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It seems to me that the current financial crisis has gone on for so long, and has proved so difficult to solve, because the crisis has severely damaged not just one of these two qualities but both. Too many of our institutions are still financially unsound and, in the eyes of many in the general public, the industry as a whole is morally unsound.
The authorities’ challenge is that much of the work deemed necessary to repair and strengthen the financial soundness of the industry – all the new regulation, the extra requirements and restrictions – merely emphasises that the moral soundness of the industry remains deeply suspect.
And this has led to a general mistrust of finance, where to many it seems that we have reached a point where the market belief is that “if it is not actually illegal it is OK”, and there is in finance a complete absence of any moral code to go alongside the legal code.
This is very different from the world of yesterday, where there was a strong moral code. It could be summed up in just 11 words:
• “my word is my bond”;
• “nothing to excess”;
• and finally, “remember the client”.
Which is not an obviously less comprehensive or effective code than the modern regulatory regime. Indeed you could replace the entire corpus of tens of thousands of lines of current legal documentation, it often seems, by the single sentence: “Don’t take advantage of your position, don’t put your own interests ahead of your clients’, don’t do anything you could not defend if it became public knowledge, and use your common sense". Or rather, you couldn’t. Because the appeal to “common sense”, and with it the implied appeal to a common set of moral understandings of what is right and what is wrong, is no longer possible.
One of the features of a global world is that we do not all have the same instinctive understanding of what words mean. A simple example — a sign outside a barber’s shop saying “haircut, 17” would be taken by some cultures to imply that it will cost precisely 17, by others to imply “with tip that means 20” and by yet a third group as the starting price and “would they do it for 12?”
And so, in the absence of an underlying and implicit basic common moral code that we can assume everyone will adhere to, we must craft an explicit code through regulations. The challenge here is that in creating an overtly rules-based culture, we have no longer got an overarching moral ethos that the authorities can expect financiers to obey and can rely on to backstop the gaps in the legal code.
So they have to respond to all innovations with yet more rules. This has two damaging consequences.
First, the authorities are always in reactive mode: the rules are usually incomplete and always post hoc, and so regulatory lacunae and arbitrage are built into the system. And secondly, the more extensive the legal code, the more the attitude of relying on it as the sole arbiter of right and wrong grows, and the sentiment that “If it is not actually illegal it is OK” takes deeper root.
Society’s distrust of the financial sector is now deeply damaging not just to the financial industry but to society itself. We need a healthy, trusted and financially sound industry and, to achieve this, we need the authorities and the political class to realise the damage that their ongoing assault on the industry – through extensive regulation and overtly populist and hostile attacks – is having and to show a sense of urgency in sharing the task of rebuilding fiduciary trust, as the report of the Parliamentary Commission on Banking Standards has so clearly stated.
I am not saying this because we want to exonerate the banking system and allow past misdeeds to be overlooked. Much less is it because the banking system deserves society’s forgiveness. No, it is because as society, we need to, in much the same way that when banks fail, we need to rescue them, uncomfortable, undeserved and expensive though that is.
Later, the question must be how the financial community responds to this generous act by society, and I hope the response contains both a degree of humility and a commitment to a more ethical industry. But first, society needs to ensure that the financial system survives.