top executives. Banks are no la création d’une rolling basis (e.g. previous twelve different. Culture, values and atti- boucle de rétroaction months, eighteen months etc.). This tudes are set at the very top. CEOs directe au niveau de la direction ; l’impli- allows employees to average out are expected to lead by example and cation de l’autorité de bad spells with prior or subsequent demonstrate a no-compromise ap- régulation dans la mise performance, relieving unnecessary proach to ethical behaviour through sur pied d’équipes de pressures and encouraging a sustai- their actions. direction de réserve, nable return to performance. Rating • DEFINE PROBLEM – Most et l’introduction d’une agencies attempt to assess creditwor- CEOs simply apologise and keep responsabilisation thiness “through the cycle”. There their positions even after scandals plus poussée dans les promotions et les rétri- is no reason why this approach can- and missteps. Are top-level execu- butions des équipes not be applied to evaluating a bank’s tives too valuable to lose? Is there dirigeantes. most precious resource – its staff. no alternative to retaining them and • DEFINE PROBLEM – Is stock trusting them to change their ways? vs. cash split a significant or relevant • IDEATE SOLUTION – Foster a contributor to ethical behaviour? Do culture where lack of awareness is no stock rewards truly work? longer an excuse. Create a regulator- • IDEATE SOLUTION – Com- overseen, board of directors-whetted pensation in the form of stock CXO bench that stands ready to step

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 440 in on contingency basis. This bench resolution to system-wide problems can cover all mission-critical roles, is system-wide innovation. Create down to individual business lines. end-to-end automation in accoun- • DEFINE PROBLEM – How can ting, trade reconciliation and settle- we introduce greater accountability ment systems, inter-bank OTC tran- for mid-level executives who are res- sactions, exchanges, clearing houses, Nous suggérons de ponsible for specific business lines? intra-day liquidity markets. These développer des plates- • IDEATE SOLUTION –Treat can all be automated and linked to- formes informatiques annual appraisals and promotion gether. couvrant le secteur evaluation of mid- to senior level • DEFINE PROBLEM – How do d’un bout à l’autre et executives as external audits. Ac- we fund such developments? le financer avec les counting firms maintain arm’s length • IDEATE SOLUTION – The ans- amendes réglemen- taires payées par les separation in assessing balance wer is stunningly obvious – banks banques, de façon à sheets. Similarly, HR consultancies pay billions of dollars in legal fines alléger les pressions can be brought in to perform truly each year, directly as a consequence sur les fonctions de independent assessment of manage- of missteps arising from unsuper- contrôle. ment successes and failures. Reports vised manual processes. Create the can be filed directly with the Board political will to plough all those fines or regulators, should escalation be back into the industry, to create a required virtuous circle of improvement and Innovation 4 – A innovation to drag the industry into the modern technological era Holistic Overhaul Nous encourageons Of Banking Systems Innovation 5 – Enriching la réhabilitation et le and Controls the Banking Ecosystem retour des banquiers • THEME – Fallen bankers, sub- déchus au sein de la • THEME – It is quite extraordi- communauté afin que nary that in these times of ceaseless ject to regulatory sanction or repri- leurs comportements technical innovation and disruption, mand, disappear from the public eye. et leurs expériences banking systems are still mired in the They are relegated to footnotes in soient des exemples worst technologies of the twentieth bland compliance presentations, the salutaires pour century. Banking abounds with ma- nuances of their experiences blur- l’écosystème dans son nual overlays in settlements, opera- red and their lessons lost. There are ensemble. tions and accounting. Adjustments, parallels in the real world (e.g. South reconciliations and excel sheets are Africa’s Truth and Reconciliation the norm, not the exception. commission, which set the bench- • DEFINE PROBLEM – Ban- mark for rehabilitation). The poten- king systems are slow to change and tial for such rehabilitation does not inflexible to new demands placed come up very often in the analysis of upon them. This leaves little time for stakeholder pronouncements. control functions to exercise any real • DEFINE PROBLEM – Is there a control over risks. better way to keep these fallen stars • IDEATE SOLUTION – The only as part of the community?

CHANGING FRONTIERS OF ETHICS IN FINANCE 441 • IDEATE SOLUTION – The type them. We introduce these pro- regulator should take a leading role totypes to selected stakeholders and Nous examinons in creating a ‘Truth and Reconcilia- observe their interactions and expe- d’autres thèmes qui tion’ type commission. Provide the riences. Finally, we progress towards méritent une enquête plus approfondie dans fallen a platform to tell their story a final solution that is then broadly un forum séparé, no- as a cautionary tale to others. Create implemented. tamment les pressions the opportunity to return to the in- In order to implement lasting auxquelles sont soumis dustry upon completion of X hours change on the banking industry, we les donneurs d’alerte of “community service”. Incorporate will ensure the buy-in of the relevant et les fonctions de these individuals in compliance trai- stakeholders into our solutions. Our ressources humaines et nings. Their version of events will starting point of empathy towards celles de contrôle. be far more relevant to business-line stakeholders will guarantee imme- professionals than a compliance ins- diate acceptance of any innovations tructor abbreviating their missteps in ethics that we propose. By starting with empathy, we start from a posi- Les deux derniers Other Notable Themes tion of strength. stades, Prototype et Several other notable themes The final two steps,Prototype and Test, impliquent la emerge in our analysis. Test, are beyond the scope of this pa- création de produits • HR departments face conflicts per. We will therefore end our analy- qui correspondent aux problèmes que nous of interest – insulate HR akin to sis here and examine the results that avons identifiés. Ceci control functions. In extremis, exter- we have achieved. va au-delà de cet essai nal consultants to adjudicate person- Conclusion and mais méritera la peine nel disputes. d’être pris en considé- • Control Functions – improve The Way Ahead ration dans le futur. remuneration, financial literacy e.g.( SWe can look back at our appli- markets-related training, perhaps cation of the Design Thinking pro- with development of business-line cess and appreciate the success of its training modules in association with ways. We have uncovered insights the CFA, ACT etc.); empower control into the banking industry and asked functions to ask the right questions. difficult questions. Importantly, we L’accalmie relative • Whistleblowing – Conduct have devised forward-thinking and dans la tempête truly external, anonymous surveys forward-looking solutions. financière nous donne to detect problems without the in- We can be confident in enlarging l’opportunité d’introduire des change- volvement of the bank’s oversight the scope of our analysis to the broa- ments durables dans (HR or Compliance). Increase regu- der world of finance. Asset manage- la culture du secteur lators’ sensitivity to whistle-blower ment firms, pension funds, sovereign bancaire et de voir s’y concerns. wealth funds, supranational banks, développer un code accounting firms and consultancies d’éthique plus solide. Prototype and Test are all subject to similar stresses as The final steps in the process of banks and deserve an empathetic Design Thinking are to take the re- evaluation. Applying a human-cen- sults of Define and Ideate and Proto- tred ethos will enable us to identify

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 442 problems in these areas long before lull in the storm presents us with an they fissure and erupt. We can iden- opportunity to enact significant and tify industry-wide trends that may lasting change in the culture of ban- not be immediately obvious to making within which a stronger ethical nagers or risk functions monitoring code can thrive. A few bad apples individual firms, the true scale of do not disguise the fact that a majo- which may be underestimated. rity in banking wish to do good and The immediacy and urgency of do it the right way. We must equip a credit, capital and liquidity crisis this silent majority with the tools to has waned. With each passing day, incorporate higher ethical standards there are fewer fires to put out. The into their behaviour. •

References Alloway, T. & Mackenzie, M. Plattner, Hasso (2010). An Intro- (2015). Bonds: How Firm a Founda- duction to Design Thinking: PRO- tion. Retrieved from www.ft.com CESS GUIDE. Retrieved from https:// Brown, T. (n.d.). About Ideo: What dschool.stanford.edu/sandbox/ We Do. Retrieved from www.ideo.com/ groups/designresources/wiki/36873/ about attachments/74b3d/ModeGuideBOOT- CAMP2010L.pdf Brown, T. (2008). Design Thinking. Retrieved from https://hbr.org/2008/06/ Stanford (2012). The Design Thin- design-thinking king Process. Retrieved from http://ds- Hambrick, D & Sanders, G. (n.d.) chool.stanford.edu/redesigningtheater/the- Swinging for the Fences: The Effects design-thinking-process/ of CEO Stock Options on Company Risk Taking and Performance. Re- Thiel, P. (2014). Zero to One. New trieved from http://www.academia. York: Random House edu/9545373/Swinging_For_the_Fen- ces_The_Effects_of_CEO_Stock_Op- Turnali, K. (2013). What is Design tions_on_Company_Risk-Taking_and_ Thinking. Retrieved from blogs.sap.com/ Performance innovation/innovation/what-is-design- Kelly, D. & Kelly, T. (2013). Crea- thinking-030869 tive Confidence. New York: Random House

CHANGING FRONTIERS OF ETHICS IN FINANCE 443 Appendix A - Mind map

CAN DESIGN THINKING HELP ENHANCING EMPATHY IN FINANCE 444 Appendix B - Mind map

CHANGING FRONTIERS OF ETHICS IN FINANCE 445 FFinance Ethics with a Massive Open Online Course

Ethics & Trust in Finance Global edition 2016-2017

Finalist

John Francis Diaz This paper satisfies the objectives because it provides solid and rich Philippines of the Ethics in Finance Prize in discussions of case studies related to Associate Professor, terms of: a) creating awareness of finance. College of Business, the fundamental role of ethics in the Chung Yuan Christian world of finance through education, Higher Education University* specifically online education; and b) Challenges Taoyuan City, Taiwan implementing an academic project The delivery of, and access that teaches ethics in finance in to, higher education has faced a universities and via independent number of challenges in the last two online education providers. decades because of changing learner This proposal is a product of the demographics. The dramatic increase authors’ years of teaching (required) in the number of adult learners, Business Ethics classes in the master as well as the usual increase in the and doctoral programs and (elective) number of students (both privileged undergraduate classes in Finance and not) who wanted access to higher Ethics. The proposed course can education, created a need for open supplement the traditional delivery and accessible education. According of the more established Business to an article on the University * The views expressed Ethics courses, because this online- World News website, the number of herein are those of the authors and do not neces- based Finance Ethics class builds students enrolled in higher education sarily reflect those of the upon the theories and concepts is estimated to reach 262 million Organization he is affiliated discussed in Ethics courses. This in 2025, which is almost twice the to. project is also a good supplement, number in 2012. This number refers

FINANCE ETHICS FOR THE MASSES WITH A MOOC 446 only to learners who can gain access on the traditional education system Le nombre d’étudiants to higher education, and not to by cost and accessibility. According inscrits dans l’ensei- those with more limited capability. to Kaplan and Heinlin (2016), a gnement supérieur Furthermore, according to a MOOC can be formally defined as devrait atteindre 262 millions en 2025 ; UNESCO report in 2016, 122 million an open access online course aimed tandis que 122 millions young people around the world are at unlimited learner participation de jeunes sont illettrés, illiterate, while 775 million adults over the web. The online class offers 775 millions d’adultes lack minimum literacy. Open access interactive user forums to facilitate n’ont pas une alpha- education plays an important role improved learning experience bétisation minimale. in solving the challenges of course among students, professors, and L’accès ouvert de l’édu- availability, and the bigger challenge cation en ligne aidera even teaching assistants. à résoudre les défis of illiteracy. This dynamic and ever- The emergence of MOOCs posés par la pénurie de changing knowledge environment generated an overwhelming, positive cours disponibles, et le was triggered by the need for an response from online learners and problème plus grand affordable and accessible higher more recently has been receiving d’analphabétisme. education model that will educate attention from researchers in a growing number of learners. distance learning education. Based L’introduction des The increased access to personal on the December 2016 report of the MOOC en 2008 a été technology and social media is an Class Central website, nearly 100 considérée comme une ultimate solution to these challenges. established MOOC providers around innovation significative the world have partnered with more dans l’enseignement Open Online Education than 700 universities. These MOOC supérieur susceptible Tendering: Necessity de repousser les limites providers offer more than 6,850 du système d’éducation The advent of massive open courses to date. Figure 1 shows the traditionnel en termes online courses (MOOCs) in 2008 was growth in the number of courses de coûts et d’accessibi- considered a disruptive innovation in launched from the beginning of 2012 lité. D’après un rapport the delivery of higher education, and to the end of 2016. Listed courses in de 2016, les fournis- a specific solution to the limits placed Class Central are growing at a rate seurs de MOOC offrent plus de 6850 cours à Figure 1: Number of MOOCs launched from 2012 to 2016 ce jour ; et le nombre estimé de candidats aux MOOC est de 58 millions. Morrison (2012) consi- dère la plate-forme comme une innovation de rupture qui entraî- nera des changements fondamentaux et des transformations notables dans l’ensei- Source: Class Central website, https://www.class-central.com/report/mooc- gnement supérieur. stats-2016/

CHANGING FRONTIERS OF ETHICS IN FINANCE 447 Par ailleurs, Carré of 15 courses a day. The report also MOOCs will solve the problem of (2013) explique que estimated the number of MOOC budget constraints among learners by les MOOC résou- enrollees at 58 million. The report decreasing the cost of degree courses. dront le problème de also indicated that Coursera remains These developments fulfill the ideal contraintes budgétaires of openness in higher education parmi les élèves en the largest provider of MOOC with 23 réduisant le coût des million registered users, whereas edX and achieve the aspiration that études. has 10 million registered users. Other learning should available regardless providers, such as FutureLearn, are of economic, demographic, and quickly catching up with its 275% geographical constraints. La loi Sarbanes–Oxley growth in the number of registered de 2002 et la loi Dodd– users in 2015. FutureLearn became Complexities of Frank pour la réforme the fourth largest provider with 5.3 Financial and de Wall Street de 2010 ont été adoptées en million online students in 2016, Accounting Fraud réponse à la vague de after XuetangX, a Chinese MOOC The complications arising from scandales financiers et provider with 6 million online financial and accounting fraud are the à la crise économique. learners. main reasons why authorities are still Il en a résulté une The open nature and bigger scale learning, and possibly recovering, industrie financière qui of MOOC-based education offers est étroitement régulée. from the wave of financial and Cependant, en ajoutant great opportunities for expanding accounting scandals that took place plus de régulation on and improving access to higher in the early 2000s. Some regulators gaspille de grandes education. The emergence of MOOC- are still in the midst of uncovering quantités de ressources based education creates a number of the lapses that happened during the qui sont improductives possibilities for experimentation in subprime mortgage crisis of 2008. - à cause de la nécessité its delivery. Perspectives, such as The Sarbanes–Oxley Act of 2002 and de respecter stricte- that of Morrison (2012), view the the Dodd–Frank Wall Street Reform ment ces règles - au lieu de les utiliser pour platform as a disruptive innovation of 2010 were ratified to respond to créer plus d’activités à that will make fundamental corporate scandals and economic valeur ajoutée. À court changes and create a significant crises, respectively, and to keep the terme, la solution est transformation in higher education. financial services industry constantly d’exiger des législa- These modifications and new in check. The financial services teurs de conduire une approaches generated significant industry is one of the most tightly analyse coûts- béné- interest from governments (e.g., regulated industries because of the fices où les bénéfices the US and the UK governments), great magnitude of its scope. When it devraient dépasser le coût. La solution commercial organizations (e.g., fails, it has knock-on effects on other à long terme et de Pearson PLC and Google, Inc.), industries. However, it can be argued demander à l’industrie and academic institutions (e.g., that adding more regulations wastes financière de prati- University of South Australia and significant productive resources, quer l’autorégulation Chinese Tsinghua University). These because firms put those resources et l’autodiscipline et players in the evolution of MOOCs into strictly complying with the de la forcer à prendre are seeking to take advantage of the rules instead of creating more value- l’initiative de faire ce innovations in massive open online added activities for the business. The qui est correct. learning. According to Carey (2013), government punishes not only the

FINANCE ETHICS FOR THE MASSES WITH A MOOC 448 Les problèmes éthiques bad apples but also most of the good our college, I noticed that business liés à la finance sont ré- ones by providing a tightly controlled case study issues are often divided pandus et ont tendance and anticompetitive environment. into environment (e.g., BP oil spill), à devenir écrasants. Les labor (e.g., Nike’s sweat shops), social pratiques financières Thus, it can be clearly stated contraires à l’éthique that the supposed solutions (i.e., (e.g., Mattel’s lead paint scandal), peuvent continuer regulations) are not really solving the technology (e.g., Apple’s intellectual pendant des années et problem. Instead, they are producing property battles), and financial (e.g., des années sans qu’il further problems by creating a Enron’s accounting scandal and en soit fait état parce restrictive business environment. Worldcom’s financial manipulation). que les gens du haut A short-term solution is to demand I also noticed that ethical issues en bas de l’échelle ont that lawmakers be judicious in related to finance cut across any été rendus aveugles divisions and tend to become highly par l’attrait du gain enacting regulations. They should personnel. conduct cost–benefit analyses, to significant. This comes down to the determine where the benefits of fact that it can happen every day from regulation outweigh the cost. The the very simple and fleeting situation Les enquêteurs long-term solution is to require the of a clerk stealing from a petty cash échouent parfois à finance industry to practice self- box to the more complicated and identifier la cause réelle regulation and self-discipline and longer-term transactions of a Chief et l’origine du scandale compel it to take the initiative to do Financial Officer hiding billions en raison de l’énorme in debts through special purpose quantité d’écritures what is right. The financial industry non comptabilisées. is a good starting point for such self- entities. Ainsi, la discipline imposed discipline because it holds These unethical financial auto imposée semble huge amounts of money. Based on practices can continue for years être une solution plus the latest survey of McKinsey and and even decades without being durable face à la com- Company of 2013, the total global noticed because people across the plexité croissante de assets of the financial industry has business, from the lower ranks right la fraude financière et reached $225 trillion. Because this comptable. to the top, have been blinded by the amount is so staggering, even a small promise of personal gain. Moreover, fraction of fraudulent activity can involved parties treat the unethical L’autorégulation dans still have huge implications. situation as normal, as part of daily l’industrie financière business operations, and view such peut sembler idéale Finance Ethics as an practices as greatly beneficial until a mais pas impossible, Academic Discipline scandal breaks. This practice is the elle est en réalité accessible grâce aux In academe, most faculties often reason Madoff-like financial scandals individus éthiquement argue that Finance Ethics (also called went on for decades without being formés par l’éducation. Ethics in Finance or Financial Ethics detected. (Madoff allegedly began L’éthique en finance in some universities) as an academic his scheme in the early 1990s.) est une discipline discipline is already included in the Issues in Finance Ethics are special académique émer- Business Ethics course. However, because, when compared with, for gente qui fait partie de in my years of teaching required example, environment or labor l’éthique des affaires Business Ethics classes in both the issues, one has to dig deeper into (une forme d’éthique Master and the Doctoral programs in the minutiae of what went wrong.

CHANGING FRONTIERS OF ETHICS IN FINANCE 449 appliquée ou d’éthique Investigators sometimes fail to want to define Finance Ethics as an professionnelle), qui identify the real cause and beginning emerging academic discipline that étudie les valeurs of the scandal because of the massive is part of Business Ethics (a form morales, les jugements, paper trails leave important details of applied ethics or professional les comportements, et unrecorded and because of the les problèmes éthiques ethics), which studies moral values, qui surgissent dans le lack of cooperation among internal conduct judgment and ethical domaine de la finance. stakeholders. Thus, a stand-alone problems that arise in the field of discipline that focuses on financial finance. The field focuses on the ethics is a more sustainable solution philosophical arguments that seek Le domaine se to untangling the growing intricacies to propose a set of ethical principles concentre sur les argu- of financial and accounting fraud. to govern individual and collective ments philosophiques behavior in the field of finance; it qui proposent un “Education is the most enquires into the motivations behind ensemble de principes powerful weapon you can éthiques pour régir le behavior, and guides the conduct comportement indi- use to change the world.” of players in the financial industry. viduel et collectif en – Nelson Mandela This is the set of definitions that I finance, enquête sur les am using in my Finance Ethics class, This classic quotation from the late motivations à l’origine which is a traditional undergraduate Nelson Mandela captures the essence du comportement, et elective course being offered by our and purpose of having a stronger guide la conduite des Department of Finance. joueurs dans l’industrie Finance Ethics education. Self- financière. regulation in the financial industry Limited (or non- may seem like a difficult to attain existent) Finance ideal but it is actually attainable – by Il y a un besoin d’avoir using education to produce ethically- Ethics Curriculum un cours MOOC trained individuals. Unfortunately, Like the traditional Finance d’éthique en finance dans chaque pro- Finance Ethics as a formal academic Ethics class, there are few, or no, gramme d’études d’un course in colleges and universities MOOC-based Finance Ethics course département de la has yet to be recognized globally. at universities and independent finance et les fournis- Based on my research, out of the MOOC providers. There is a need seurs indépendants en 163 higher education institutions for a MOOC-based Finance Ethics ligne peuvent jouer in Taiwan (where I am currently course in every Finance Department un rôle important en teaching), less than 5% are actually curriculum, and independent online éduquant les actuels et offering courses related to Finance providers may also play an important futurs professionnels Ethics. This situation also applies to des affaires à la gestion role in educating current and correcte des informa- other academic institutions around future business professionals about tions et ressources the world. the proper handling of financial financières et comp- The formal definition of this and accounting information and tables. emerging academic field is also not resources. An open-access ethics in Un accès ouvert à yet well established in academic finance education could also make l’éducation en éthique papers, as far as I am aware. For good the shortage of this course in the et finance peut aider that reason, an exact definition curricula of business colleges and aid à résoudre la pénurie online is hard to find. Given that, I in propagating an ethical approach

FINANCE ETHICS FOR THE MASSES WITH A MOOC 450 de ce type de cours to financial literacy. The primary Finance Ethics course offers an dans le programme goals of this MOOC-based course introduction to ethics in modern d’études des écoles de are to promote ethics in finance finance and helps finance students commerce et aider à as an academic discipline, and to and practitioners approach this propager une approche éthique dans l’édu- encourage colleges and universities relatively new academic discipline. cation financière. Un and independent providers to create This online course aims to achieve cours MOOC peut être a MOOC-based course related to its learning objectives through the un instrument puissant Finance Ethics.1 use of case studies and debate topics d’éducation en rendant related to financial companies, conscient du rôle fon- Course Design: A Case individuals, and related financial and damental de l’éthique Study Approach accounting issues. The opening topic dans la discipline financière. This MOOC-based course discusses the definition, importance, could be a powerful educational promotion, and discussion of tool in creating awareness of the essential concepts in Finance Le cours en éthique fundamental role of ethics in financial Ethics. This MOOC-based course en finance proposé en disciplines. It could provide learners will feature video summaries of the forme MOOC offre une following: introduction aux pro- with the ethical principles to govern blèmes éthiques dans the financial services industry, and • 17 financial- and la finance moderne et also help online students to easily accounting-related case studies; aide les étudiants en identify ethical issues encountered by • 4 debate topics on the ethical finance et les prati- financial institutions and individuals questions around government ciens à approcher cette in both public and private sectors. bailouts, white-collar criminality, discipline académique An online Finance Ethics course relativement nouvelle. credit card lending malpractices, L’ntroduction traite could serve as a moral compass in and auditor independence; and de la définition, de the business curriculum, particularly • a bonus case on the l’importance, de la pro- finance-related topics, that could interesting issue of bribery in motion et des concepts help prevent fraudulent activities global business. essentiels en éthique and eliminate the need for excessive en finance. regulation. This course, through The 17 case studies and 4 debate education, would relieve individuals topics are divided into 4 main different sections. The first section talks about La première section and business organizations of the economic burdens that arise from cases related to ethical risks in the définit formellement financial services industry. The l’objet de la discipline fraudulent activities and from the second section discusses conflicts of académique émer- compliance costs that come with gente, l’éthique en excessive regulations. interest and individual misconduct. finance. Elle examine The third section deals with the The proposed MOOC-based aussi l’importance de misuse and manipulation of financial la promotion de cette 1 This paper indirectly encourages acade- instruments. The fourth section discipline. mic institutions to create traditional Finance explores unethical accounting Ethics course (i.e., a required or an elective practices. At the end of each main course) to be part of the Business College, section, a review will be provided to La deuxième section specifically the Finance Department’s curriculum. cover the central issues of each case

CHANGING FRONTIERS OF ETHICS IN FINANCE 451 parle des plus grands study and debate. The final topic engaged in risky behavior. Thus, the scandales récents de synthesizes the case studies and debate topic questions the extent to l’industrie financière et debate topics discussed, mentions which government bailouts furthered s’interroge sur l’irres- some limitations of the course, and or tolerated these collapses. This ponsabilité des corporations financières. provides future directions in the section will explore the following Cette section met en study of Finance Ethics. topics in details: lumière la culture de The proposed MOOC-based • AIG’s Weak Financial l’arrogance et de la Finance Ethics courses’ syllabus can Oversight cupidité en accord be found in the Appendix. Below are avec la mentalité “too Synopsis: The AIG case uncovers big to fail”. Cette the brief descriptions of each topic. how a long-standing and venerable partie soulève aussi la institution can be led to eventual question du rôle du Finance Ethics demise by a single department, here gouvernement dans le Definition, Importance, the Financial Products Unit. The fait de discipliner ces and Promotion case examines the reckless financial grandes institutions Section 1 formally defines the decisions of the unit and explains financières avec leurs how the system, though inadequate comportements à focus of this emerging academic risque. Ainsi, le thème discipline based on its relation to regulation, allowed AIG’s corruption du débat porte sur la Business Ethics. This discussion also to develop. remise en question des argues the discipline’s relevance to • Countrywide Financial’s sauvetages gouverne- today’s financial environment in the Contribution to the Subprime mentaux pour aider context of fraudulent activities and Mortgage Crisis ou tolérer ces faillites. Cette section explorera the cost of excessive regulation. The Synopsis: The Countrywide les sujets suivants en opening topic suggests how Finance Financial case identifies the root détail : Ethics can be promoted in academic cause of the subprime mortgage - La faible surveillance institutions and recommends that crisis as it points to banks’ unethical financière d’AIG every business organization should lending practices, which were - Contribution finan- be clear in its definitions of what is designed to generate loans. The cière du pays entier à legal, ethical, and profitable. abuse of subprime loans created high la solution de la crise des subprimes rates of payment delinquency and - La chute de Lehman Finance Industry mortgage foreclosures because high- Brothers Blunders risk consumers could not afford to - Les questions Section 2 talks about the pay. éthiques en rapport biggest finance industry scandals • The Collapse of Lehman avec la Taiwan Asset Brothers Management Corpo- of the recent times and questions ration whether financial corporations acted Synopsis: The Lehman Brothers - L’éthique des plans de responsibly. This section highlights case examines the largest bankruptcy sauvetage – l’argent du the culture of arrogance and greed in the world and the fall of one of the contribuable contre la consistent with the “too big to fail” world’s biggest investment banks. négligence de l’entre- mentality. This part also questions This case highlights the company’s prise. the role of the government in involvement in subprime lending disciplining big financial institutions and subsequent allegations of

FINANCE ETHICS FOR THE MASSES WITH A MOOC 452 negligence. This led to a massive schemes. This part also questions La troisième section exodus of clients, drastic falls in the the ability of investors to identify présente des personna- bank’s stock, and the devaluation of fraudulent investments. Given the lités hautes en couleurs assets, all of which contributed to involvement of credible individuals, impliquées dans des scandales d’investis- shut-down in access to short-term identifying such investments proved sement. Cette section funding that was needed to keep the difficult, which resulted in massive porte sur le conflit company afloat. financial scandals. The debate topic d’intérêts où les indivi- Taiwan’s Asset Management explores whether white-collar dus concernés utilisent Corporation’s Ethical Issues criminals are intrinsically bad as leur influence et leur individuals or are merely influenced Synopsis: This case discusses réseau pour prendre au by the business organization culture. the ethical concerns thrown up by piège des investisseurs. This section will feature the following Cette partie soulève the processes that Taiwan’s Asset topics: aussi la question de la Management Corporation (AMC) capacité des investis- applied in helping distressed • Tom Petters’ Fraudulent seurs à identifier les in- Taiwanese banks recover. The case Scheme vestissements vrais des also examines the advantages and Synopsis: Tom Petters’ case faux. Cependant, étant donné la participation disadvantages of AMC’s role in examines a US$3.65 billion d’individus hautement providing financial assistance to fraud carried out by a prominent crédibles, l’identifica- local banks. businessman through the sale of tion de ces investisse- • Debate: Ethics of promissory notes to investors. This ments frauduleux a été Government Bailouts – Taxpayers’ case explains how Petters fabricated difficile, aboutissant fund vs. Corporate negligence purchase orders from retailers and ainsi à des scandales used them as collateral to borrow Synopsis: This debate examines financiers massifs. La money from hedge funds and section explore si les the benefits and drawbacks of how this misconduct remained criminels en col blanc government bailouts for troubled, undetected for years. sont intrinsèquement big corporations. This topic weighs mauvais s’ils sont pure- the thousands of jobs that are saved • Allen Stanford’s Magic ment influencés par Investments la culture de l’organi- by bailouts against the argument sation. Cette section that tax payers’ monies are wasted Synopsis: The Allen Stanford case présentera les sujets thanks to the reckless behavior of discusses a Ponzi scheme totalling suivants : huge firms. US$7 to US$8 billion. This case - Le système pyramidal highlights the red flags that should be frauduleux de Tom Individual Financial brought to the attention of managers Petters Misconduct and other employees, feeder - Les investissements fund managers, and others who magiques d’Allen Section 3 features colorful typically interact with investment Stanford personalities involved in investment organizations. - Le système de Ponzi scandals. This section focuses de Bernie Madoff on conflict of interest, where the • Bernie Madoff’s Ponzi - Nick Leeson et la individuals concerned used their Scheme chute de la Barings influence and network to trap Synopsis: The Bernie Madoff case Bank investors into their investment shows how massive a US$65 billion

CHANGING FRONTIERS OF ETHICS IN FINANCE 453 - L’implication de scheme victimized thousands of Martha Stewart dans Misuse of Financial investors for a long time. This case Instruments un scandale de délit illustrates how a successful and a d’initié reputable individual, with legitimate Section 4 talks about the abuse of - Les mauvaises financial instruments through over- conduites organisa- success and stature, can be consumed tionnelles – Criminels by greed and use their status to start speculation and personal gain. This en cols blancs vs. an illegitimate money management section concentrates on the misuse Faiblesse de la culture business. of financial products and insider d’entreprise • Nick Leeson and Barings information to the detriment of the Bank’s Demise investing public. It also inquires into the ability of regulations to detect La quatrième section Synopsis: The Nick Leeson case these manipulations, given the parle de l’abus des ins- evaluates how one individual can secretive and internal nature of the truments financiers à cause the collapse of one of the dealings. The debate topic focuses travers la sur-spécula- world’s oldest merchant banks. tion et le gain person- on the ethical issues surrounding This case explains how a concealed credit card lending, examining the nel. Cette section se US$1.4 billion loss in unauthorized concentre sur la mau- faults in the bank’s lending practices vaise utilisation des trading and inadequacy in the bank’s and the irresponsibility of the produits financiers et internal controls led to the demise of borrowers. This section will feature sur l’information d’ini- Barings Bank. the following topics: tiés au détriment de • Martha Stewart’s • Ethical Issues in Derivatives l’investissement public. Involvement in an Insider Trading Trading Cette partie enquête Scandal aussi sur la capacité Synopsis: This case explains the des régulations à détec- Synopsis: The Martha Stewart history of the risky, yet pervasive, ter ces manipulations scandal is a celebrated insider trading financial instruments called à cause de la nature case because of the involvement derivatives. It also examines the secrète et interne des of a very popular TV personality. use of investment instruments, the transactions. Le sujet This case highlights the abuse of du débat porte sur les ethical implications involved, and nonpublic information and the use questions éthiques the reasons why they can sometimes entourant le prêt par of a private informant, which favored spiral out of control and create carte de crédit. Cette Stewart in an investment position financial disasters. section présentera les over other investors. • Galleon Group’s Insider sujets suivants : • Debate: Organizational Trading Scandal - Questions éthiques Misconduct – White-collar criminals dans les transactions Synopsis: The Galleon Group vs. Weak Corporate Culture sur produits dérivés case examines rampant criminal - Le scandale de délit Synopsis: This debate presents and unethical activity in the shape d’initié du groupe Gal- the argument that serious of insider trading. The scandal is leon organizational misconduct can considered one of the largest insider - La crise des cartes de occur in a firm because corporate trading cases in U.S. history. This crédit: le cas de Taïwan psychopaths occupy high executive story of security fraud and conspiracy - Questions éthiques positions and/or because the overall includes providing false information, dans les prêts sur organizational culture is unethical. withholding key information, and

FINANCE ETHICS FOR THE MASSES WITH A MOOC 454 cartes de crédits (prê- offering bad advice to clients. topics: teurs vs. emprunteurs) • Credit Card Crisis: The • Financial and Accounting Taiwan Case Fraud at Enron La cinquième section Synopsis: This case discusses Synopsis: The Enron case s’occupe de quelques the conduct of Taiwanese banks examines how a well-known and cas classiques de in dealing with bad credit card lauded company became plagued scandales comp- debts. The case takes a close look at by unethical, and illegal, business tables qui ont choqué indiscriminate lending practices and and accounting practices, which l’industrie financière. resulted in its collapse. This case Cette section porte the ethics of targeting students and sur des manœuvres young professionals in marketing also explains how stakeholders and financières qui ont and approvals. gatekeepers failed to stop Enron’s pour but de cacher les • Debate: Ethical Issues in business malpractices. dettes et d’enregistrer Credit Card Lending (Lenders vs. • Conflict of Interests at des dépenses fictives. Borrowers) Arthur Andersen Cette partie soulève la question de la Synopsis: This debate presents Synopsis: The Arthur Andersen capacité des gardiens the ethical issues in credit card case highlights how conflict of du système, particuliè- lending. This topic highlights the interests at auditors can lead to the rement les auditeurs et indiscriminate and predatory lending sacrifice of accounting standards. les cabinets d’avocats of banks to non-creditworthy The case also illustrates the à dénoncer les fraudes importance of maintaining corporate comptables. Le sujet customers. This debate also argues the case that consumers did not culture, values, and integrity in du débat se concentre implementing effective reputation sur les avantages et les carefully study the terms and inconvénients d’avoir conditions and are irresponsible management. des liens personnels et/ borrowers. • Worldcom’s Accounting ou professionnels avec Scandal des auditeurs externes. Financial and Synopsis: The Worldcom case Cette section présen- Accounting Scandals shows that manipulating accounts tera les sujets suivants : - Fraude financière et Section 5 deals with some of to flatter the company’s financial comptable chez Enron the classic accounting scandals results can lead to bankruptcy. The - Conflit d’intérêts chez that shocked the financial industry. case shows that financial fraud can Arthur Andersen This section focuses on financial start out small but may snowball - Le scandale comp- maneuvers undertaken to hide debts over time. table de Worldcom • Diamond Foods’ - Les pratiques comp- and pad revenues. This part also tables douteuses de questions the ability of gatekeepers, Questionable Accounting Practices Diamond Foods particularly auditors and law firms, Synopsis: The Diamond Food - La fraude comptable to expose accounting frauds. The case illustrates how a company that chez Satyam Compu- debate topic concentrates on the embraces an aggressive corporate ters advantages and disadvantages of culture can allow ethical lapses in - L’indépendance de having a personal and/or professional its financial accounting practices. l’auditeur: relation relationship with external auditors. The case examines the reputation personnelle vs. profe- This section will feature the following of the company in making bold and

CHANGING FRONTIERS OF ETHICS IN FINANCE 455 sionnelle expensive acquisitions, a practice that cultural differences, has prompted L’étude de cas du eventually forced it to cut corners in some multinational corporations to bonus explore les the preparation of its books. resort to bribery to oil the wheels. problèmes éthiques This case study illustrates the liés à la corruption • Accounting Fraud at Satyam difficulties of differentiating between dans des opérations Computers gifts and bribes when business is d’affaires au niveau Synopsis: The Satyam case done on a global scale. However, mondial. Cet envi- examines how Ramalinga Raju the bribery trend is leading to ronnement de haute misrepresented the accounts of technologie qui évolue heightened government enforcement the company to the board, stock rapidement, associé of anticorruption regulation and to exchange, regulators, and investors. avec des différences more comprehensive anticorruption This case exposes another scheme of culturelles régionales, compliance programmes. This incite les sociétés mul- fraudulent auditing practice, this time case study offers a significant tinationales à recourir in the Indian corporate setting. This understanding of the issues that affect à la corruption pour one allegedly had the involvement of the short- and long-term growth accélérer les proces- auditors and accountants. sus d’affaires. Ce cas plans of firms operating abroad and illustre les difficultés • Debate: Auditor of the use of bribes to achieve them. de distinguer entre des Independence: Personal vs. cadeaux et des pots- Professional Relationship Review of Finance de-vin dans les affaires. Synopsis: This debate presents Ethics Case Study La dernière section the advantages and disadvantages offre une synthèse des The final section provides études de cas présen- when a business hires someone from a synthesis of the case studies tées ici. Elle cite les their external auditing firm to be a covered. This part brings together points principaux ana- consultant to the company and still the major points covered in the lysés dans les sections continue the same level of auditing previous sections and explains how précédentes et explique relationship. This topic weighs a specific fraudulent activity can comment différents conflicts of interest against the big trigger a variety of ethical problems problèmes contraires contribution such a consultant can à l’éthique ont lieu en simultaneously. The review will also make to the management of the même temps qu’une talk about potential issues that may activité frauduleuse finances of the firm. arise in the field of Finance Ethics, spécifique. in particular how cryptocurrencies Chaque sujet MOOC Bonus Case: Ethical and financial technology (fintech) en éthique en finance Issues Around Bribery are quickly emerging as possible sera traité en combi- in Global Business alternatives to traditional ways of nant l’explication de carrying out financial transactions. l’instructeur et des dia- This bonus case study explores positives PowerPoint. the ethical issues surrounding MOOC-based Finance Chaque vidéo com- bribery in global business operations. prendra deux épisodes Today’s business landscape is more Ethics Delivery d’environ six à huit dynamic than ever because of the Similar to the delivery of minutes pour expli- increased role of social media and MOOCs, each topic will be delivered quer la vue d’ensemble technology. This rapidly changing through a combination of instructor de l’éthique en finance, environment, coupled with regional explanation and PowerPoint slides.

FINANCE ETHICS FOR THE MASSES WITH A MOOC 456 les principaux pro- The script and discussion for each might be covered in other online blèmes et les études de case study, and for the debate topics, classes of respective students. That cas, ainsi qu’un résumé will be based on independent research is, university students might use this final du sujet abordé. carried out by the main instructor, MOOC-based Finance Ethics course Une discussion de cinq as a supplemental resource in their à sept minutes sera with support from teaching or consacrée à la présen- research assistants. Each video will traditional Business Ethics classes, or tation de deux aspects have two installments, of about 6 any related course. des sujets du débat. to 8 minutes each, to explain the Étant donné le nombre overview of Finance Ethics, the main Online Assessment de sujets à choix dans issues of the case studies, and the final and Completion ce cours en ligne, les summary of the topics discussed. instructeurs pourront Certain pedagogies and specific Discussion of 5 to 7 minutes will proposer ces MOOC en organizational processes can also be éthique en finance en be devoted to the presentation of put in place to ensure the delivery deux parties et diviser two sides of the debate topics. This of a high-quality online learning les sujets selon la pré- video duration follows the study of experience. This is aside from the férence des conféren- Guo (2013), which suggests that usual peer-assessment method that is ciers. Les instructeurs student engagement time maxes out common for MOOC-based courses. pourront aussi inclure at 6 minutes and that optimal video For example, an online Teaching des scandales finan- length should be 6 to 9 minutes. ciers plus récents afin Assistant (TA) can help in facilitating de maintenir ce cours Given the number of suggested discussions and in realigning the en ligne à jour. topics in this proposed online answers of students by providing course, instructors could deliver this the key points of the every topic Finance Ethics MOOC in two parts explained. Academic institutions can Certaines méthodes and divide the topics depending on also require faculty members to allot pédagogiques et des lecturer preferences. For example, 4 to 6 hours of their time a week to processus organisa- monitor and assess the learning of tionnels spécifiques instructors could consider grouping peuvent aussi être utili- topics under Sections 2 and 3 as their online students. This method sés pour produire une Finance Ethics I, and have Sections 4 will also be more efficiently done expérience d’apprentis- and 5 as Finance Ethics II. Although with the help of the TA, and can sage en ligne de haute topics were arranged in a certain overcome the criticism that there is qualité en plus de la way as outlined above, online too little formal quality assurance méthode habituelle students can also create their own in MOOCs as mentioned by Daniel d’évaluation par les individualized learning experience (2012). This solution can also offer pairs. opportunities for nontraditional Pour les examens, trois by taking alternative routes through teaching approaches and learner- questions peuvent être the cases and debate topics. posées pour chaque Instructors can also include more centered pedagogy to become more présentation vidéo recent financial scandals (e.g., the dynamic where faculty members, et une question de Wells Fargo Fake Accounts Scandal, TAs, and students can learn from réflexion peut être and Toshiba Accounting Scandal) each other’s views. formulée pour chaque to make this online course more With regard to examinations, sujet de débat et le up-to-date. Some of the case studies three questions can be asked for each résumé final des sujets covered in this proposed online class video presentation on topics related

CHANGING FRONTIERS OF ETHICS IN FINANCE 457 peut être discuté. to the overview of Finance Ethics innovation also solves the problem La forme la plus signi- and case studies to measure the of inaccessible and expensive ficative d’assurance degree of understanding of online education and the bigger problem de qualité et d’amé- students. One reflection question of illiteracy. In the aftermath of the lioration de ces cours can be asked for each debate topic MOOC en éthique en subprime mortgage crisis of 2008, finance viendra des ré- and the final summary of the topics there was a new wave of concern flexions et des évalua- discussed, to determine the opinions about how best to rethink the way in tions informelles des and degree of understanding of the which the financial services industry étudiants en ligne. Ces learners. The most significant form of operates. The economic crisis also communautés d’élèves quality assurance and enhancement raised questions about the learning en ligne peuvent in this MOOC-based Finance Ethics we gained from the notorious set of aussi faire du « crowd- course will come from the reflections financial and accounting scandals sourcing » de leurs and informal evaluations of online avis et réponses aux in the early 2000s. A MOOC-based problèmes. On peut students who put answers on the Finance Ethics course has a huge délivrer des certificats comments of participants using the potential to combine these two de formation à certains MOOC platform of the university or strands by introducing a stronger participants qui pour- independent providers. ethics in finance course to the higher ront même obtenir des These online communities of education curriculum. This online crédits académiques learners can also crowdsource their Finance Ethics course can provide officiels s’ils ont achevé accessible, flexible, and free or low- avec succès ce cours opinions and answers to problems. en ligne d’éthique en Such an approach can form networks cost (depending on the provider) finance. or groups that create additional way of learning about the ethical learning channels, which seldom issues surrounding the financial occur in the traditional classroom services industry. Online learners Les cours en ligne setting in universities. Depending on can simulate, and practice dealing ouverts à tous ont the MOOC platform of the university with, ethical heterogeneity based on inauguré une nouvelle or an independent provider, online real-life case studies of companies ère dans l’enseignement supérieur et ont participants can be given Certificates and individuals. This course can permis aux établisse- of Accomplishment and may even be also serve as an avenue to discuss ments académiques able to gain official academic credits the role of ethics in finance based on et aux fournisseurs upon the successful completion of individual and corporate practices, indépendants d’explo- this online Finance Ethics course. and how such activities can be rer de nouvelles voies understood in a more comprehensive pour l’apprentissage. Conclusions way through ethics. Le MOOC en éthique en finance fournit une Open online courses ushered in All stakeholders concerned manière d’apprendre a new age of innovation in higher should ponder the causes of the les problèmes éthiques education. They allowed academic recent crisis and of past and present en lien avec l’industrie institutions and independent financial scandals. They should financière de façon providers to explore new ways also rethink the ethical role that accessible, flexible et of providing online learning and finance and accounting practice gratuite ou bon marché creative practices in teaching plays in the sustainable future of the (selon le fournisseur). a wide range of learners. This industry. Given the third installment

FINANCE ETHICS FOR THE MASSES WITH A MOOC 458 Les élèves en ligne of the Basel Accords (a.k.a. the empower professionals in the world peuvent simuler et pra- Basel III regulations), banking of finance to align financial prosperity tiquer l’hétérogénéité has been under scrutiny again for with personal integrity. The long-term éthique basée sur des questionable activities, as well as solution is to produce skilled and études de cas réelles. some related auditing practices. ethical financial practitioners through Ce cours peut aussi servir à discuter le rôle However, financial regulations do Finance Ethics education. That de l’éthique en finance not totally solve the complications would create massive and sustainable basée sur des pratiques that arise from unethical practices. positive transformation in the individuelles et d’entre- In fact these regulations even created financial services industry. Through prises, et comment de unexpected problems as they can lead this online Finance Ethics course, telles activités peuvent to a restrictive and anticompetitive students would be expected to gain a être comprises d’une business environment. Criticisms holistic understanding of how sound façon plus complète à should be analyzed and alternatives ethics and strong professionalism can travers l’éthique. should be presented to incorporate contribute to the financial viability of ethics in support of profitability an individual, company, and society. • and efficiency, and to educate and

References Bhasin, M.L. (2013). Corporate Guo, P. (2013). Optimal video accounting fraud: s case study of length for student engagement. Edx. Satyam Computers Limited. Open org blogs. Retrieved February 2, 2017, Journal of Accounting, 2, 26-38. from http://blog.edx.org/optimal- video-length-student-engagement Carey, K. (2013). Obama, Rubio, agree on one thing: technology could Kaplan, A.M., & Haenlein, M. fix the higher ed mess. Future tense, (2016). Higher education and the Slate.com blogs. Retrieved February digital revolution: About MOOCs, 15, 2017, from http://www.slate.com/ SPOCs, social media, and the cookie blogs/future_tense/2013/02/13/state_ monster. Business Horizons, 59. of_the_union_moocs_obama_rubio_ Morrison, J. (2012). Taking care agree_on_using_tech_to_fix_higher_ of business? The political economy of ed.html MOOCs and open education. Digital Daniel, J. (2012). Making sense Present Blogs. Retrieved February of MOOCs: musings in a maze 2, 2017, from http://digitalpresent. of myth, paradox and possibility. myblog.arts.ac.uk/2012/12/12/ Journal of Interactive Media in taking-care-of-business-the-political- Education. Retrieved January 17, economy-of-moocs-and-open- 2017 from http://jime.open.ac.uk/ education/ articles/10.5334/2012-18/

CHANGING FRONTIERS OF ETHICS IN FINANCE 459 Appendix Course Objectives: in the field of Finance Ethics. The Finance Ethics online At the end of the course, course offers an introduction to the students are expected to: ethical issues in modern finance, • identify moral struggles and helps finance students and of individuals and ethical practitioners approach the relatively problems of business new discipline of Finance Ethics. organizations related to finance This online course achieves its • propose solutions and design learning objectives through the use new strategies in solving and of case studies related to financial preventing future ethical companies and related financial and misdeeds; accounting issues. • be empowered to properly The opening topic discusses the face unethical practices in the definition, importance, promotion workplace, and be a catalyst and essential concepts about Finance for sustainable changes in the Ethics. The course will feature video financial industry summaries of seventeen case studies including a) four debates on ethical questions in relation to government Finance Ethics MOOCs Content: bailouts, white-collar criminals, 1. Finance Ethics definition, credit card lending malpractices, importance and promotion and auditor independence; and b) a 2. Financial Industry Blunders bonus case on the interesting issue • AIG’s weak financial oversight of bribery in global business will be also featured. • Countrywide Financial’s contribution to the subprime Case study topics were divided mortgage crisis in four different sections: first is on cases related to ethical risks in • Taiwan’s asset management the financial industry; second is corporation’s ethical issues conflict of interests and individual • The collapse of Lehman misconducts; third is about the Brothers misuse and manipulation of financial • Debate: Ethics of government instruments; and lastly, there are bailouts – taxpayers’ fund vs. cases about unethical accounting corporate negligence practices. Each main section will • Section Review provide a review to cover the main 3. Individual Financial Misconduct contents of each case study and debate. The final topic summarizes • Tom Petters’ fraudulent scheme the case studies discussed, and talks • Allen Stanford magic about the future and potential issues investments

FINANCE ETHICS FOR THE MASSES WITH A MOOC 460 • Bernie Madoff ponzi scheme 5. Financial and Accounting • Nick Leeson and the demise of Scandals Barings Bank • Financial and accounting fraud • Martha Stewart’s involvement in at Enron insider trading • Conflicts of interest at Arthur • Debate: Organizational Andersen misconduct:white-collar • Worldcom’s accounting scandal criminals vs. weak corporate culture • Diamond Foods’ questionable accounting practices • Section Review • Accounting fraud at Satyam 4. Misuse of Financial Instruments Computers • Credit card crisis: the Taiwan case • Debate: auditor independence – personal vs. professional • Ethical issues in derivatives trading relationship • Galleon Group’s insider trading • Section Review scandal 6. Bonus Case: Ethical issues in • Debate: ethical issues in credit global bribery in business card lending (lenders vs. 7. Finance Ethics Case Study borrowers) • Section review Review

CHANGING FRONTIERS OF ETHICS IN FINANCE 461

isually Enhanced Ethical VVThinking

Ethics in Finance, Robin Cosgrove Prize Global edition 2014-2015

Finalist

Christóbal Have you heard of the “Front- by his spouse, children, and friends. At Miguel Gómez Page Test”1? If you doubt whether Salomon we simply want no part of any Gutiérrez your behavior could be considered activities that pass legal tests but that Panama and Costa unethical, ask yourself how you we, as citizens, would find offensive.” Rica would feel if your actions were bro- (p. 36). Lawyer II, Superin- adcast as front-page news. To descri- This method of self-evaluation tendency of Banks*, be the method, Jennings (2015) tells constitutes a genuine expression Panama how Warren Buffett managed the of ethical thinking. Regardless of aftermath of the Saloman Brothers what the law says (but never going bond scandal. Having taken the po- against it ), the individual has a cri- sition of interim chairman in 1991, terion that helps him discern which he instructed: courses of actions to avoid. There “Contemplating any business is nothing novel in appealing to an actor’s own conscience to decide act, an employee should ask himself whether to pursue a course of action whether he would be willing to see it or not. The added value of this idea immediately described by an informed is the interplay highlighted between and critical reporter on the front page the individual’s feelings and a factor * The views expressed of his local newspaper, there to be read herein are those of independent of his own opinion (i.e., the author and do not 1 Others as USLegal.com (2015) call it “the how others will perceive his actions). necessarily reflect those New York Times rule”. Jennings (2015) also While this method provides a of the Organization he is give some variants such as “What if [in our reasonable analytical tool there is affiliated to. private meeting] the cameras were running... would we be worried?” (p. 36). still room for improvement. The

VISUALLY ENHANCED ETHICAL THINKING 462 thought process it relies on (consi- (d) the message should not be dering others’ perception of a certain easy to avoid. course of action) may be subject to By way of illustration we will the thinker’s own biases or lack of Connaissez-vous le apply the above method to lending motivation. We will therefore consi- “test des cinq colonnes transactions; Nevertheless, in the fu- à la une”? Si vous avez der how whether the process can be ture we hope to develop this method des doutes quant au altered slightly in order to reinforce and apply it in other arenas or for the decision maker’s objectivity and caractère éthique de other addressees. votre comportement, attitude. demandez-vous quelle Initiative In loan paperwork serait votre réaction s’il An alternative device is required se trouvait à la une des Let us consider mortgage lending. journaux. Ce test peut to facilitate a more thorough con- Although the details of the process être amélioré, car en sideration of the factors involved l’état, la subjectivité et in making any decision regarding and the documents involved vary le manque de motiva- ethics. The use of images will cons- from one organisation to the next, tion peuvent biaiser titute a more powerful trigger to the some basic steps remains the same: l’exercice d’imagina- imagination and furthermore will a front-desk clerk analyses with the tion qu’il demande. Je appeal more forcefully to emotional customer the amount required to propose un autre outil borrow, repayment conditions, co- pour améliorer la prise intelligence. llateral, credit record, etc. Following en compte des facteurs How would this look objectifs dans notre this the back office assesses in detail raisonnement éthique: in practice? whether the potential customer can les images. Elles Virtually any document that in- be accepted, aligning internal poli- éveillent mieux l’imagi- forms a decision maker can contain cy criteria (e.g. credit availability for nation et alertent plus images. An insert containing images his category of risk) with complian- fortement l’intelligence would be added to an original docu- ce (e.g. anti-money-laundry regula- émotionnelle. Les élé- ment. For the purposes of our initiation). The process is of interest to us ments suivants doivent être présents: (a) le tive, the documents would be used because the Financial Crisis Inquiry décideur doit savoir by financial professionals, in parti- Commission (FCIC), appointed by qu’il est destinataire cular those whose handling is close the government of the United Sta- du message ; (b) le in time to practices which have been tes to study the crisis that started in message doit mettre identified as potentially unethical. 2007, found out that in this indus- en lumière, ne serait- The following elements must be pre- try, “lenders made loans that they ce que par analogie, sent in the insert: knew borrowers could not afford les conséquences de l’inconduite; (c) il doit (a) it must be clear the the person and that could cause massive losses susciter l’émotion; making the decision is the intended to investors in mortgage securities la- et (d) le message ne recipient of the insert ter, they noted that certain high-risk devrait pas être facile à (b) the insert must communicate loans they were making could result éviter. the consequences of misconduct (at not only in foreclosures but also in least by analogy) “financial and reputational catastro- (c) the insert should aim to pro- phe” for the firm. But they did not voke an emotional response stop. (p. xxii).

CHANGING FRONTIERS OF ETHICS IN FINANCE 463 From the series of papers that face to the silhouette. Another debate loan officials and credit committees concerns whether it would be ethi- communicate to each other, we ty- cal to insert the face of the decision pically see a checklist form and a maker himself2. request of credit approval memoran- Finally, the image of a person ex- dum. Figure 1 shows a prototype in- pelled from his home and the choice of Pour illustrer la puis- sert that makes reference to the sub- the words “misbehavior”, “examina- sance de l’instrument, prime scandal mentioned above. tion” (i.e. your action), “may depri- prenons l’exemple du The dimension and position of ve” and “your complicity” serves the prêt hypothécaire. Le the label makes it almost impossible goal of appealing to emotional intelli- processus correspon- gence as well as directing the reason dant est intéressant for the reader to ignore. Then, given puisqu’ avant la crise that several different people will deal to consider foreseen consequences qui a débuté en 2007, with the document (in both the front which otherwise may not be easily les créanciers ont and back offices),the generic phrase foreseen. conclu des contrats “to whom it may concern” has been Expanding the concept to other alors qu’ils savaient used. But, keeping this in mind, one scenarios que les débiteurs ne can appreciate that another stakehol- pouvaient pas les The visual reminder that we have honorer et que cela der will also have the opportunity to entraînerait des pertes observe the cautionary message: the seen in the previous section could considérables pour les customer. Modern technology per- be attached to other kinds of docu- porteurs des obliga- mits us to go a step further, if desi- ments. To mention some, it could tions correspondantes red. In the same way that template feasibly be used with risk assessment (CDOs). La Figure 1 e-mails can be personalized, an algo- reports and transaction proposals for montre l’ébauche d’un rithm could automatically fill in the the issuance of credit to large pro- insert qui se réfère au names of the addressees and the cus- jects. Let us suppose three energy scandale des crédits projects are on the table, each of them sub-prime, et qui est tomer, to more efficiently appeal to with equal expected returns and si- placé dans la check- the emotional understanding of the list dans le formulaire matter . Further improvements could 2 In my opinion, an authorization note of the d’approbation de la be made, for example, giving a real employee is enough to permit this option. ligne de crédit. La taille et la manière dont Figure 1 . Warning label in a document l’insert est placé font que ni le destinataire ni le client ne peuvent l’éviter

VISUALLY ENHANCED ETHICAL THINKING 464 milar risks involved. Only one may the imminent prevention of inside be chosen. Even if we assume that in trading3 is of secondary importance. all cases the practitioner is going to Of more relevance is that the remin- act with absolute honesty, the diffe- der serves an ulterior objective, one Un rappel visuel peut rence between the projects could be which is repeatedly recommended être inclus aussi bien 4 dans les rapports d’éva- highlighted by the different emotio- on ethical forums: actor education . luation du risque que nal burden perceived from each ima- And perhaps a third positive effect dans les propositions ge. For example, in one project, the can be obtained. If John discovers portant sur l’octroi de image could portray the consequence that a colleague is engaged in such crédit pour de grands of a a community without electricity, activity, he might be more encoura- projets. Supposons le and in other a polluted river. ged to denounce it. choix d’un parmi trois projets énergétiques. It is also beneficial to explore the The pop-up message freezes the Les trois ont les mêmes suitability of media other than paper. of the decision maker’s computer paramètres de risque Indeed, the potential power of the vi- processes. He would only be able to et de rendement. Dans sual message increases if we place it resume the activities if he marks the l’hypothèse que le pra- throughout a process rather than in a box indicating agreement with the ticien de la finance agit value judgment that inside trading single document. To explain this, let dans chacun en toute “deserves condemnation”. It is only us return to the use of illustrations. probité, la différence after this positive and communicati- d’appréciation peut ve action that the “continue” button découler des diffé- In a pop-up message rences dans la force de 3 Inside trading: trade of securities of a pu- l’émotion suscitée par In Figure 2 we have a pop-up blic company with the unfair advantage of chaque image. Nous message that suddenly appears to knowing privileged information of the com- pouvons aussi envisa- the clerk named John Sample. John pany that other participants of the market do ger la pertinence du may or may not have the clearance not manage recours à des formes 4 e.g. cf. Objective (c) of the Rules for the to access confidential information of Ethics in Finance – Robin Cosgrove Prize autres que le papier. a public traded company; therefore, 2014-15. Par exemple, dans la Figure 2, un employé du nom de Jean Figure 2 . Pop-up message during a computer process l’Echantillon apparaît inopinément lors d’un message à propos du délit d’initiés. Cela peut être utile pour la prévention de ce type d’agissements, pour l’éducation et aussi pour encourager la dénonciation.

CHANGING FRONTIERS OF ETHICS IN FINANCE 465 enables the user to proceed.5 What if important and will prove to be use- the user does not agree with the ethi- ful in the case that a concept requires cal formulation? This is a subject of further explanation. discussion for the top executives of the organisation. I estimate that the In an e-mail Le message peut aussi être transmis par un solution is to deem such non-confor- Another technique that could be e-mail, avec un phrasé mity as a departure from the code of tried is to send the message via e- à la fois sympathique ethics of the organisation enough to mail. In addition, we could replace et encourageant. La justify laying off of the user. the “punitive” tone of the previous Figure 3 se réfère à The pop-up window satisfies the examples with a more sympathetic un conseiller finan- four proposed elements. It is inten- and empowering wording. In Figure cier dans une banque ded to be read by John and he cannot 3, the decision maker is a financial d’investissement qui reçoit un e-mail. Il y avoid the request for active partici- advisor in an investment bank. He est question d’un de pation if he wishes to continue with receives a dedicated electronic letter ses clients. L’expédi- his tasks (…and his job). To compel with regard to one of the clients he teur – le comité d’audit the assessment of the consequences, is in charge of. Indeed, the sender, – lui rappelle qu’il est the visual aide shows the hands of the Audit Committee of the bank, tenu d’agir dans “dans someone in jail. And that same ima- announces that is acting “on behalf l’intérêt” et au nom du ge together with the words “deserve” of” the client. Her name is Jane Test. client. and “condemnation” serve as stimuli La fréquence de ce Financial advisory is one of the for emotional engagement. The hy- type de messages doit most common activities performed être considérée. Un perlink to further information is as by investment banks. It is in what is bombardement per- called the buy side of the business be- manent peut s’avérer 5 A closing button remains available at the cause it will suggest to the client the contre-productif. Les upper right corner of the window in case of purchase of the best financial pro- messages espacés sont a mistake, but the continuation of the process is only through the selection of the agreement ducts available. On the other hand, à recommander pour box. donner l’impression de spontanéité. La proposition formulée Figure 3 . Kind e-mail ici étant nouvelle, l’éventail de ses applications va apparaître progressivement. Quels messages pour quelles personnes? Quelle longueur et quelle fré- quence? Quels vecteurs pour quelles cibles?

VISUALLY ENHANCED ETHICAL THINKING 466 “Construisons une we have the sell side, called that way the mechanisms depicted in Figures société et une écono- because it helps to raise funds for 2 and 3. To resolve this issue messa- mie où l’homme et its clients through the trading of fi- ges could be spaced out over time to son bien-être et non nancial instruments. Inappropriate bring a sense of natural spontaneity l’argent occupent la collaboration between both sides of to the communication. In the same place centrale” a dit le Pape François. Cette the institution should be prevented sense, the content should vary ran- phrase est à la fois ins- because it will cause a conflict of domly to appeal to the recipient’s piration et défi. Qu’est- interests detrimental to customers curiosity and encourage him to read ce qu’une économie ignorant of this collaboration. A the messages. centrée sur l’homme? Il Chinese wall between both sides is a Naturally, the scope of imple- est difficile de trouver metaphor used to describe the limita- mentation of the initiative is still to un visage humain au tions of cooperation. cœur des transactions be gauged, given the novelty of the financières, pour la In the previous illustration, the proposal. What messages should be simple et bonne raison recipient of the mechanism is clearly sent to whom? How many messages que l’homme en est John Sample, who can see a photo- and how frequently should they be absent. Il n’y a que des graph of the person that can be har- sent? What information should be chiffres, des lettres, des med in case of conflict of interests. sent and who should the sender be? symboles et peut-être The presence of such a recogniza- Can we add audiovisual content? quelques graphiques ble face appeals to the emotions, as Can we invite actors to simulate a et logos. Il n’en demeure pas moins does the friendly tone of the email. journal intervention? These are le- que la dimension The doctor analogy should motivate gitimate questions that I would like humaine de la finance John to treat Jane’s expectations with scholars and innovators to engage est devenue évidente the same respect he would desire for with. Your knowledge and creativity, quand les responsables himself6. To reduce the possibility dear reader, could turn out to be va- publics et les auteurs that John ignores the message, he is luable contributions. ont diagnostiqué que asked to reply so that the Audit Com- l’une des causes de mittee knows that he has read at least Could this provide la crise venait du fait que le ”système était part of it. a new service? en panne d’éthique”. Scopes The field of ethical thinking as it En même temps les applies to the financial services in- documentaires et les Now, something to be taken into account is how frequently the diffe- dustry is waiting to be explored and journalistes ont monté there is therefore scope for the deve- l’impact de la crise sur rent means of communicating the la vie quotidienne des messages are employed. It is not hard lopment of new services in this area. personnes. Je suppose to imagine that a permanent bombar- Consultancy firms could, for exam- que si ceux qui qui ont ding of warning or suggestive mes- ple, help an organisation set up the pris ces décisions délé- sages would be counterproductive. most suitable graphic devices and tères avaient disposé à The label in Figure 1 could go unno- series of entries to be displayed. The l’époque des moyens ticed, and the same could happen to independence of such firms is key pour anticiper la suite in creating a valuable benchmark des évènements, ils 6 This is a use of the denominated “golden among the organisations it serves. auraient été nombreux rule” present in the holy books of several à se comporter diffé- religions: “do unto others as you would have We also foresee a role for certi- remment. them do unto you”. fying agencies that can issue official

CHANGING FRONTIERS OF ETHICS IN FINANCE 467 statements distinguishing the com- is called ethical investing, i.e. when is panies that have fully implemented “supporting companies that are crea- Il est important de efficient systems of visually enhan- ting positive change in the world [or, faire appel à l’émotion- ced ethical thinking. Such certifica- for others, at least] aren’t making the nel du décideur. Cet tion could be marketed by the use argument peut paraître world worse” (Fontinelle, n.d.). But banal et dénué de of logotypes that can be stamped in the reason it was hard for me to see fondement technique. visible areas of the office, or in the the human side in a financial transac- Mais la recherche Annual Report of the corporation. tion was exactly because there were en neurosciences Present and future investors would not humans to see. There were only cognitives a montré greatly appreciate this certification. numbers, letters and symbols… and que deux processus perhaps some graphs and brands. neuronaux sont impli- Rationale qués dans la prise de However, clear glimpses of the décisions: le cognitif et This idea was inspired by an ap- human side of finance could be seen l’affectif. Aussi, dans la peal made by Pope Francis when in- when officials and authors pointed quête d’incitations qui terviewed by Tornielly and Galeazi out that among the causes of the peuvent entraîner un (2015): 2007-08 crisis was a “systemic break- changement de com- “When money, instead of man, is at down in ethics” (e.g. FCIC, 2011, portement, je ne suis the centre of the system… men and wo- ib.). Some journalists and documen- pas seulement intéressé par la construction des men are reduced to simple instruments tary producers showed the severity chaînes rationnelles du of a social and economic system… Let of the consequences of the crisis on type “cause-effet” mais us try and build a society and an eco- peoples’ daily lives (e.g. cf. Moore, par l’assimilation émo- nomy where man and his welfare are at 2009). And here we had a one-way tionnelle du message. the centre, instead of money.” (para. 3) glass that forced ex post facto re- Il a été démonté que la The sentiment is at once inspi- search to look at individual conduct décision des individus in the past whereas those ex ante in- peut être influen- ring and challenging. What exactly is dividuals, even if aware of that their cée par la manière a human-centric economy? Further dont le problème est exploration of the topic is surely a decisions were morally wrong, per- formulé. Ainsi, pour job for scholars from different fields, haps were not aware of the magnitu- améliorer la qualité des some describing, others proposing de of the consequences. Did each of décisions, le décideur and not with less merit, the work of them apply the front-page test? That devrait se concentrer those who criticize. As far as concerns we do not know. I assume that if they sur ses conséquences my own small part in the debate, I re- had had access to a real document futures et se demander which helped them project the con- “Qu’est-ce que je vais mained intrigued. Where/when had ressentir alors?” plutôt I seen a philosophical concept such sequences of their decisions, a good que “qu’est-ce que je as the human being part of a financial number would have refrained from veux maintenant?” La analysis? By the nature of their pro- the misconduct. Therefore, let us not première question, si fessions, lawyers and economists take wait for the self-motivated imagina- elle est appréhendée into account the notion of the human tion of a headline; let us force actors avec soin, est un guide in their deliberations with more fre- to turn to a real page 2 story with a très utile dans les déci- quency than a financial practitioner. human situation which says, “if your sions difficiles. To be fair, the latter also does so, for conscience fails you, this is what you example, when he is driven by what will have done to me”.

VISUALLY ENHANCED ETHICAL THINKING 468 Behavioral sciences deliberation of the reader. However, some plausible contributions have Throughout this essay I have to be mentioned with regard to the La question de savoir made numerous appeals to the im- wording, starting with the seminal comment les images portance of a decision maker’s emo- work on by Kahneman and dans un document framing tional intelligence. This foundation Tversky (1981). As a result of their influencent les déli- may seem both insubstantial and lac- bérations du lecteur behavioral experiments, they poin- king in any academic grounding. In est peu documentée ted out that identical propositions of en finance. Mais il order to defend my reference to emo- value according to mainstream ex- existe d’autres études, tional intelligence, I quote the work pected utility theory were weighted notamment sur la of Benton (2009): differently by the participants, de- façon dont la désagré- “[An] emerging field, moral cog- pending on how those propositions gation, la localisation nitive neuro-science, provides us with were written. ou les résultats sont additional insight into the human de- présentés affecte les For instance, in one of those ex- choix des managers en cision making process. The roles of periments, two groups of people matière de présentation deliberation, affect and emotion are were given the same hypothetical des choix et d’investis- highlighted through this research [… scenario of preparing for the out- sement. Ainsi, quand which] is in direct opposition to the break of an unusual disease. Group la relation entre la classical Cartesian view of decision- 1 had two alternatives, one in terms performance future et making as a reasoned, emotion-free les actions de l’organi- of certainty and the other in terms of process. By using brain imaging… probability, which were mathema- sation ne sont pas bien researchers have determined that two comprises, les analyses tically equivalent to the alternatives financières accordent clear neural processes, cognitive and given to group 2. The difference was plus d’importance à affective, are involved in decision ma- that the first group received the state- l’information qualita- king.” (p. 41). ments in terms of lives that could be tive. That means that our behavior, in saved whereas the other group were La recherche sur les terms of deliberated determinations, presented with the same information images prolifère en is to some extent influenced by the psychologie et en in terms of people who could die. marketing. Le meilleur stimuli to our sentimental percep- The authors observed that “choices exemple est celui des tions. Hence, in the quest for the fac- involving gains are often risk aver- mises en garde sur les tors which bring about behavioural se and choices involving losses are paquets de cigarettes change I am interested not only in often risk taking” (p. 453); but for dont s’inspire la Figure the rational cause and effect but also the purposes of this essay their most 1. L’expérience réussie in the emotional assimilation of the relevant findings are (a) that indivi- dans le tabac permet message. duals’ preferences changes according d’escompter que ces techniques auront les to how factors involved in a decision Images and formats that in- were presented to them and (b) that mêmes effets quand fluence financial decisions elles seront appliquées to improve the quality of decisions: dans les formalités de In the field of finance there is decision-maker [should] focus on fu- l’industrie financière. little material on how the placing of ture experience and ask “What will images in a document, let us say, a I feel then?” rather than “What do transaction proposal, can affect the I want now?”. The former question,

CHANGING FRONTIERS OF ETHICS IN FINANCE 469 when answered with care, can be the labels on the tobacco packets that more useful guide in difficult deci- guided the design of Figure 1. Those sions (p. 458). studies, although not exempt from re- Libby and Emett (2014), while cent criticism, demonstrate that ima- not yet studying the use of images, ges encourage support or rejection of have surveyed U.S. based research the regulation and lead to proposals with regard to the disaggregation, for a more effective deterrence to be location and narrative attributes of put in place. In the report to the Di- earning presentation and their effects rectorate General for Health and Con- on manager reporting choices and sumers of the European Commission, investor decisions. The relationship Sambrook Research International between these is a good starting point (2009) stresses six principles, two Ma préoccupation ici of which inform us that : Combined n’est pas de savoir si je to better understand the incidence pictorial and text warnings are signi- verrais un jour l’appli- of such components in the informa- cation de cette propo- tion content and the ease with which ficantly more effective than text only sition dans l’industrie it can be processed. Other authors warnings, especially educating the financière. Je pense (Ettredge, Richardson and Scholz, public of the health risks and chan- que cela viendra de soi 2001 and Dull, Graham and Baldwin, ging consumer behavior… [and that] quand apparaîtront les 2003) have looked at the format of fi- Fear inducing warnings (using strong opportunités d’affaires nancial information that is presented ‘shocking’ images related to health que cela offre. Je me on internet. Bell’s work (1984) comes risks) and strong emotion inducing préoccupe plutôt de warnings (especially involving chil- savoir comment limiter closer to our line of enquiry into the dren and unborn babies) are the most la manipulation et use of images. He categorises infor- l’incurie qui pourraient mation to be considered in manage- effective way to educate consumers dénaturer l’élabora- ment decisions according to whether on the health risks of tobacco use and tion et le contenu des it is numeric or non-numeric. His stu- to achieve changes in attitudes and messages et comment dy concludes:“when the link between behavior (p. 2). faire pour que la organizational actions and future per- systématisation de ces formance is not well established and The bottom line: from techniques n’amène understood, financial analysts may self-criticism to a call for pas le relâchement du sens éthique de give more weight to nonnumeric in- more research and action responsabilité. formation in evaluating a company” (p. 169). The success of warning notices in the tobacco industry leads us to Experience of images that in- expect similar results in the utiliza- fluence non-financial decisions tion of such a technique in financial paperwork. It has to be remarked, Even though investigations into nevertheless, that although smoking the effect of images used in finan- continues to be legal, our goal with cial documents are lacking, the same the visually enhanced ethical thin- cannot be said regarding the fields of king tools is to eradicate unethical marketing and psychology. The best behavior. example is the study of the warning

VISUALLY ENHANCED ETHICAL THINKING 470 Assessing the feasibility of this ini- and conduct sense of responsibility tiative is not straightforward without towards ethics in the staff at every being able to rely on enough relevant level. Outsourcing the production research. However, I am not concer- of the tool should not be the same ned with wondering whether one as outsourcing responsibility. Let us Ces préoccupations devraient conduire à day I will see the implementation of imagine that a firm is under public approfondir davantage the proposals described in this essay. scrutiny due to a scandal. The top l’idée. La meilleure I think that it will surely happen as executives could be tempted to claim manière d’avancer est long as there is a strong enough busi- that they are not ethically responsible de tester en grandeur ness case behind it. Rather, I am con- and show to the media as evidence nature plutôt que de cerned with limiting the possible ma- their certification (previously mentio- spéculer sur ce qui nipulations or negligence that could ned in this essay) and other tools we pourrait arriver. C’est occur when designing. For instance, have proposed. ainsi que les faiblesses in the case of the three energy produ projet, celles The aforementioned criticisms mentionnées plus haut jects on the table, it is clear that the should be better considered as ob- et les nouvelles qui person deciding which images to use servations which highlight the need ne manqueront pas can greatly influence the decision one to study this idea further. Moreover, d’apparaître ultérieure- way or another. As the Roman poet the best way to analyse the effects ment, seront corrigées Juvenal once asked, “who will guard of something is to test what is rea- au fur et à mesure de the guards themselves”? And what if lly happening rather than imagining sa réalisation. one day the pop-up message requests what could happen. Therefore, a good agreement for something whose ethi- number of the project’s limitations cal credibility is still under debate? will be amended during the path of Or worse even, if the static statements its realization. This will count also for do not catch on time the formation of new objections that are bound to sur- unethical practices that must be de- face at some point. What is missing nounced. then? It has been already said. Let us Another possible danger is that not wait for a self-interested glance outsourcing the design of ethical at an imaginary headline to motivate criteria or relying too much on a us: “the initiative of visually enhan- certificate provided by a specialised ced ethical thinking that could have consulting firm may cause staff at happened”; let us turn to a real page every level to abdicate responsibility 2 with a human situation saying “we for the ethics of their own decisions did it”. •

CHANGING FRONTIERS OF ETHICS IN FINANCE 471 References Bell, J. (1984) The Effect of Presen- Jennings, M. (2015) Business Ethics tation Form on the Use of Information in and Selected Readings. Connecticut: Annual Reports. United States: Mana- Cengage Learning. gement Science. Kahneman, D. and Tversky, A. Benton, M. (2009) Emotions, Perso- (1981) The Framing of Decisions and nal Ethics and Professional Life: the Lost the Psychology of Choice. United States: Link. Switzerland: Finance and Com- Science. mon Good1. Libby, R. and Emett, S. (2014) Ear- Dull, R., Graham, A. and Baldwin, nings Presentation Effects on Manager A. (2003) Web-based financial state- Reporting Choices and Investor Deci- ments: hypertext links to footnotes and sions. United States: Cornell Univer- their effect on decisions. United States: sity. International Journal of Accounting Information Systems. Moore, A. and Moore, M. (Produ- cers) & Moore, M. (Director). (2009) Ettredge, M., Richardson, V. and Capitalism: A Love Story [Motion Pic- Scholz, S. (2001) The presentation of ture]. United States: The Weinstein financial information at corporate Web Company & Dog Eat Dog Films. sites. United States: International Jour- nal of Accounting Information Sys- Sambrook Research International tems. (2009) A review of the science base to support the development of health war- Financial Crisis Inquiry Commis- nings for tobacco packages. England: sion (2011) The Financial Crisis In- Sambrook Research International. quiry Report. United States: Official Government Edition. Tornielly, A. and Galeazi, G. (2015, January 11). Francis: to take Fontinelle, A. (n.d.) Ethical Inves- care for the poor is not communism, it is ting Tutorial. Investopedia. Retrieved the Gospel. Vatican Insider La Stampa. from http://www.investopedia.com/ Retrieved from http://vaticaninsider. lastampa.it/en 1 Second place in the 2009 edition of the Ro- bin Cosgrove Prize.

VISUALLY ENHANCED ETHICAL THINKING 472 473

uppose we change the (meta) SSrules of the game?

Ethics in Finance, Robin Cosgrove Prize Global edition 2012-2013

Finalist

Ewa Kruchowska When faced with serious difficul- manifesto – an attempt to speak on Poland ties, or a full-blown crisis, we tend to behalf of the nameless, faceless, voi- Psychologist, Cracow assume that the solution should be celess many. What I have to say may commensurate with the problems. sink without trace in the waters of si- The more difficult the situation, the lence; and yet I hope it will be heard more radical – even revolutionary – in broader circles. As I write these the solutions we look for. We prefer words I cannot know if it will – but general, abstract approaches to con- I very much hope so, and it is this crete, down-to-earth ones. I would hope that encourages me to write. like to propose a different approach, and seek reasons for the erosion of Whose voice are you public trust in financial institutions, reading? Whose voices as well as ways to rebuild it, by ma- are you not hearing? king some specific observations. In I do not work in a financial ins- this paper I will make use of ‘hot’ titution. My right to take part in the knowledge (Kozielecki, 2000), i.e. debate and present my views comes knowledge based on my own expe- from my professional and private rience. This will not be an abstract contacts with people employed in or cold analysis. There will be no such institutions. I am a psycholo- graphs or rows of figures. No well- gist, and I have observed a dramatic known businesspeople or young, increase in the number of bank staff promising financial experts will be among my patients. Regardless of quoted. In a sense this paper is a which institution employs them, or

SUPPOSE WE CHANGE THE (META)RULES OF THE GAME? 474 which position they hold within it, the world around us, and our own the symptoms that have made them lives. In many ways it fulfils our fun- seek help turn out to be very similar, damental needs and give us a sense Cet essai n’est pas celui ranging in severity from minor (dis- of purpose – not always the final and d’un professionnel de couragement, loss of motivation) to only purpose, sometimes just one of la finance. L’auteur est moderate (constant stress, psycho- several alternatives, but always an une psychologue qui somatic symptoms, burn-out) and important one (Palusiński, 2002). opte pour une analyse major (suicidal tendencies, symp- de l’éthique en finance Until some years ago I had no toms of personality disintegration or depuis la perspective professional background. I had a uni- du thérapeute, en ana- behaviour similar to the post-trau- versity degree, but I was uncomforta- lysant le cas d’em- matic stress disorder (PTSD) first ble with the role it conferred on me. ployés, victimes de la « diagnosed in Vietnam war veterans). That changed with time, and with guerre sous couvert » Although the patients I am writing newly acquired skills and experien- qui sévit dans le milieu about are not involved in an armed ce. Now I can call myself a psycholo- bancaire. conflict, they feel as if they have gist. Yet I do not feel that my current lost a war – the war for themselves, profession is my final one. I am also their dignity and their professional a trainer and a lecturer, and one day L’activité profession- self-respect. They are the victims of I may become someone else. I am nelle va au-delà d’une a silent war being waged within fi- open to change. Probably this is a simple source de reve- nancial institutions, a war without question of age, in two senses – post- nus. Parfois, elle nous bloodshed, a war fought with white modernist multi-personality, typical aide à définir notre gloves, often within the limits of the of the age of fluid modernity and personnalité et nous law – but not the law that determines early adulthood (Bauman, 2007). fait sentir que nous people’s rights to respect and digni- pouvons influencer But what about people who have le monde qui nous ty, a law so vague and hard to define grown up in different times, their entoure. that it is all too easy to overlook it, consciousness and personalities de- and abuse it. termined by the work ethic, for a Work that shapes longer period, and on a larger scale – people who, having worked for the personality same institution for twenty or thirty Les cas de deux patients nous aide- What is work? It is more than years, discover (often in an inhuman ront à développer nos just a source of income. Sometimes manner) that they are no longer ne- propos. it is a fundamental element of our eded? This generation is gradually personality that helps us determine leaving the workforce, and perhaps who we are, or who we are not – per- there is no point in paying attention haps that we are nobody. Work takes to them – perhaps we should simply up most of our daytime hours, crea- wait for the problem to fade away of ting a vital structure that satisfies our its own accord. Maybe this is what need for order and security. It gives will happen. Purely in terms of pro- our lives a rhythm without which we fit and loss, it may also make sense would find it very hard to function. to lay off employees aged over fifty. Work makes us feel we can influence Perhaps this is a logical strategy. Yet,

CHANGING FRONTIERS OF ETHICS IN FINANCE 475 even if ethics makes use of logic, is psychiatric treatment, one resigned Le premier cas est celui it nothing more than that? I may be and one spent some time in a men- de P.L., une employée wrong, and banking ethics may be tal hospital. The ‘ethos’ prevailing at de banque de 51 ans something essentially different, con- P. L.’s bank is well illustrated by an licenciée sans indem- sisting only of rows of figures that do excerpt from one of the e-mails the nités, alors qu’elle avait été élue par le journal or do not add up to expected sales branch manager sent employees on a de sa communauté targets. But what makes me persist daily basis: ‘Just remember, it’s all or comme la « meilleure is my belief that this is not so, or nothing. I don’t want to have to go to employée de banque » at least not entirely so – and that it the regional office and try to explain et qu’elle était dans la should not be so. why our branch generates no sales moyenne des objec- and others do. So no excuses – the tifs à atteindre de sa Too old to count weather, holidays, or whatever...’. Of succursale. Son renvoi course, face-to-face communication et celui de toute son I would like to present an exam- équipe a provoqué ple that illustrates the above pheno- with staff was no different – if an- chez P.L. une crise menon (with all identifying details ything, since the spoken word is so nerveuse et elle a dû omitted) – a case study rather than fleeting, it was even harsher. suivre un traitement a statistical sample that can be ge- The trial court deemed P. L.’s depuis lors. La justice a neralized and applied to the whole dismissal unlawful, stating that she par la suite conclu que was fired because she refused to ca- le licenciement était population. Just for a moment, let abusif et qu’il était la us think in quantitative rather than rry out the bank’s unethical policies. conséquence de son qualitative terms. The judge said he had not apprecia- refus d’appliquer une A 51-year-old woman, P. L., was ted how badly bank employees were politique bancaire peu employed as an individual client ad- treated in terms of working condi- éthique. visor for 21 years. She was dismissed tions, atmosphere, mental pressure and disrespect. Le cas de T.U., un from her job for ‘insufficient business activity to warrant a personal bonus’. jeune conseiller finan- Too young to matter cier enthousiaste à ses It should be mentioned here that she débuts, nous permettra was voted the ‘best bank worker’ in On the right-hand side of the em- de comprendre en quoi a survey among bank clients held ployment bell curve, people over 50 les attentes employé/ by a local newspaper, was highly are being lopped off as if they were employeur divergent. trained and met her sales targets at extreme cases. On the left-hand side Après quelques mois the average level for her branch. P. of the curve a similar fate awaits de travail T.U. était pro- L. received no severance pay or out- younger staff, employed on never- fondément démotivé et souffrait de burn-out. placement offers. The shock of her ending temporary contracts that are L’origine du pro- unexpected dismissal, and the way nevertheless eventually terminated, blème était éthique : in which it took place, caused her and treated like so much cannon Il se sentait comme le to suffer a nervous breakdown and fodder, to be replaced whenever héros d’une tragédie become reliant on medicines. Worse Poland’s calamitous labour market grecque dans laquelle still, her dismissal was the culmina- demands it. Of course, some may say quoiqu’il fasse, certains tion of a prolonged harassment cam- a bank is not a charity but a business gagneraient et d’autres paign whose victims were not only whose staff must generate profits in perdraient. P. L. but the whole team: two sought order to justify their employment. In

SUPPOSE WE CHANGE THE (META)RULES OF THE GAME? 476 that case, let us consider why they Perhaps if T. U. had been working Devenu vendeur plus do not generate profits, or why the in a large city, his wish to be fair to que conseiller, il ne level of profits they generate does his customers would not have been croyait pas que les pro- not satisfy their employers. so acute. In cities, clients are just an duits financiers qu’on anonymous mass of faces, and, as we l’obligeait à vendre afin Take the case of a young VIP ad- d’atteindre les objectifs visor, T. U., who came to me for coa- know, depersonalization encourages étaient bons pour ching. He sought help because, after dehumanization of relationships. ses clients. Le fait de just a few months in his new post, But T. U. was meeting his clients in vivre dans une petite his initially very high motivation had private life, and wanted to be able to communauté aggravait evaporated and he had all the symp- look them in the eye without feeling son dilemme, car il toms of burn-out. He was torn bet- ashamed. His dilemma may be sum- connaissait personnel- med up as follows: was he a client lement chacun de ses ween his clients’ and his bank’s con- advisor or a bank salesman – and, if clients. flicting interests. He felt he was in a ‘win-lose’ situation, and saw himself he was both, how was he to reconcile as a tragic hero in an ancient dra- the two? One of the faulty strategies ma: damned if he did, damned if he he adopted was ‘amputation’: at work didn’t. Aside from purely pragmatic he tried to forget that he was a human being and become a mechanical, issues, the problem was mainly an Pour remplir ses unthinking ‘robot’, doing his mana- ethical one. T. U. did not believe the obligations profession- gers’ bidding without any thought for nelles, il opta pour la products he was compelled to offer its ethical or practical consequences. stratégie de « l’ampu- his clients (in order to meet sales tar- In 1844 Marx described a similar tation » et agissait gets) were really useful or valuable phenomenon, which he termed ‘alie- sans sentiments, de to them. Nor was he alone in this. nation’: the factory worker’s inability manière mécanique, Here is a statement by a bank emplo- sans penser aux to identify with all or part of the pro- yee published in the newspaper Ga- conséquences éthiques. duct he was making. Une sorte d’aliéna- zeta Prawna: ‘It’s quite simple – you In this case alienation was due tion marxiste. Mais have to meet your quotas. You have finalement, le code to sell a certain number of products: to the work itself, which the worker d’éthique personnel mortgages, life insurance policies, was unable to understand – and abode T.U. l’empêcha de credit cards, loans, investments ... ve all accept on ethical grounds. The manipuler ses clients Perhaps this month you were luc- effects soon became visible: loss of pour atteindre les ky in, say, mortgages, but that’s not commitment, and growing emotional objectifs de la banque distress, even in private life. et se manifesta d’abord enough. If you haven’t sold enough 1 par un maque d’enga- cards or policies, the manager will T. U. felt increasingly reluctant to gement professionnel be on your tail. Good salespeople carry out his professional duties. If puis par un état de have to be goal-oriented, but they people do not understand or accept détresse émotionnelle, mustn’t think too much or feel any what they are doing but are forced to y compris dans sa vie empathy’ (Suchodolska, 2012). keep on doing it, their work becomes personnelle. more mechanical and uncommitted. 1 It is worth stressing that these words, in As a result, they accept it even less their rhetorical dimension, are a clear reflection what the bank manager quoted above was and feel even more alienated – until saying to his staff. something finally snaps.

CHANGING FRONTIERS OF ETHICS IN FINANCE 477 Another way to cope with the hierarchical structure – from abs- situation was the ‘ruthless bastard’ tract and complex to more personal Face aux dilemmes strategy. The idea was to achieve sa- and concrete. éthique rencontrés les targets by any means, using ma- par T.U. et P.L., on nipulative psychological tricks (a. k. How to remain oneself pourrait penser qu’une démission mettrait fin a. ‘sales techniques’) to talk clients while working at a bank au problème. Toute- into purchasing products that had Let us start – perhaps illogica- fois, plutôt que mettre top priority for the bank but were lly – with the third and final dilem- fin au problème, not really appropriate to the clients’ ma. Staff want to remain themselves nous souhaiterions le needs. T. U. rejected this strategy out résoudre. when they are at work; specifically, of hand, for it was incompatible with they want to be able to apply the his personal code of ethics. From same code of ethics as in their pri- a pragmatic point of view, we can Le personnel bancaire vate lives. They want to treat clients affronte un triple compare this strategy to sprinting fairly, respect them and offer them conflit d’intérêts (1) during a marathon: profits are swift 2 the most appropriate solutions ba- concilier les intérêts but short-lived, and the runner sed on the best available professional de la banque et de ses ‘blows up’ at the first bend. knowledge. Clients expect the same, clients (2) être conseil- Of course, there is always a radi- ler et à la fois vendeur for they are talking to advisors, not cal solution to this dilemma – quit- (3) rester soi-même salespeople. In practice, however, dans sa vie profession- ting your job. Let us assume, howe- things are quite different: clients do nelle. ver, that we want to solve problems not receive the products most suited rather than just erase them. The to them, but the ones that are high dilemmas facing bank staff can be on the bank’s sales agenda in the cu- Les employés sou- summed up as follows: (1) how to re- rrent quarter. More and more clients haiteraient pouvoir concile the bank’s and the client’s in- are aware of this, and it influences appliquer le même terests, (2) how to be an advisor and code éthique dans leur their trust in the counselling they a salesperson at the same time, and vie professionnelle que receive from banks’ client advisors. dans leur vie person- (3) how to remain oneself in profes- The internal conflicts advisors find nelle. Ils souhaitent sional life. Hence we have a conflict themselves facing changes the way être justes avec leur of interests on three levels: a conflict they serve clients. Here even the best clients et les respecter. of institutional interests (between sales training will not help much, for L’attitude des employés the client and the bank), a conflict of what matters is not know-how but est très importante professional interests (between the internal conviction (ethos, attitude), quant à l’image que la perfect advisor and the perfect sale- culminating in the question: am I re- banque projette auprès sperson) and a conflict of personality des clients. S’ils sont ally offering my clients what is best abattus, en conflit in- interests (between the bank emplo- for them? Let us note here that not terne, ils transmettront yee and the human being). Looking only because of spectacular finan- une image défavorable, at these three dilemmas, we can see cial scandals (such as the collapse celle d’une institution that in fact they involve very similar of the Polish company Amber Gold peu fiable. issues, are interlocking and have a in 2012) but also because of nume- 2 The runner in this analogy may be either the rous more minor instances of unfair advisor or the bank itself. practice, banks are no longer trus-

SUPPOSE WE CHANGE THE (META)RULES OF THE GAME? 478 ted by the general public (Pieńkosz, to create situations in which emplo- 2012). We should bear in mind here yees do not perform their duties pro- that a ‘bank’ is too general and elu- perly because of internal conflicts, sive a concept for clients; instead, or else do perform them but end up L’homme éprouve un they identify the institution with the besoin d’influencer son despising themselves and the banks entourage et de main- employees they talk to. If employees they work for, culminating in burn- tenir un comportement are troubled by internal conflicts and out and despair? They are then re- cohérent. Mais si pour feel discouraged and burned-out, the placed by inexperienced newcomers conserver son emploi, institution they work for will be seen who are unaware of the conflicts il doit perdre cette as untrustworthy. they will soon be trapped in – and cohérence interne, le will end up functioning, and suffe- jeu en vaut-il la chan- Needs and dilemmas ring, just like their predecessors. The delle ? Research by psychologists has huge turnover in front-office staff, shown that we all need to influence including the VIP section, is not the world around us and be inter- conducive to building up long-term nally consistent in our behaviour relationships with clients. All these Remplacer un employé and attitudes (Frankl, 2009; Obu- factors point to short-term thinking, parti pour cause de chowski, 2002). These needs are and do not create in clients’ minds conflit d’intérêts par a sense of security and trust towards un employé plus jeune, inherent and general, and do not go the institutions they have entrusted inexpérimenté et away once we are at work – unless, inconscient des conflits of course, our professional survival their money to. auxquels il sera bientôt seems to depend on it. Yet eventually confronté, n’offre pas we must ask ourselves the following Ethics in banking: une image positive question: if I am losing myself in or- myth or reality? (sécurité et confiance) der to gain something, what is the The common factor in the afore- de la banque. point of gaining it in the first place? mentioned cases of both young and Moral dilemmas and awareness of more experienced employees is their conflicts of interest are not confined concern for client relationships. P. L. to specific employees or the more received awards for high-quality ser- informed and observant clients. A vice, and T. U. received thanks from Les deux cas étudiés ci- wider circle of friends, relatives and satisfied clients. Both of them adhe- dessus ont en commun colleagues share the same feelings – red to the principle that the client un licenciement dû which become a matter of public re- is the most important person in the au refus d’appliquer la politique de la banque cord as they are mentioned more and bank, and that good relationships que les protagonistes more frequently in legal proceedings are more important than short-term considéraient peu instituted by dismissed bank emplo- sales targets. Both were dismissed éthique. yees. The circle of potential and exis- for ‘failure to implement bank poli- ting clients that are aware of the true cy’. The question we must then ask facts is growing. Is it really in banks’ ourselves is this: what is ‘bank poli- interests to allow such negative cy’? Is it just about short-term pro- views about financial institutions to fits, with no thought for long-term become more widespread? Is it wise benefits or client relationships? Or

CHANGING FRONTIERS OF ETHICS IN FINANCE 479 has it been distorted at some level goals rather than their own; but they Employés et clients of management?3 Whether we are should respect the various parties’ ont de plus en plus dealing with the first option (the di- needs by creating win-win situa- l’impression de n’être sappearance of the ‘good work’ ethos tions. To achieve this, a relationship que des moyens pour atteindre des objectifs, at banks – see Kotarbiński, 1982) or of cooperation and co-dependence plutôt qu’une fin en the second one (distortion of initia- must be created, based on a sense of soi. L’idée que tout le lly correct assumptions), the chan- ‘playing on the same side’. It should monde y gagne semble ces of remedying the situation are be noted here that the client’s, the avoir disparu or, fina- slim if only lip service is paid to the employee’s and the bank’s goals do lement, l’objectif (les relevant principles. The use of such not conflict: both the client and the bénéfices) est bel et camouflage techniques as campaigns employee want to make a profit, bien le même pour tout and so does the bank. Furthermo- le monde. Le succès designed to increase consumer con- individuel n’est assuré fidence (e.g. advertisements creating re, strange though this may sound, que si tous les sujets an illusion of trust) comes closer to the bank needs respect and secu- jouent selon les mêmes ‘corpse painting’ than revival of the rity (in the sense of its clients’ and règles (dilemme du basic idea. If the bank has adopted employees’ loyalty and the stability prisonnier). a ‘win-lose’ rather than ‘win-win’ of the franchise) quite as much as approach to its relationships with the client or employee does. So, if Il est de plus en plus everyone’s goals are the same, why nécessaire d’ins- clients and staff, any improvement all the problems? The answer to taurer un système will require a radical change in its de confiance tridi- basic assumptions. this question may lie in Dresher and mensionnel où (1)la Flood’s famous ‘prisoner’s dilemma’. banque part du prin- A self-fulfilling Individual success can only be achie- cipe que le client veut (meta)assumption ved if the relationships between all rembourser son prêt et the subjects are well understood and Both bank employees and more que son personnel veut everyone abides by the rules of fair être aussi efficace que observant clients feel that they only play. Clearly, if one party breaks the possible. (2) Le client matter to financial institutions if assume que les offres rules in order to make a short-term they generate profits. They are only profit, everyone else will suffer. faites par la banque a means to an end, rather than the correspondent à ses What would a system of three- end itself (contrary to Kantian prin- besoins. (3) L’employé way trust look like in practice? The ciples). Of course, financial insti- sait qu’il couvre les institutions affiliated to the Euro- tutions cannot suddenly start pur- besoins de sa clientèle pean Federation of Ethical and Al- et que ses conditions suing their employees’ and clients’ de travail se basent sur ternative Banks (FEBEA) are good 3 le respect mutuel. The Good Principles of Banking Practice examples. According to a report by quoted here seem to point to the second op- Toute hypothèse Poland’s Credit Information Bureau tion: ‘Chapter II: Principles of banking activi- de départ contraire ties in relations with customers: 1. In relations (BIK), ‘87% of [FEBEA] companies créerait une situation with their customers, banks should act with repay their loans on time, or with paranoïaque menant the special trust conferred on them by custo- only a slight delay. Only 5% of com- fatalement à une mers and high standards of dependability, thus panies are seriously (more than a «prophétie auto-réali- treating all their clients with due diligence; 2. year) in arrears. Moreover, these satrice». A bank must not use its professionalism in a way that damages clients’ interests.’ data concern only part of the corpo-

SUPPOSE WE CHANGE THE (META)RULES OF THE GAME? 480 rate loans market. Of the companies This is not to say that in reali- affiliated to Poland’s Society for So- ty we will not encounter situations cio-Economic Investments (TISE), in which the mutual trust ‘pact’ is none is in arrears’ (Zachariasz, broken. Some customers, employees 2011). The rules of fair play are qui- and banks will always break the ru- C’est aux institutions te simple. Banks assume that clients les of fair play; but the point is that bancaires, en tant intend to repay their loans and that we should not assume this in advan- que maîtres du jeu, staff want to be as efficient as possi- ce, and that toxic situations – con- de changer le climat ble; clients assume that offers made sidered as the exception rather than dominant. Si elles by banks are well suited to their ne- the rule – should be recognised and mettaient en œuvre eds, even if they are temporarily not corrected in good time. un changement réel in line with the banks’ sales policies; et visible, la confiance Suppose we change the auprès de la clientèle and staff act ethically and honestly. et des employés serait Staff in turn assume that banks offer rules of the game? restaurée au fil du clients the best possible solutions, The bank, as the institution that temps. that their employment contracts will basically dictates the rules of the be permanent and that their working game, can and must change the pre- conditions will be based on mutual vailing climate (from ‘win-lose’ to respect. The opposite assumption – ‘win-win’) and the basic principles that customers will not repay loans, (from ‘unfair’ to ‘fair’ play). If this is Un état de confiance that staff will make as little effort as reflected in actions and attitudes, it mutuelle repose sur possible and that banks will exploit can – with time – change the beha- la foi en la nature both clients and staff and then get viour of both staff and clients. This humaine. rid of them – creates a paranoid, self- will entail believing in human nature fulfilling situation in which no-one (harmony and confidence), the uni- trusts anyone else, thereby confir- versality of human needs (respect, ming the initial assumptions about security, trust), psychological dis- complete lack of trust. The self-ful- coveries (self-fulfilling prophecies, filling prophecy principle reveals, the prisoner’s dilemma), practical through numerous experiments, the examples (FEBEA) and the need to mechanism that turns our assump- make innovative proposals – for is tions into reality. The same principle there anything more radically inno- is the basis for the whole mechanism vative than proposing to implement of cognitive-behavioural therapy, the principle of mutual trust in times which can be summed up as follows: of crisis? ‘Watch your thoughts; they become words. Watch your words; they be- ‘I’m OK, you’re OK’ come actions. Watch your actions, The root of the changes I propose they become habits. Watch your ha- here lies in altering the basic wor- bits, they become character. Watch king principles of financial institu- your character; it becomes your des- tions – from a policy of mutual dis- tiny’ (Frank Outlaw). trust towards the ‘I’m OK, you’re OK’

CHANGING FRONTIERS OF ETHICS IN FINANCE 481 principle.4 Only then can the mutual and comments between employees trust necessary for further action be and their superiors. For example, Parmi les mesures sus- created. Failing this, any changes one could consider asking employees ceptibles de favoriser will be temporary and unrealistic, for their opinions, rather than – as is un climat de confiance, and hence will simply make things currently the case – instantly firing cet article propose de se focaliser sur des worse. The types of action I am pro- whistleblowers, who often identify actions permettant posing here are not new – most of problems sooner than the rest and/or l’échange d’opinions et them are well known and widely have the courage to draw attention d’idées entre employés used in practice. What matters is that to them. This would enable the insti- et supérieurs. they should become firmly establis- tutions concerned to respond swiftly hed and deeply rooted, in a Kierke- and make any necessary changes gaardian ‘leap of faith’ based on good that would help them function better intentions and willingness by all tho- at both staff and product level. Une attention particu- lière doit être prêtée se involved in the ‘financial game’ to 2. Listening to all employees, aux employés qui sont play by the rules. Is it logical to make especially those in direct contact en contact direct avec this assumption – especially in times with clients. These front-line troops la clientèle pour les of crisis that encourage mutual dis- can inform us about key aspects or aider à trouver des trust and a wish to remain afloat at effects of assumptions made higher solutions éthiques à any cost? I will answer this question up in the hierarchy. They can show d’éventuels conflits in a perverse manner: probably not. d’intérêts. us how abstract ideas are converted The proposed solution does not refer into facts, and how our institutions to logic but to ethics, and the two are operate and are manifested at the not always compatible (though so- point ‘where the rubber meets the Par ailleurs, le fait de metimes ethics makes use of what is road’. To help employees understand traiter les employés de known as ‘existential logic’). Yet are the need to raise thorny issues and manière individuelle we now not in need of ethics more make sure they are not afraid to do favorise le dévelop- than anything else? so, the ‘I’m OK, you’re OK’ principle pement d’un sentiment de satisfaction From words to reality must be widely adopted. Employees personnelle tout en will only be willing to raise such is- augmentant leurs com- The action that can be taken to sues if the bank they work for is in- pétences. implement the ‘I’m OK, you’re OK’ terested in finding ethical solutions principle is in keeping with the ini- (the need for coherence), their voi- tial premise of this paper. It means ces are heard and have some influen- improving the quality of employees’ ce on reality (the need for agency), L’implantation d’un relationships with their superiors they need not fear repercussions (the système de motivation qui permette à and clients. The proposed changes need for security) and they matter to l’employé de se sentir are as follows: the bank (the need for respect). plus qu’un simple 1. Creating conditions that allow 3. An individualized approach to maillon, comme s’il a safe and honest exchange of ideas employees. When sales targets are était part intégrante not met, the reason is not necessa- d’une équipe, est plus 4 The term comes from the title of Dr Thomas rily inadequate sales ability. Could que nécessaire. Harris’s book I’m OK, you’re OK, but is not based on his assumptions. it be an ethical dilemma, or incom-

SUPPOSE WE CHANGE THE (META)RULES OF THE GAME? 482 petence, or something else again? idea can be turned into specific ac- Discovering the real reason for an tion, and some potential benefits of employee’s failure to meet targets such a strategy. They do not rely on requires trust and mutual openness, financial knowledge, but on familia- individualized ways of overcoming rity with universal principles of hu- Finalement, ajoutons obstacles and guidance in helping man functioning and deliberations le besoin de réajuster employees perform their duties di- based on analysis of my patients’ le profil des cadres, ligently (the need for competence), professional situation. As a trainer en confiant la respon- rather than ruthless exploitation who coordinates creative sessions sabilité du manage- of employees simply to meet sales I am well aware that my position is ment à des personnes targets at any cost. Employees who that of an amateur whose thoughts plus orientées sur les are convinced that their institution and proposals are still rather rough- relations positives et de seriously cares about realizing their and-ready, like those of a think tank longue durée que sur le résultat immédiat. personal potential will not feel they that require subsequent analysis by are simply a means to an end. On experts. My purpose is not to pro- the contrary, this makes it easier for pose a full set of solutions, but to them to develop a joint sense of per- launch the process and trigger the sonal satisfaction and accomplish- necessary changes. The main thing ment as their competence increases. is to focus on something we have Cet essai prétend aider tended to forget in these turbulent à rompre le cercle 4. Adjustment of management times – the idea that people matter vicieux de manque de profiles to comply with the bank’s confiance mutuelle qui ethical policies. What matters here more than numbers. semble régner actuelle- is to choose people oriented towards ment au sein des insti- positive, long-term relationships The vicious circle versus tutions bancaires. Peu with both customers and employees, the wheel of fortune importe si l’origine des rather than short-term sales targets The original question was this: changements se situe and managerial objectives. This will au niveau de la clien- what mechanisms lie behind the ero- help ensure that the new banking tèle, des employés, du sion of ethical attitudes in financial modèle de direction ou ethos is not distorted on subsequent institutions, and what can we do to de la communication steps of the management ladder. stop it and restore consumer confi- au sein de l’équipe. 5. Changing the staff motivation dence? system, above all by creating a work I believe we are now confron- model that makes employees feel ted with a vicious circle of growing they are important, structural parts distrust, whose increasing costs are of a team rather than anonymous, borne by financial institutions, their dispensable cogs in a machine. It employees and their clients. This turns out that motivation based on a paper has adopted the viewpoint of sense of meaning and agency is equal bank staff to present some of the to – and sometimes greater than – more pernicious phenomena in fi- purely pecuniary motivation. nancial institutions. However, I do These are just a few examples of not believe it matters where we start how the general ‘I’m OK, you’re OK’ out from, for the conclusions would

CHANGING FRONTIERS OF ETHICS IN FINANCE 483 be no different: the need for a radical To repeat the key message of this change in the meta-principles of the paper, the solution does not depend ‘financial game’. The same applies to on specific actions, but on attitudes the proposed remedies: it does not at both the starting point (the ‘I’m matter where we start to make chan- OK, you’re OK’ principle) and the ges, whether it be with clients, em- end point (an ethos of mutual trust ployees, managerial models or inter- created by changing the underlying team communication, as long as the assumptions). Another self-fulfilling basic premise is altered, for the result prophecy – or, if you prefer, another will be the same: the vicious circle of vicious circle, only this time in a very mutual distrust will be broken. different direction… •

References Bauman, Z. (2007). Tożsamość. dzkich. Poznań. Zysk i Sk-a Gdańsk: WGP Palusiński R. (2002). ‘Sens życia a Frankl, V. (2009). Człowiek w sens pracy: odkrywanie sensu pracy’, poszukiwaniu sensu. Warsaw: Czarna Zmieniające się przedsiębiorstwo w Owca dawniej Jacek Santorski & Co. zmieniającej się politycznie Europie, Vol. V, ‘Zarządzanie pracą’, Cracow: Kotarbiński, T. (1982). Traktat o Wydawnictwo Informacji Ekonomi- dobrej robocie. Wrocław, Warsaw, cznej Uniwersytetu Jagiellońskiego Gdańsk and Łódź: Zakład Narodowy im. Ossolińskich Wydawnictwo Pols- Pieńkosz, P. ‘Zalecali inwestowa- kiej Akademii Nauk nie w Amber Gold: czy teraz za to odpowiedzą? A może zapłacą?’, Fi- Kozielecki, J. (2000). Koncepcje nanse, No. 161, 2012 Psychologiczne Człowieka. Warsaw: ŻAK wydawnictwo Akademickie Suchodolska, M. (2012). Przydus- zeni kredytem. Gazeta Prawna (maga- Marx, K. (1959). Economic & Phi- zine), 24 August 2012 losophic Manuscripts of 1844. Mos- cow. Progress Publishers Zachariasz K. (2011). Etyczne banki rosną w kryzysie: nie ryzykują, Obuchowski, K. (2002). Ga- nikt nie zalega ze spłatą, in Wyborcza. laktyka potrzeb-psychologia dążeń lu- biz

SUPPOSE WE CHANGE THE (META)RULES OF THE GAME? 484 485

Appendices 486 487 The Global Prize Jury 4th, 5th and 6th edition

Stéphane Bernard, Managing Director, has been recently appointed CEO of the Euroclear Bank Poland Branch. He is also a member of the Board of Directors of the ESES (Euroclear Settlement of Euronext-zone Securities) central securities depositories (Euroclear Belgium, Euroclear France and Euroclear Nederland) and a member of the ESES Audit Committee. Prior to taking his current position, Mr Bernard was COO for the ESES CSDs as well as being part of its management committee. Mr Bernard was General Manager of Belgian central securities depository, from 2001 until 2006, when CIK joined the Euroclear group. Mr Bernard started his carreer as a broker dealer in 1989. He holds degrees in Commercial and Consular Sciences from the Saint Louis Institute of Commer- ce in Belgium, a degree in Marketing from Institut Supérieur Economique Ixelles and a Master in Treasury Management from the University Antwerp Management School. Jury member: 6th to 7th edition of the global Prize

Mrs Marie Casimiro-Crepin is Compliance Officer Professional Ethics and Privacy BGL BNP Paribas (Luxembourg). She is a former winner of the Robin Cos- grove Prize, 2008-2009 edition. Lawyer by training (Master II at the Assas-Paris II Uni- versity), Marie Casimiro-Crepin focused her final thesis on history of law, particularly of the budgetary law at the time of the “Ancien Régime”. In 2007 she started to work for Ethiea Gestion, a portfolio management enterprise which centers its work on an ethical and behavioural analysis of different societies. Jury member: 4th to 6th edition of the global Prize

Prof. Marc Chesney is Professor of Finance at the University of Zurich. Pre- viously in Paris, he was Professor and Associate Dean at HEC, President of the CEBC (Centre d’Etudes sur le Blanchiment et la Corruption) and an external expert with the World Bank. He has published articles and books in quantitative finance and on financial crime mechanisms. In particular, he is interested in ethics and finance. At the University of Zurich, he is member of the Board of the Graduate Programme for interdisciplinary Research in Ethics and co-organizer of the Ethical Finance Research Series. He is also member of the advisory Board of Finance & Common Good/Bien Commun journal. Marc Chesney holds a Ph.D. in Finance from the University of Geneva and obtained his Habi- litation from the Sorbonne University. Jury member: 1st to 7th edition of the global Prize 3rd edition of the Ibero-American Prize

THE GLOBAL PRIZE JURY 488 Dr Carol Cosgrove-Sacks, Robin’s mother, lives and works in Geneva. She is co-founder of the “Ethics in Finance, Robin Cosgrove Prize” which she co-chaired from 2005 to 2015. Dr Carol Cosgrove-Sacks was formerly Director of Trade in the United Nations in Geneva (1994-2005); since 2006 she is a Professor at the College of Europe, Bruges; a Professor at the Europa Institute, University of Basel; and the Senior Advisor on International Standards Policy to OASIS, the global eBusiness standards organisation. She also maintains interest in some British academic centres, including the Institute of Development Studies (IDS), University of Sussex, and the Centre for Euro-Asian Studies (CEAS), University of Reading.

st th Co-Chair: 1 to 5 edition of the global Prize

Mr Steve Culp is a senior managing director, Accenture Finance & Risk Services. Based in Chicago, Steve has more than 20 years of global experience working with clients to define strategy, and execute change programs across a broad spectrum of risk management and finance disciplines. Steve is responsible for leading the global group across all dimensions, from setting the strategic direction through to the enablement of local teams operating across diverse markets. In addition, he oversees Accenture’s efforts on large- scale transformation programs across Finance and Risk for some of our most important financial services clients. Prior to his current role he was responsible for our Global Risk Management Practice, and prior to that he led Accenture’s Finance & Enterprise Perfor- mance consulting services for global banking, insurance and capital markets institutions. Jury member: 5th edition of the global Prize

Prof. Henri-Claude de Bettignies, the Aviva Chair Emeritus Professor of Leadership and Responsibility and Emeritus Professor of Asian Business and Compa- rative Management at INSEAD is also the Distinguished Emeritus Professor of Globally Responsible Leadership at the China Europe International Business School (CEIBS) and former Director of the Euro-China Centre for Leadership and Responsibility (ECCLAR) that he created in Shanghai, at CEIBS, in 2006. Between 1988 and 2005, with a joint appointment at Stanford University (Graduate School of Business), he shared his time equally between Europe, California and the Asia Pacific region (particularly with the INSEAD campus in Asia). He was educated at the Sorbonne (Licence ès Lettres), at the Catholic University of Paris (EPP), then at the Harvard Business School (ITP). He worked in Africa (MIFERMA, Mauritania), at the University of California (IIR, Berkeley), in New York (for IBM), and then in Tokyo for 5 years. Jury member: 1st to 4th and 7th edition of the global Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 489 After graduating from the HEC, Mr François Debiesse joined the Bank of Paris and the Netherlands in 1971, holding succesively various management positions. In 1999 he became Director of the Private Bank BNP Paribas, and in 2008 he was appointed Director of BNP Paribas Wealth Management. From 1995 to 2008 he also serves as Chair- man of BNP Paribas. François Debiesse is now President of the Fondation de l’Orangerie for individual philanthropy since 2009 and Advisor for Philanthropy and Microfinance for BNP Paribas Wealth Management since 2011. Jury member: 3rd to 4th edition of the global Prize

Mr Christopher de Mattos is a director of London-based investment manager RAB Capital Ltd. He has spent over 20 years in the financial services industry, working as a financial analyst and investment banker in Europe and Latin America. Christopher joined the founding team at RAB in 1999 and, as Finance Director, was instrumental in taking the company to flotation on London’s AIM market in 2004. He holds a degree in Mechanical Engineering from Imperial College, London and gained SERC and Kitchener scholarships to study for his MBA at INSEAD. Having reduced his involvement in the day-to-day management of RAB, he has taken a particular interest in the role of the board in promoting corporate governance in financial services businesses. He is an INSEAD Certified Director and chairs the INSEAD Directors’ Network. Jury member: 3rd to 7th edition of the global Prize

Prof. Paul H. Dembinski is the initiator and Director of the Foundation of the Observatoire de la Finance. The mission of the Observatoire de la Finance is to promote awareness of ethical concerns in financial activities and the financial sector. Paul H. Dem- binski is the founder and editor of the bilingual journal Finance & the Common Good/ Bien Commun. In parallel, he is partner and co-founder (with Alain Schoenenberger) of Eco’Diagnostic, an independent economic research institute working for both government and private clients in Switzerland and elsewhere. Paul H. Dembinski is also Profes- sor at University of Fribourg where he teaches “International Competition and Strategy”. His latest published book is Ethics and Responsibility in Finance, Routledge, 2017. Co-chair: 1st to 7th edition of the global Prize Co-chair: 1st to 3rd edition of the Ibero-American Prize Vice Chairman: 1st to 7th edition of the Polish Prize

THE GLOBAL PRIZE JURY 490 Dr Eduard Dommen is a specialist in economic ethics. He is past President of the Scientific Committee of the Swiss Network of International Studies (www.ruig-gian. org); and was a member of the Scientific Committee of the Swiss Network of Interna- tional Studies (www.snis.ch). He is a founding member of “Actares, Shareholders for a sustainable economy” (www.actares.ch). He was also a founder of the Ethics Committee of the Swiss Alternative Bank (Banque Alternative Suisse) and a member of the Board of Geneva’s Caisse Publique de Prêts sur Gages as well as a member of the Council of the RAFAD Foundation, an institution that guaranteed micro-credit. Edward Dommen has been a university professor, but he spent most of his career before he retired as a researcher with the United Nations conference on Trade and Development (UNCTAD). He has written and edited several books on economic ethics. Jury member: 4th and 7th edition of the global Prize 1st to 3rd edition of the Ibero-American Prize

Ms Michaela Erbenova is in charge of the Financial Supervision and Regu- lation Division of the Monetary and Capital Markets Department of the IMF. Her responsibilities include oversight of policy analysis and technical advice on prudential and conduct-of-business regulation and supervision, work with the international standard setting bodies and national regulatory and supervisory agencies on the design and implementation of financial supervision policies and global regulatory reform, as well as leading capacity building effort in these areas. Prior to joining the IMF in 2007, Ms. Erbe- nova served as a Board Member and Chief Executive Director of the Czech National Bank. Previously, she held public and private sector positions in her native Czech Republic, as Advisor to the Prime Minister; Chief Advisor to the Minister of Finance, member of the Government Steering Committee for Bank Privatization, and Head of Investor Relations of Komercní banka, country’s second largest commercial bank. Jury member: 5th edition of the global Prize

Dr Robert Alan Feldman is the Chief Economist and Co-Director of Japan Research at Morgan Stanley Japan Securities Co., Ltd. As part of Morgan Stanley’s global economics team, he is responsible for forecasting the Japanese economy and interest rates. He is a regular commentator on World Business Satellite, the nightly business program of TV Tokyo. Prior to joining Morgan Stanley in 1998, Robert was the chief economist for Japan for Salomon Brothers from 1990-97. He worked for the International Monetary Fund from 1983-89, in the Asian, European, and Research Departments. Robert has a Ph.D. in Economics from the Massachusetts Institute of Technology, where he concentrated on international finance and development. He did his undergraduate work at Yale University, where he took BAs in both Economics and in Japanese Studies, graduating phi beta kappa, summa cum laude. Before he entered graduate school, he worked at both the Federal Reserve Bank of New York and at the Chase Manhattan Bank. Jury member: 1st to 5th edition of the global Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 491 Dr Philippa Foster Back has over 25 years of business experience. She began her career at Citibank NA before joining Bowater in their Corporate Treasury Department in 1979, leaving in 1988 as Group Treasurer. She was Group Finance Director at DG Gardner Group, a training organisation, prior to joining Thorn EMI in 1993 as Group Treasurer. She was appointed Institute of Business Ethics’ Director in August 2001. Philippa Foster Back has a number of external appointments, including at the Ministry of Defence, The Institute of Directors and the Association of Corporate Treasurers, where she was President from 1999 to 2000. In 2006 she was appointed Chairman of the UK Antarctic Heritage Trust. Jury member: 1st to 7th edition of the global Prize

Mr Peter Gakunu was Executive Director at the International Monetary Fund in charge of Africa Group One Constituency. Before joining the Fund, he served as Permanent Secretary and Senior Advisor to the Kenya Government from 2003 to 2004. In 2000 he joined the “Dream Team”, a team of high level personalities put together by the World Bank and the UNDP to advise the Kenya Government on economic reforms, including the development of an economic growth and poverty reduction strategy. Prior to that, he worked with the African Caribbean and Pacific Group in Brussels, first as the Trade Expert (1977 to 1986) and later as the Director Trade and Customs Division (1986 to 2000) at the ACP Secretariat. Jury member: 1st to 6th edition of the global Prize

Dr Andrew Hilton is Director of the Centre for the Study of Financial Innova- tion, a London-based non-profit think-tank, supported by 70 City institutions, that looks at threats to and opportunities in the global financial system. The CSFI was set up 20 years ago, and has since published several books and around 100 reports. More significantly, he has organized well over 1,300 round-tables on issues of pressing interest in the financial services sector – including EMU, the single European market, the Internet, small business finance, high-tech start-ups, microfinance and regulation. Dr. Hilton also runs a small economic and financial consultancy. He has worked for the World Bank in Washington and has run a financial advisory service for the Financial Times in New York. He has a PhD from the University of Pennsylvania, an MBA from Wharton and MBA from New College, Oxford. Jury member: 1st to 7th edition of the global Prize

Mrs. Jo Iwasaki is Head of Corporate Governance within Professional Insights, ACCA. Jo writes regularly on a wide range of corporate governance topics, including governance principles, board responsibilities, and corporate culture. She gives lectures to various audiences, including directors, professional accountants, academics, and students. A qualified accountant, she is trained in tax and audit. In addition to corporate governance, she also has extensive experience in business assurance. Jury member: 6th edition of the global Prize

THE GLOBAL PRIZE JURY 492 Prof. Dominique Jacquet is Visiting Scholar at Insead Social Innovation Cen- ter and Professor of Corporate Finance at Cedep, University of Paris Ouest and Ecole des Ponts ParisTech. He is a civil engineer (Ecole des Ponts), holds an MBA from Insead and a PhD from the University of Bordeaux. Before starting an academic career, he has been a finance executive in American and French corporations, holding controller, treasurer and CFO positions. His main areas of interests are the relationship with business and finance, the role of incentives in sustainable value creation and the link between uncertainty and financial strategy. Jury member: 3rd to 7th edition of the global Prize

Prof. Robin Jarvis is Special Adviser to the European Federation of Accountants and Auditors (EFAA) and Professor of Accounting at Brunel University. He chairs the Advisory Panel of the Chartered Banker’s Professional Banking Standards Board and the European Banking Authorities (EBA) Consumer Protection Group. For the last ten years he has been a member of European Commission’s Expert Group the Financial Servi- ces User Group. Robin has researched and published on SMEs, accounting and banking for a number of years resulting in numerous publications and 10 books. His interest in SMEs and accounting has been recognised through his membership of the International Accounting Standards Board (IASB) SME specialists groups and his membership of the European Financial Reporting Advisory Group (EFRAG). Jury member: 4th to 7th edition of the global Prize

Mrs. Josina Kamerling is Head of Regulatory Outreach at CFA Institute, responsible for supporting CFA Institute’s policy development, in the Europe, Middle East, and Africa (EMEA) region, advancing the impact of advocacy efforts, and promoting capital market integrity and investor protection issues. Prior to joining CFA Institute, Josina was a Specialist Adviser on financial services in the European Parliament for six years, advising most significantly the Economic and Monetary Affairs Committee and the Special Committee on the Financial, Economic and Social Crisis on all aspects of financial services policy issues and technical information. Prior to this, Josina was a banker for 15 years in a variety of functions and locations, most notably as a senior banker in the global clients division of ING (managing a group of multinational clients on a worldwide basis and on all business lines) and prior to that as head of sales in the financial markets division of ING group (overseeing different sales teams in the dealing room). Josina holds a Bachelor of Arts with honours degree from Cambridge University in Law and modern languages. Jury member: 5th edition of the global Prize Co-chair: 6th to 7th edition of the global Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 493 Dr Hakan Lucius is Head of Stakeholder Engagement, Transparency and Civil Society at the European Investment Bank, the European Union’s bank and largest supranational lender, where he covers the transparency and stakeholder engagement of the institution. Prior to that he was responsible for the financing of operations, ranging from large-scale infrastructure projects, structured operations, environmental investments to SME finance, both through loans and equity. Dr Lucius also serves as the President of the European Investment Bank’s Pension Board. He is a member of the European In- vestment Bank Institute’s Social Committee and of the Royal Institute of International Affairs, Chatham House. Dr Lucius received a Ph.D with distinctions in industrial economics, a MBA from INSEAD, France, and an MSc in Engineering from Vienna Technical University. He is also a Professor lecturing on Sustainability issues in Finance and on Cross-Cultural Management. Jury member: 6th to 7th edition of the global Prize

Dr hab. Róża Milic-Czerniak is vice President of the Banking Ethics Com- mission at the Polish Banking Association and is an associate professor at the private economic university in Warsaw. Previously, she has held a number of managing positions in one of the largest banks in Poland, where she was responsible for developing capital management, product management and client profitability. Prior to joining the bank, she worked at the Institute of Philosophy and Sociology of the Polish Academy of Science in Warsaw, where she researched economic behavior of households, including in periods of transition. She is the author of several books and research papers and spent one and a half year in Germany at the Hohenheim University in Stuttgart and University of Kiel. Jury member: 4th to 7th edition of the global Prize 1st to 7th edition of the Polish Prize

Mr Ross Murdoch is a lawyer at the Financial Conduct Authority (FCA) in London, within its Enforcement and Market Oversight Division. Ross specialises in regulatory enforcement proceedings, particularly within wholesale financial markets, including market abuse, benchmark manipulation (e.g. LIBOR), and other market misconduct. Prior to working at the FCA, he worked as a lawyer at a commercial law firm within its Commercial Dispute Resolution & Regulatory practice in London. He is dual qualified as a solicitor in England & Wales (2011) and Scotland (2010). In September 2015, Ross was awarded first prize in the Global Edition of the Ethics in Finance Prize (2014/2015). Jury member: 5th to 7th edition of the global Prize

THE GLOBAL PRIZE JURY 494 Mr Peter O’Connor is an experienced global and regional asset allocation and manager selection adviser for financial institutions, family offices and charities. He is Chair- man/Lead Director of a number of publicly quoted investment/production companies with particular personal experience in Asia for the past 30 years. After boarding school in Ire- land, Peter O’Connor read Economics and Law at Trinity College Dublin and King’s Inns Dublin respectively. He has lived and worked in London and Hong Kong, and he travelled frequently to most Asian countries, Canada and emerging economies in Europe. Jury member: 1st to 5th edition of the global Prize

Mrs Clare Payne is the founder and Board Member of The Banking and Finan- ce Oath and is a St James Ethics Centre Consulting Fellow for Ethics in Banking and Finance. Clare also holds the professional position of Director of Business Partnerships for Good to Great Schools Australia, an organisation focused on education reform, lead by Australian Indigenous Leader Noel Pearson. Clare previously managed the Integrity Office of Macquarie Bank and is a World Economic Forum Young Global Leader. Clare was awarded the Inaugural Robin Cosgrove Prize for Ethics in Finance, Geneva, and in 2011 she was nominated in the FINSIA Pinnacle Awards category for ‘Most Outstanding Thought Leader’ in Financial Services. Clare commenced her career as a lawyer having completed a Bachelor of Laws and Mass Communications. Jury member: 4th to 6th edition of the global Prize

Mr Jean-Christophe Pernollet is Chief Audit Executive of the Edmond de Rothschild Group, after having been its Chief Financial Officer. Earlier in his career he was the partner in charge of the Geneva office of PricewaterhouseCoopers. He is a graduate from IEP and EDHEC and has completed the Columbia Business School Senior Executive Program. As a former Lead bank auditor recognised by the Swiss Regulator FINMA, he is a financial services industry specialist and benefits from more than twenty years of working experience, of which three in Paris and two in New York. He was Chief Financial Officer of EFG International between 2010 and 2012. Jury member: 1st to 6th edition of the global Prize

Mr Charles Pictet acted as a financial regulator in Switzerland from 2005 until 2012 in his capacity as a member of the board of FINMA. Prior to this, he worked at Pictet & Cie, a Geneva-based Swiss private bank, where he spent 25 years as a partner and senior partner. He was President of the Geneva Private Bankers Association, Vice President of the Swiss Private Bankers Association, and a member of the Board of the Swiss Bankers Association. He also served as Vice President of economiesuisse. He is currently Vice President of the International Red Cross and Red Crescent Museum in Geneva (Conseil de Fondation), and a member of the Board of Europa Nostra. He holds an MBA from the University of St Gallen. Jury member: 4th to 7th edition of the global Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 495 After taking his degree at Oxford University, Mr John Plender joined Deloitte, Plender, Griffiths & Co in the City of London in 1967, qualifying as a chartered accountant in 1970. He then moved into journalism and became financial editor ofThe Economist in 1974, where he remained until joining the UK Foreign Office policy planning staff in 1980. On leaving the Foreign Office, he became a senior editorial writer and columnist at the Financial Times, an assignment he combined until recently with current affairs broadcasting for the BBC and Channel 4. A past chairman of Pensions and Investment Research Consultants (PIRC), John Plender has served on the London Stock Exchange’s quality of markets advisory committee and the UK government’s Company Law Review steering group. He is a non-executive director of Quintain PLC, a FTSE 250 company. His book, All You Need To Know About Ethics And Finance, is published by Longtail Publishing. Jury member: 1st to 4th edition of the global Prize

Mr Domingo Sugranyes graduated from the University of Fribourg (Swit- zerland) in 1969. He was Secretary General of the International Christian Union of Busi- ness Executives (UNIAPAC) based in Brussels from 1973 to 1981. He moved to Madrid in 1981 and joined the MAPFRE insurance group, a Spanish agricultural mutual which was at the time starting to grow internationally and has developed into a multinational insurance and reinsurance group now present in 44 countries. As one of the vice-chairmen of the group and Executive Committee member, he participated in the internationalisation and the demutualisation process and was in charge of Finance and Economic affairs. After retiring from executive office in 2008, he remained on the Board of the MAPFRE Founda- tion until reaching the statutory age limit of 70 in 2015. Since 2009 he is Chairman of the Centesimus Annus pro Pontifice Foundation, a Vatican body dedicated to spreading and debating Catholic social teachings in economic and business circles. Co-chair: 1st to 3rd edition of the Ibero-American Prize Jury member: 1st to 7th edition of the global Prize

The Most Reverend Justin Welby, Arch-Bishop of Canterbury and a member of the House of Lords, is an Emeritus Member of the Jury. He served as a member from 2006-2013. He was a senior executive in a UK oil company, before ordination in the Church of England. For many years, he was responsible for the reconciliation work of Coventry Cathedral, travelling widely in Africa and the Middle East. Justin Welby has written extensively on ethics and finance. In July 2012 he was appointed to the Parlia- mentary Commission on Banking Standards. Jury member: 1st to 5th edition of the global Prize

THE GLOBAL PRIZE JURY 496 The Ibero-American Prize Jury 3rd edition

Clara Bazán es abogada, licenciada en derecho por la Universidad Complutense de Madrid, con un master en Dirección estrategíca de RR.HH por la Universidad Carlos III, y un Master en Responsabilidad Social por la Universidad de Alcalá. Experta en Res- ponsabilidad Social Corporativa y con conocimientos en gestión de asuntos públicos, trabaja en MAPFRE desde el año 2000 y desde 2005 desempeña el cargo de Directora de Responsabilidad Social del Grupol. Jury member: 3rd edition of the Ibero-American Prize

Marc Chesney See appendix 1, The Global Prize Jury. Jury member: 3rd edition of the Ibero-American Prize 1st to 7th edition of the global Prize

For the last 26 years Roberto Delgado Gallart has carried out dedicated social work with some of the most vulnerable social groups in Mexico and has trained many generations of new social workers on Mexico. This work won him the National Al- truism Prize in 2004, bestowed by the Mexican Association of Private Welfare Institutions (l’Asociación Mexicana de Instituciones de Asistencia Privada). He also developed the first postgraduate programme in Social Responsibility in Latin America. He is the founder of Latin American Centre for Social Responsibility of the University of Anáhuac where he created the Diploma in Administration of Institutions and Social Welfare (Diplomado de Administración de Instituciones de Asistencia Social). This diploma course is also available in the groups in Cancún, Cozumel, León, Oaxaca, Puebla, Xalapa, Quintana Roo, and Torreón. This course has now been run for Twenty-three successive years. Roberto Delga- do Gallart has also received recognition such as the Latin American Prize for Educational Excellence (Premio Iberoamericano a la Excelencia Educativa) in Peru in 2004 as well as many other awards and over 200 different diplomas and degrees. Jury member: 1st to 3rd edition of the Ibero-American Prize

Paul H. Dembinski See appendix 1, The Global Prize Jury. Co-chair: 1st to 3rd edition of the Ibero-American Prize Co-chair: 1st to 7th edition of the global Prize Vice Chairman: 1st to 7th edition of the Polish Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 497 Eduard Dommen See appendix 1, The Global Prize Jury. Jury member: 1st to 3rd edition of the Ibero-American Prize 4th to 7th edition of the global Prize

Fernando Flores Maio, sociologist and journalist, contributor and columnist for several Argentine newspapers, was since 1990 director of the “Business Challenge” symposia, in Argentina, in France at the Institut des Hautes Etudes de l’Amérique latine and in Coface. Since 2001, he is the founder and director of the Ecumenical Social Forum, which disseminates the concept of social responsibility, relizes ethical campaigns, and rescues core values with symposia in Latin America. Fernando Flores Maio is the director of the Open Chair of Social Responsibility and Citizenship, which began in 2002 in Argentina with the help of Georgetown University, and later from other universities including the University of Salamanca and the Rey Juan Carlos de Madrid. He organized presentations at the Instituto Italo Latinoamericano in Rome and at the Gregorian University and he is the author of several essays, including “Los hippies-Introducción”, “Rebelión Juvenil y Cambio Social” y “Comu- nismo o Reino de Dios”. Jury member: 2nd and 3rd edition of the Ibero-American Prize

After a brief career in Civil Engineering, Filomeno Mira Candel joined MA- PFRE Insurance Group in late 1970 as risk prevention engineer and has since held various senior positions in the Group. He is currently Vice President of the Board of the Fundación MAPFRE, the main shareholder in the new MAPFRE, SA. After retiring from management positions, he remains a member of the Board of Directors of MAPFRE SA and other Group companies of MAPFRE. Until May 2009, he was a member of the Board of the Geneva As- sociation and he is currently a Member of Honor of the same. He serves on the Board of the Universidad Pontificia de Salamanca. He was President of the Insurance Commission of the Chamber of Commerce of Paris from 1994 to 1997, and Chairman of the AISAM (Internatio- nal Association of Mutual Insurance Companies) for the period 2002-2004. Jury member: 1st to 3rd edition of the Ibero-American Prize

Paul-André Sanglard, after working as Assistant in the Department of political economy of the University of Geneva, was an economist in the Federal Department of foreign economic affairs. From 1978-1979 he was a research fellow at Stanford University and MIT. In 1979 he was nominated as head of Public Finance of the Canton of Jura, and since 1982 he has been a lecturer in public finance in Geneva University. From 1984-1989 he was a member of the executive committee of the World Economic Forum. Since 1989, Paul-André Sanglard has been an independent economist. He is currently President of the Board of the Banque Can- tonale du Jura in Porrentruy as well as member of several other Boards. Paul-André Sanglard is also a member of the Board of the Foundation of the Observatoire de la Finance. Jury member: 1st to 3rd edition of the Ibero-American Prize

THE IBERO-AMERICAN PRIZE JURY 498 Leire San Jose is a professor of finance at the University of the Basque Country [UPV / EHU] Bilbao (www.ehu.es) and visiting scholar at the University of Huddersfield (UK) (www.hud.ac.uk) where she is a member of the Financial Ethics and Governance Research Group (FEGReG). His doctoral thesis which examines the development of new technologies in the cash management has gained the distinction of Summa Cum Laude unanimously and received a special prize. Leire San Jose is also specialized in social economy. She was president of the Scientific Committee of the XVII Congress of the European Business Ethics Network Spain in 2010. Currently, she combines her academic interests and research in the field of corporate finance, cash flow management in the short term, with themes of ethics and corporate social responsibility. Leire San Jose has also received the first Robin Cosgrove Prize for Ethics in Finance at the first iberoamerican edition sponsored by MAPFRE. Jury member: 2nd and 3rd edition of the Ibero-American Prize

Simão Davi Silber has a doctorate in Economy and is professor at the Faculty of Economy, Business and Accounting of the University of Sao Paulo. For the last 18 years Simão Davi Silber has successively held the post of Research Coordinator (1991- 1994), then Head of Research (1995-1999), followed by that of President Director of FIPE, the Foundation for Economic Research (Fundação Instituto de Pesquisas Econô- micas) from1999-2003. He is currently member of the Board of FIPE. Since 2007 he has also been a member of the Conseil Supérieur d’Etudes Avancées – FIESP. He most recent publication (together with Marcos S. Jank) is on the subject of Comparative Tra- de Practice: Performance and Organisational Models (Políticas Comerciais Comparadas: Desempenho e Modelos Organizacionais, Editora Saraiva, 2007). Jury member: 1st to 3rd edition of the Ibero-American Prize

Domingo Sugranyes See appendix 1, The Global Prize Jury. Co-chair: 1st to 3rd edition of the Ibero-American Prize Jury member: 1st to 7th edition of the global Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 499 The Polish Prize Jury 1st, 2nd, 3rd, 4th and 5th edition

Dr Jacek Bartkiewicz – the member of the management board of the National Bank of Poland. From 2002 to March 2013 he was he president of the management board of BGZ Bank. From 2001 to 2002 he was the deputy of the Minister of Finance. Up till 1990 he was professionally related to Bank Slaski (Bank of Silesia). From 2004 to 2006 Jacek Bartkiewicz was the president of the Council of Warsaw Stock Exchange, from 2001 to 2002 the vice president of Financial Services Authority and the president of the Com- mittee KUKE. Since 2004 he has been the member of the council of Good Practice of PTE. Jury member: 2nd edition of the Polish Prize

Paul H. Dembinski See appendix 1, The Global Prize Jury. Vice Chairman: 1st to 5th edition of the Polish Prize Co-chair: 1st to 7th edition of the global Prize Co-chair: 1st to 3rd edition of the Ibero-American Prize

Prof. dr hab. Wojciech Władysław Gasparski– the head of the Ins- titution of Ethics of Business and the founder of the Centre of Ethics in Business and Social Innovations at Kozminski University where he worked as vice rector for scientific research. The Congress of Ethics in Business of International Society of Business was his initiative in 2005. The author and co-author of the numerous works and articles on praxeology, ethics in business, methodology of practical disciplines, among them the manual for students “Business, ethics, responsibility” (PWN 2012) and the series “Praxiology: The International Annual of Practical Philosophy and Methodology” (Transaction Publis- hers). Prof. Gasparski was awarded the Order of Polonia Restituta. Jury member: 1st to 5th edition of the Polish Prize

Maciej Głogowski – the journalist (the scope of work- economics), Has been working for TOK FM since 2004, since 2007- economy editor. Maciej Głogowski con- ducts the auditions about the most important events from the finance, economy and business. Maciej Głogowski is the host of the everyday audition ‘’EKG - ekonomia kapitał gospodarka’’ (on economy and capital). The laureate of some awards, among others the Journalist on Economy in 2014- the title awarded in competition of Władysław Grabski of the National Bank of Poland. Jury member: 3rd to 4th edition of the Polish Prize

THE POLISH PRIZE JURY 500 Władysław Gołębiewski, vice president of the National Bank of Poland, the Polish vice governor of the World Bank in Washington, vice president of the group negotiating the restructurising of the Polish debt in the Paris Club and the commercial banks. The president of the management board of Raiffeisen-Leasing Inc. The president of the Commission of Ethics in Banking. The member of the management board of Rai- ffeisen Bank Poland Inc. Chairman: 1st to 5th edition of the Polish Prize

Włodzimierz Grudziński – the Polish matemathician and the computer scientist. Włodzimierz Grudzinski participated in actions of the democratic opposition during the times of PRL (The Polish People’s Republic), for many years (1990-2007) the president of the management board of BISE Inc. From 1997 to 2009 Włodzimierz Grudzinski was the vice president of the Polish Bank Association. Currently he is the advisor of the president of the Polish Bank Association. The member of three management boards: TISE SA, Blikle Inc. and Rada Fundacji Zdrowie (The Council of the Foundation Health), Vice president of the European Federation of Ethical and Alternative Banks. Włodzimierz Grudzinski is the member of the jury of the prize of Irena Sendlerowa „For making the world better”. Jury member: 1st to 5th edition of the Polish Prize

Prof. Krzysztof Jasiecki - a political scientist and a sociologist of economy, a long-standing researcher of the Institute of Philosophy and Sociology of the Polish Aca- demy of Sciences (1987-2017), a lecturer, among others, at the University of Warsaw, Warsaw School of Economics, the Academy of Leon Koźmiński, the National School of Public Administration, Collegium Civitas and the Post-graduate Studies of Public Rela- tions in the Institute of Philosophy and Sociology of the Polish Academy of Sciences. Prof. K. Jasiecki does the research concerning the formation, the role and the activity of the elite of economy and politics, the activity of the pressure groups and economy lobbing (in particular - the associations of employers), material and social aspects of wealth, a social and civic dialogue, the membership of Poland in the EU and globalisation. Jury member: 5th edition of the Polish Prize

Dobrochna Kędzierska-Truszczyńska– the Polish journalist, the independent publicist, the member of the Polish Parliament- Sejm- of the 10th tenure (X kadencja). She participated in the Committee on Culture and Media and the Committee on Administration and Internal Affairs. In the 90s she worked as the chief in the newspaper “Wprost” in Warsaw. Later, she started to be the editor-in-chief of the portal Wirtalna Pols- ka. The advisor of the media affairs in the tenure of Marek Pol as the Ministry of Infrastruc- ture. The vice president of the management board of the Association of Art and Fashion “Art- mode” that dealt with the promoting of the Polish goods of culture and the care of the artists. Jury member: 2nd to 5th edition of the Polish Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 501 Aleksander Kompf - all his life professionally connected with the banking sector; the career launched in 1976 (National Bank of Poland). Since 1989 connected with Wielkopolski Bank Kredytowy Inc. and later with Bank Zachodni WBK Inc. - in both banks - a member of the management board; from 2004 to 2015 - the head of the Department of Compliance. In the scope of his activities was the work-out and implementation of ethical standards in banks. A long-standing member of the Commission of Ethics in Banking by the Polish Bank Association. The head of the group which worked out “Re- commendations of the Commission of Ethics in Banking by the Polish Bank Association for the banking sector in the scope of senior customers” ain 2015 and “Recommendation of the Commission of Ethics in Banking concerning the formation of the ethical culture in banks” in 2019. Jury member: 4th to 5th edition of the Polish Prize

Teresa Grażyna Kudlicka – the president of the Board of the Cooperative Bank in Płonsk (Bank Spółdzielczy w Płonsku). The economist, working in the banking area since 1991 when she started to work for the Cooperative Bank in Płonsk. She partici- pates in the work of the Polish Bank Association. From 2009 to 2010 she was he member of the Revisory Commission of the Polish Bank Association. Since 25th January, 2011 she is the chair of the Section of the cooperative banks in the Polish Bank Association and the member of the Council of the Polish Bank Association. Jury member:1st to 3rd edition of the Polish Prize

Jakub Kuriata – the laureate of the 1st prize in the global edition of the competition Ethics in finance – Robin Cosgrove Prize (2011). Jakub Kuriata graduated from Sciences Po Paris (Finance) and Warsaw School of Economics (Finance and Banking). The PhD applicant in economics. Jakub Kuriata works in the department of risk management in the group of BNP Paribas in London and is the specialist on credit risk in financial transactions. Jury member: 1st to 5th edition of the Polish Prize

Anna Lewicka - Strzałecka - a philosopher, a professor in the Institute of Philosophy and Sociology of the Polish Academy of Sciences. The author of many scientific works in the scope of praxeology, methodology of political science, ethics in business. The head of many scientific international and domestic projects, among others: “Unders- tanding and Responding to Societal Demands on Corporate Responsibilty”, “Citizens and Governance in a Knowledge Based Society”, “Ethics in Human Resource Management”, “Praxeology and Practical Philosophy, “Ethics in the Polish Economy: perception, preferences and norms”. The editor-in-chief of the journal “Praxeology” who co-organises and hosts the all-Poland seminar of Ethics in Business, Organisation and Management. Jury member: 5th edition of the Polish Prize

THE POLISH PRIZE JURY 502 Dr hab. Róża Milic-Czerniak See appendix 1, The Global Prize Jury. Jury member: 1st to 5th edition of the Polish Prize 4th to 7th edition of the global Prize

Andrzej S. Nartowski – the lawyer, the publicist, the editor, the specialist in corporate governance. From 2003 to 2005 the editor-in-chief and the publisher of “Gazeta Bankowa”. The editor-in-chief of “Przeglad Corporate Governance”. Andrzej S. Nartowski is experienced in the management of limited companies and popularisation of the knowledge on services of financial institutions. The author of the blog on corporate governance. Jury member: 1st edition of the Polish Prize

Marcin Prell – the member of the management board of Bank Zachodni WBK Inc. He has been connected with the Group of Bank Zachodni WBK Inc. since 1993. From 2001 to 2006 he was the chief of the legal area of Bank Zachodni WBK Inc. In 2001 he was the member of the management board of Wielkopolska Credit Bank and the member of the Committee Controlling the fusion of Bank Zachodni and Wielkopolska Credit Bank (Wielkopolski Bank Kredytowy). Marcin Prell is the member of the Council of the Ban- king Law of the Polish Bank Association. Jury member: 2nd edition of the Polish Prize

Jerzy Pruski – the president od the Bank Guarantee Fund, PhD in economics. From 1983 to 2009 he worked in the Institution of Economy of the University in Łódz. Jerzy Pruski participated in many Polish and foreign scientific programmes in the scope of monetary fund and the banking system. From 1991 to 1997 he worked for LG Perto Bank Inc., from 1998 to 2004 he was a member of Monetary Policy Council in the Republic of Poland, from March 2004 to February 2008 he was the first deputy of the president of the National Bank of Poland. On 28th of October he was elected the member of the Executive Board of IADI. Jury member: 1st edition of the Polish Prize

Grażyna Rokicka - President of the Association of Polish Consumers, the expert group set up in 1995 aiming to develop consumers’ awareness of their rights to safety and health, information, education and representation, as well as the protection of their economic and legal interests. Education and professional profile: economics, management sciences, qualitative market research. Expert in consumer policy with 28 years experience in Poland and at the international level. Jury member: 3rd to 5th edition of the Polish Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 503 Prof. dr hab. Michał Romanowski – the solicitor, the equity partner in the lawyer’s Office Romanowski i wspólnicy, sp. k. (Romanowski and equity partners, share- holding company) in Warsaw. From 1996 to 1998- the equity partner and the co-founder of MC Concordia and from 1998 to 2000- the equity partner and the co-founder of BNP Paribas Corporate Finance Poland. The member of the Commission of Codification of civil law and commercial law. Prof. Michał Romanowski was the member of the group that recommended the changes for the Code of Good Practices of the public companies quoted on Warsaw Stock Exchange. Jury member: 1st edition of the Polish Prize

Małgorzata Rothert – City Spokesman of Customers in Warsaw; the function of the spokesperson of Customers was established in 1999, after the initiation of the institution after the creation of such the institution after the municipality reform. The spokesperson in Warsaw recognises as many as 40 thousand of customer matters each year. She gives pieces of advice for customers in their arguments with entrepreneurs and in legal actions, too. The vice president of the Council of the Spokespeople of Customers. She was the first spokesperson who represented a group in the group legal action. Jury member: 2nd and 5th edition of the Polish Prize

Konrad Sadurski – since 2014 the secretary of the editorial board of „Gazeta Wyborcza”. Konrad Sadurski was awarded in the 1st edition of the competition of Citi- bank Excellence of Journalism Award in 1996. Since 2005 the editior-in-chief of economy in “Gazeta Wyborcza”. The subordinates of Konrad Sadurski were awarded many prizes in the competitions of Grand Press for professionalism. Some of the subordinates of Kon- rad Sadurski continue their careers in domestic public administration and the administration of European Union. Konrad Sadurski was awarded the scholarship of German Marshal Fund for USA. Jury member: 3rd to 5th edition of the Polish Prize

Małgorzata Terpiłowska - connected with the banking sector since 1992; professional experience in the department of the first commercial bank as a specialist for customer service, next: an internal inspector in the Department of Internal Control in Powszechny Bank Kredytowy Inc. in Warsaw. M. Terpiłowska dealt with the formulation of the internal regulations in the scope of deposits, later: with the process of intenral legislation in the Legal Department. M. Terpiłowska has been responsible for the process of compliance and risk management of lack of compliance since 2014. A professional aconomist. A graduate from the Academy of Finance in Warsaw and a graduate from a post-graduate studies at the University of Warsaw (banking) and the Academy of Leon Koźmiński (compliance in an organisation) Jury member: 5th edition of the Polish Prize

THE POLISH PRIZE JURY 504 Katarzyna Zajdel-Kurowska – the member of the management board of the National Bank of Poland. In 2005 she started to work as the key economist and the chief of the board for analyses for Central and Eastern Europe in Citibank Handlowy. In 2007-2009 the deputy Minister of Finance responsible for the management of the national debt, warranties and guarantees, the politics for finance and the analyses and the development of the financial markets and cooperation with the foreign states. Simultaneously, she worked as the vice president of the Financial Services Authority. Katarzyna Zajdel- Kurowska represented the Republic of Poland in the Economic and Financial Committee in Brussels. From 2009 to 2012 she worked as the deputy of the executive chief and represented the Republic of Poland in the International Monetary Fund. Jury member: 3rd to 5th edition of the Polish Prize

Małgorzata Zdzienicka-Grabarz – works in BGZ BNP Paribas Bank (earlier: Bank BGZ). Since 2006 Małgorzata Zdzienicka-Grabarz was the chief of the So- cial Responsibility of Business and since 2008- the president of the Foundation of BGZ BNP Paribas. In the bank she created and implemented the strategies: of internal communication, sponsorship, Foundation of BGZ and CSR. In these institutions the Forum of the Responsible Business and the Forum of Donators. She is the member of the Commis- sion of Ethics in Banking and one of the initiators of the Coalition of the Spokespeople of Ethics in Poland while cooperating with Global Compact Polska. She used to work as a diplomat. Jury member: 3rd to 5th edition of the Polish Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 505 Observatoire de la Finance The Observatoire de la Finance was set up in response to a question raised in the early 1990s: what is the social and economic “licence to operate” of financial markets? The corresponding report entitled Financial markets: mission impossible? was published in 1993 (http://www.obsfin.ch/founding-texts/financial-markets-mission-impossible/). On this basis, three years later the Foundation “Observatoire de la Finance” was established in Switzerland as an independent, apolitical and non-confessional body. Today, the Observatoire de la Finance is a think tank which work focuses on the complex interplay between financial techniques and practices on one side, and the requirements of the common good on the other. In doing so, it endeavours to clarify what is happening, and then investigates why..

The Observatoire’s activities are aimed at: • Developing and formulating ideas. The Observatoire engages in inquiry and multidisciplinary diagnosis regarding selected aspects of the economy and finance and their relationship to society. • Proposing new leads and views. Following this process of inquiry, the Observatoire compares, tests and refines the various diagnoses and the most promising avenues in consultation with the operators and institutions concerned. • Launching a dynamic process to enhance the ethical content of the technical debate.

Director of the Observatoire de la Finance: Prof. Paul H. Dembinski Members of the Board of the Observatoire de la Finance: • Paul-André Sanglard - Porrentruy • Jean-Michel Bonvin - Geneva • Andrew Hilton - London • Josina Kamerling - Brussels • Anthony Travis - Geneva

Over the years, the high standard of its work and its ability to initiate dialogue and collaboration have given the Observatoire benchmark status in the field of financial responsibility and ethics. At a time of growing concern about ethics and sustainability, the Observatoire plans to develop further its activities and make them available to its academic and private partners as well as to the general public.

www.obsfin.ch

OBSERVATOIRE DE LA FINANCE 506 Staff Team

Mr Chris Cosgrove is now working on intergovernmental conference management at the United Nations Conference on Trade and Development (UNCTAD) in Geneva and following more than 25 years international business consulting, Chris has an extensive network of high-level contacts within governments, the private banking, wealth management and financial services industry worldwide. He previously managed the Ethics in Finance Robin Cosgrove Prize at the Observatoire de la Finance, during which time the global competition was supported by ACCA Global, Accenture, the CFA Institute and the IMF promoting awareness of ethics in finance among young people worldwide. Project Manager: 4th edition of the Global Prize

Mrs Nati Garcia studied in Geneva where she graduated in History and European Studies. Her professional career has centred around communications and event management for both public sector organisations and private sector firms. These have included the Observatoire de la Finance, Logistica de Actos SL and the School for Arabic Studies. She currently works in Accenture. She has coordinated the administration of the Prize since 2012. Administrator of the Prize: 3rd edition of the Ibero-American Prize 4th - 6th edition of the Global Prize

Dr Virgile Perret holds a Ph.D in Political Science from the University of Lau- sanne, for which he was awarded the Prize of the Faculty in 2013. He’s specialized in the study of digital currencies and technological innovation from an interdisciplinary perspective. He collaborated with the European Commission, the International Labour Organization (ILO) and the State of Vaud. He contributes to the organization of the Prize since 2018. Project Manager: 6th edition of the Global Prize

Mrs Hannah Soissons studied in France for a Master’s degree in Economics and Finance, specializing Statistical and Economics Studies. She works at the Observa- toire de la Finance on diffents projects, including managing the administration of the Prize since 2011. Administrator of the Prize: 4th - 6th edition of the Global Prize

CHANGING FRONTIERS OF ETHICS IN FINANCE 507

Globethics.net is a worldwide ethics network of teachers and institutions based in Geneva, with an international Board of Foundation and with ECOSOC status with the United Nations with the vision to embed ethics in higher education. We strive for a world in which people, and especially leaders are educated in, informed by and act according to ethical values and thus contribute to building sustainable, just and peaceful societies.

The founding conviction of Globethics.net is that having equal access to knowledge resources in the field of applied ethics enables individuals and institutions from developing and transition economies to become more visible and audible in the global discourse. In order to ensure access to knowledge resources in applied ethics, Globethics.net has developed four resources:

Globethics.net Library

The leading global digital library on ethics with over 8 million documents and specially curated content.

Globethics.net Publications

A publishing house open to all the authors interested in applied ethics and with over 190 publications in 17 series.

Globethics.net Academy

Online and offline courses and training for all on ethics both as a subject and within specific sectors.

Globethics.net Network

A global network of experts and institutions including a Pool of experts and a Consortium

www.globethics.net

GLOBETHICS.NET 508 Globethics.net Publications The list below is only a selection of our publications. To view the full collection, please visit our website. All volumes can be downloaded for free in PDF form from the Globethics.net library and at www.globethics.net/publications. Bulk print copies can be ordered from [email protected] at special rates from the Global South. The Editor of the different Series of Globethics.net Publications Prof. Dr. Obiora Ike, Executive Director of Globethics.net in Geneva and Professor of Ethics at the Godfrey Okoye University Enugu/Nigeria. Contact for manuscripts and suggestions: [email protected]

Global Series Deon Rossouw / Christoph Stückelberger (eds.), Global Survey of Business Ethics in Training, Teaching and Research, 2012, 404pp. ISBN: 978–2–940428–39–7 Theses Series Tibor Héjj, Human Dignity in Managing Employees: A Performative Approach Based on the Catholic Social Teaching (CST), 2019, 320pp. ISBN: 978-2-88931-280-1 Texts Series Water Ethics: Principles and Guidelines. Endorsed by the Globethics.net Board, 2019, 41pp. ISBN: 978-2-88931-313-6 Focus Series Florian Josef Hoffmann, Economic Justice and Welfare for All. Seeking Prosperity and Freedom, 2018, 122pp. ISBN 978–2–88931–224–5 Cristina Calvo / Humberto Shikiya / Deivit Montealegre (eds.), Ética y economía la relación dañada, 2017, 377pp. ISBN 978–2–88931–200–9 China Ethics Series Liu Baocheng / Zhang Mengsha, Philanthropy in China: Report of Concepts, History, Drivers, Institutions, 2017, 246pp. ISBN: 978–2–88931–178–1 CEC Series Peter Pavlovic (Ed.), Beyond Prosperity? European Economic Governance as a Dialogue between Theology, Economics and Politics, 2017, 147pp. ISBN 978-2-88931-181-1 Reports African Church Assets Programme ACAP II: Workshop Report, Nairobi 2017, 2018, 106pp. ISBN: 978-2-88931-237-5 Co-publications & Others Patrice Meyer-Bisch, Stefania Gandolfi, Greta Balliu (Eds.), L’interdépendance des droits de l’homme au principe de toute gouvernance démocratique : Commentaire de Souveraineté et coopérations, 2019, 338pp. ISBN : 978-2-88931-316-7

CHANGING FRONTIERS OF ETHICS IN FINANCE 509

Trust and Ethics in Finance Innovative ideas from the Robin Cosgrove Prize 2006-2011

Carol Cosgrove-Sacks and Paul H. Dembinski (eds) Published by Globethics.net

The values that guide finance professionals and the core role played by trust in the modern finance industry have been the dominant themes of the best papers submitted for the Robin Cosgrove Prize since it was launched in 2006. Inviting young people to submit innovative ideas to advance ethical approaches to the world of finance in its many manifestations has stimulated a global 400 pages debate on the role of ethics and integrity in ISBN 978-2-940428-40-3 (online) finance. ISBN 978-2-940428-41-0 (print) It is important to note that the prize was www.amazon.com/ launched before the topic of ethics in finance dp/2940428417/ (US$25) became fashionable. It is not a reactive www.amazon.co.uk/ exercise to the current crisis. The aim is to dp/2940428417/ (GBP16) prompt a shift in thinking throughout the world of finance the fresh ideas submitted Globethics.net, PO Box 2100, for the prize have global relevance. The 150 route de Ferney, CH-1211 twenty-three essays in this volume come Geneva 2, Switzerland from young researchers on six continents; their innovative ideas will contribute to PDF version in future-oriented ethical solutions. Globethics.net Ethics and Responsibility in Finance Paul H. Dembinski , Routledge, 2017

https://www.routledge.com/Ethics-and-Responsibility-in- Finance/Dembinski/p/book/9781138637900

Available in several languages:

• Ethique et responsabilité en finance, Quo vadis ?, Paul H. Dembinski, Editions Revue Banque, 2015. http://www.revue-banque.fr/ouvrage/ethique-responsabilite- en-finance • Ethik und Verantwortung im Finanzsektor, Paul H. Dem- binski, Schäffer-Poeschel, 2017 https://shop.schaeffer-poeschel.de/prod/ethik-und-verantwortung-im-finanzsektor

• Etyka i odpowiedzialność w świecie finansów, Paul H. Dem- binski , Studio Emka, 2017. http://www.studioemka.com.pl/index.php?page=p&id=608 • Etika és felelosség: A pénzügyi életben, Paul H. Dembinski , Budapest: Keteg Oikonomia Kutato Intézet Alapitàny, 2018. http://kairosz.hu/p/10343/paul-h-dembinski-etika-es-felelos- seg-a-penzugyi-eletben 511 The Partners

(4th to 6th Global Edition) (1st to 5rd Polish Edition)

(5th to 6th Global Edition) (6th Global Edition)

(5th Global Edition)

(4th Global Edition) (4th Global Edition)

(3rd Ibero-American Edition) Changing Frontiers of Ethics in Finance Ethics & Trust in Finance Global Prize Awards 2012–2017

The “echo from the bottom” sent by the young academics and professionals competing Changing Frontiers of Ethics in Finance for the Prize is crucial: ethics must permeate practices, technology, strategy and culture in financial institutions.

— François Villeroy de Galhau, Governor of the Banque de France

The book “Changing Frontiers of Ethics in Finance” offers this crucial knowledge to the international financial actors, and I believe will impact international finance.

— Tamar Frankel, Professor of Law Emerita, Boston University School of Law

The Ethics and Trust in Finance Prize has stimulated an exceptional range of analysis, published in this second volume of nominated papers which I am happy to recommend.

— Dr Carol Cosgrove-Sacks, Honorary Member of the Prize Jury and formerly co- Director of the Ethics in Finance-Robin Cosgrove-Prize

ISBN 978-2-88931-317-4