What Wall Street Advisers Have To Say About Ethics In Their Industry

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Five years on from the passage of landmark financial reforms in the United States, many Wall Street professionals remain convinced their industry is prone to lawbreaking and ethical compromises in the name of profit, a new survey indicates.

Nearly half of all respondents believe their competitors have ignored the law or acted unethically to get an edge in the markets, and 23 percent say their own coworkers have probably done so. A third of those making over half a million dollars annually said they have firsthand knowledge of such wrongdoing in their own office. A quarter of all respondents would break insider trading laws in order to make $10 million as long as they would not get caught. Those who have been in the business for more than 20 years were less likely to volunteer that hypothetical lawbreaking than their junior colleagues, and women were less likely than men to say they’d break the law.

Gauging the industry’s ethics is difficult, and the new survey suggesting the financial profession has serious ethical problems features some important methodological quirks. Respondents volunteered, rather than being sampled randomly as a scientific study would require, and most of the questions posed in the survey are based on speculation rather than hard evidence. But the findings nonetheless provide a limited snapshot into how industry insiders view their own ethical obligations and rate the conduct of their coworkers.

Positive indicators are few and far between in the survey, but they’re there. Nearly all respondents say they would report rulebreaking, and the proportion of those reporting firsthand knowledge of wrongdoing in their office is very slightly down from the previous iteration of the survey. But a full third of respondents say the industry has grown no better policed and no more willing to police itself than in the days before the financial crisis and Great Recession.

In addition to speculating about competitors and hypothetical situations, survey respondents were asked about concrete experiences in their own workplaces. More than a quarter say their company puts its own interests before what would be best for clients — a number that jumps to almost four in 10 of the highest-paid respondents. Illegal or unethical activity is a must in order to succeed in finance, according to about a fifth of the 1,200-plus respondents to the survey. A third said their company’s compensation structures incentivize rulebreaking. About a quarter of the highest earners said they have been explicitly pressured to break rules on the job and that they have signed something that would prohibit them from whistleblowing.

Insiders also suggested that regulators and law enforcement agencies do not have a tight enough grip on Wall Street to even know when misconduct has occurred, let alone to punish it. Four in 10 respondents said regulators are ineffective at monitoring the industry for misconduct, and almost half of the the best-paid respondents agreed.
While the survey suggests that clear majorities of industry professionals believe their firms operate ethically and do not push workers to skirt the law, the scattered nature of the financial services business means that a relative handful of malicious or unethical operators can corrupt markets and harm trusting investors. It only takes one bad adviser to defraud a client of her life savings. In just the past few years, the markets for oil, foreign currency, electricity, aluminum, and money itself have all been rigged or manipulated by very small groups of unscrupulous insiders.

Tackling the industry’s self-reported ethical and legal dalliances isn’t some mysterious process. A variety of proposals from lawmakers and thinktanks could curb the bad incentives in the system and disrupt firms’ ability to manipulate markets. Clearly labeling financial products that workers use to plan for retirement would make it harder for people to get fleeced, and New York City may impose such constraints on the industry under a January proposal from Comptroller Scott Stringer. President Obama has proposed regulations that would bind retirement advisers to put their clients’ interests ahead of their own or their firm’s. As regulators struggle to get control of high-speed computer-based trading platforms, Congress could opt to take the simpler approach of using the tax code to ensure that cheating the markets using fiberoptic cable isn’t profitable. Proposals to alter how corporations in all industries structure their compensation could reduce the incentive that financial insiders have to goose their own payouts by breaking rules.