Restoring trustworthiness in the financial system: Norms, behaviour and governance

Abstract

We examine how trustworthy behaviour can be achieved in the financial sector. The task is to ensure that firms are motivated to pursue the long-term interests of customers rather than pursuing short-term profits. Firms' self-interested pursuit of reputation, combined with regulation, is often not sufficient to ensure that this happens. We argue that trustworthy behaviour requires that at least some actors show a concern for the well-being of clients, or a respect for imposed standards, and that the behaviour of these actors is copied in such a way that it becomes a behavioural norm. We briefly suggest what such behavioural norms might need to be if trustworthy behaviour is to be achieved, and consider how they might be supported; we describe the research that is necessary in order to understand these norms in more detail. We argue that the norms of traders are different from the norms of those engaged in other activities, since they are inevitably self-interested, and we consider the risk that traders' norms might undermine those of other actors. We analyse the task for governance in dealing with this problem, and the role which leadership by a corporate board and management might play in doing this. We describe the need for further research to describe how this might be done. EXECUTIVE SUMMARY The global financial crisis revealed how untrustworthy the financial sector is, and subsequent studies indicate there has been little meaningful reform since. This paper considers how trustworthiness may be restored through the framing of non-self-regarding behavioural norms which improve the culture of the financial system. The task is to ensure that firms are motivated to pursue the long-term interests of customers rather than pursuing short-term profits. Trustworthiness requires reliable Journal of the British Academy, 6(s1), 131-155.