Ethics in Finance: Why is it such a problem?

December 1, 2015 • GLOBAL ECONOMY, FINANCE & BANKING, Capitalism in the 21st Century, Banking Innovation, Governance & Regulation

By John Hendry

Despite the best efforts of all concerned, the financial sector continues to have a bad reputation for illegal and unethical behaviour and to be more prone to ethical lapses than other business sectors. John Hendry explores why this should be, and what might be done about it in practice.

Why has the financial sector such a bad reputation for illegal and unethical behaviour? Partly perhaps, because of ignorance and prejudice. Most people have very little understanding of finance, and throughout history its practitioners and their core activities – lending, borrowing and speculative trading – have been seen as morally distasteful. Nowadays everybody who has a bank account is a lender, everybody with a pension or life policy is a speculator, and most of us are also borrowers, but the moral stigma somehow remains. There is more behind the bad reputation of finance than that, however. While it’s difficult to get a meaningful measure of such things, the financial sector almost certainly is much more prone to ethical lapses than other business sectors. There may be a problem of perception but there is a real problem as well, and it is a problem that refuses to go away, despite the best efforts of firms and regulators to address it.

This situation prompts a number of questions. The first and most important is: what can be done? Good intentions are clearly not enough and while there have been all sorts of suggestions, from enforced restructuring of the banking sector to capping bankers’ bonuses and from enhanced compliance regimes to the requirement that bankers swear some kind of hippocratic oath, none of these seem particularly promising. We need to come up with something better, and to do this we need to ask two further questions. What kinds of ethical problem are we up against here? And what is it about the financial sector that gives rise to these particular kinds of problem?


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