A “window of opportunity” exists to define integrity as a step to mending Australia’s financial regulatory system, according to Professor Deborah Ralston and Professor Justin O’Brien.
Ralston, professor of finance and director of the Australian Centre for Financial Studies, told delegates attending the ‘Ethics, advice and regulation’ session at the 2011 SPAA National Conference that “integrity is a critical thing and it needs to be defined in a code of conduct or an appropriate measure”.
“The difficulty with the financial advice industry is that it’s quite fragmented,” she said.
“There are so many different professional bodies and it’s a much younger industry than accounting, which is more mature with three professional bodies [that all] have a very strong stance on professional standards.
“So there is a really good case for the regulator co-ordinating and lifting standards. And I think ASIC can do that.
“I’m very optimistic about the fact that they created the expert panel to advise on education and competencies. We had an absolutely minimum standard with RG146. Now the doors are open for very good advice.
“When there is strong input from the professional bodies for a very high ethical standard, I think there will be a good outcome.”
O’Brien, professor at the Faculty of Law at the University of NSW, said the financial regulatory system is “fundamentally flawed and needs to be changed”.
“If we say that we want to have markets which act with integrity, we have to define what integrity is,” he said.
“What does it mean to be a professional acting with integrity in the self-managed super funds area? What does that mean in practice? And what role should the professional body now take to ensure that its own reputation is enhanced?
“You have to demonstrate that these values mean something. If we don’t do that, then it’s just window dressing, and if we’re window dressing, we will have another Storm.”
O’Brien said that disclosure is insufficient and raises a “very thorny question” over what it should be replaced with.
“We need to be thinking, ‘Should we be intervening much earlier in the product design?’,” he said.
“Are there certain products that actually should not be permissible in the first instance? Now that raises huge questions about regulatory intervention and how you can justify that.
“I don’t think it can be imposed by the regulator, but I do think reform has to be the result of a sustained conversation between the regulators and the regulated in terms of what is an ethical product.”
O’Brien said that the global financial crisis (GFC) represented a “monumental policy error, monumental regulatory failure and monumental lack of confidence that one can have in the robustness of the regulatory system.”
“What we need is basically the interaction between rules, principles and societal norms. How do we ensure that ethical considerations are actually brought to the fore? We all talk about the importance of integrity,” he said.
“The problem is, we haven’t stopped to define what integrity means in business context and what it means specifically for specific communities within the regulatory system whether that be the lawyer, the investment banker, the auditor, etcetera.”
Ralston said that the GFC highlighted that despite the information and protection given to consumers, “they still don’t make the best decisions and financial advisers don’t always act in their best interest”.
“I think we’re seeing a lot of change and regulatory reform but I think in some ways we’re still chasing a new philosophy for that,” she said.
“This is not just an issue for regulators, it’s an issue for regulators, professional bodies, professionals, corporates, dealer firms, educational institutions and individuals to have a very strong ethical background and in an environment that supports that. There’s got to be a mix across those different bodies.”
