Commissioner Jonathan Hill, Financial Services, Financial Stability and Capital Markets Union
2015 Award for the Robin Cosgrove Prize for Ethics
I am delighted to be here to celebrate the 2015 Award for the Robin Cosgrove Prize for Ethics.
It is a particular pleasure to be able to congratulate this year's winner Ross Murdoch for an excellent and thoughtful essay. And yes, as this is an event to promote ethics, I feel I should make clear I did actually read it. I didn't outsource it. Or give it to a compliance officer to read. I read it myself, which seems to me in the spirit of Ross's core argument that we have an individual responsibility to think about values and to question the environment in which we operate.
As Commissioner responsible for stability and financial services, my day job means that I have to think a lot about rules. But I also try to think about values – or ethics - which are clearly not the same as rules, and for which, in my view, rules are not a substitute.
In my previous job, as leader of the House of Lords, the UK's second parliamentary chamber, I also thought a lot about standards of behaviour and how to uphold them. Here again, it was not just a matter of rules, but rather of values and of the collective will of the Members of the House of Lords to identify and uphold them.
The scandal in the UK over parliamentary expenses in the House of Commons provides another excellent example of the difference between rules and values. Some Members of Parliament – a small minority – broke the rules. Those were the simple cases. The great majority acted within the rules – the problem was that the rules, and how they were applied, did not conform to the set of values that the public expected of their politicians. Saying that it was within the rules did not prove much of a defence. What the saga demonstrated to me was that rules are not enough and that values are ultimately more important.
As in politics, an ethical approach needs to underpin the way we do business. After all, it is the basis of trust. The trust that we place in companies that the products they sell do what they say on the tin. And the trust we place in politicians and our other institutions to act responsibly and live up to promises they make. This trust is fundamental to market economies and to democracies.
When businesses mislead their customers about what they are selling, as some banks did with payment protection insurance, trust built up over decades can vanish overnight.
We need ethical behaviour across the board - from finance, to FIFA. And I agree with Ross - this is not just something for boards or for managers. It is for all of us – for all of us to ask questions of others, but also of ourselves.
To that extent, people working in finance are no different from anyone else. But it is, I think, a sector with a special responsibility because so much economic activity flows from it. It looks after our money, our savings, our houses, our hopes for old age. It is the lifeblood of our economy, fundamental to society. So when things go wrong, it has a huge knock-on effect on us all.
An ethical financial sector is one that is focused on serving its clients, not itself. And it will be a more stable one that is better at supporting investment, growth and jobs in the long term.
So how do we encourage and support an ethical financial sector? Let me touch on three areas that I believe are important: the right framework; the right values; and the right incentives.
Businesses need simple boundaries to operate within, and sanctions to back up those boundaries.
So in this sense, part of the answer is legal. Individuals must know that they will be held to account. I was very pleased that on my watch at the House of Lords we gave ourselves for the first time the power to expel a member. By the same token, if people have cheated or misled unsuspecting customers, or manipulated the markets, I have a simple view: we should come down on them like a ton of bricks. Taking money from a customer by manipulating a benchmark is no different from stealing from their handbag or wallet.
Six years on from the financial crisis, a great deal has been done to put the right framework in place. Rules have been tightened and oversight has been strengthened. Risk management procedures have been improved. Banks, for example, are now more resilient and better capitalised. A great deal has been done to restore confidence.
At EU level, we have worked to update our rules in line with new sources of risk or unethical behaviour. We have taken more measures to detect and punish illegal behaviour.
We have modernised the European market abuse framework to ensure market integrity. Taking into account the growth of new trading platforms and technologies our legislation now contains provisions against the manipulation of benchmarks – like Libor or Euribor – and makes it a punishable offence. And EU countries will now have to have criminal sanctions for market abuse – including imprisonment for the most serious offences.
But whether something is right or wrong cannot be simply reduced to whether it is permissible by law.
Indeed, I believe that too many rules can make things worse, leading to a culture where people take less personal responsibility for what they do. The question, when you bring in the lawyers and compliance officers, can quickly become: is this within the rules? Can we get away with it? But the question we should really ask is a different one. It should be: is this the right thing to do? Over-complex rules can also lead to people losing sight of the big simple principles, a box-ticking compliance culture, and a mind-set that seeks to exploit any ambiguity within the rules.
For me, it is better that human ingenuity should be put to work to serve customers better or invent new products rather than trying to find a way to wriggle around the regulatory framework.
To support the right values, we also need the right incentives.
Here transparency can help. Like any other business, financial service providers should be straight with their customers about the service they provide and the price they charge. And customers need to be able to assess whether what they are being sold is right for them.
The managing director of the IMF, Christine Lagarde, has argued that we need bankers who do the right thing "even when no one is looking". I agree and here the Bankers' Oath which has been introduced by the Dutch banking industry offers an interesting example. But I also believe that the permanent possibility of someone looking – transparency - is a powerful tool.
The Commission has acted to hardwire transparency into our financial markets. We have, for example, extended the transparency regime so that market participants publish the prices and volumes of trades in both equity and debt instruments. This will give investors a better overview of prices and the transactions taking place in different trading venues.
Another factor that obviously helps to shape behaviour in an organisation is the system of rewards within which employees operate. Who gets hired and promoted, reprimanded or dismissed, is usually a pretty good indication of what is valued by senior management.
Here the challenge is not only to align the interests of managers and staff with the interests of shareholders, but to make sure that pay is not driving short-term decision-making that cuts across the long term interests of the company or of consumers. Today, in more companies, a greater proportion of pay is deferred and a greater proportion is subject to cancellation and claw back provisions. This seems to me a way not only of reducing financial risk, but also of encouraging a longer term business outlook.
We also need to consider how to be more open about what happens when people fall short. We need to consider what we can do to make sure that if people break the law, they are not ushered out of the back door, only to reinvent themselves in another company a few months later.
I am very keen that the financial services industry should be seen as part of the mainstream of our economy and society. For that to happen it needs to demonstrate not just that the rules have changed but that its values have changed too. The higher the potential financial rewards, the stronger the culture needs to be. All staff can – should – help shape the culture, but there is, of course, a particular responsibility for those at the top. What do I mean by the phrase 'taking responsibility'? There was a time when it meant taking collective failure on one's own shoulders. But not long ago I heard one boss of a business where there had been a series of failures under his leadership being asked whether he accepted responsibility. "My responsibility" he said, "is to work hard to put these problems right". A neat PR line. But what he was really saying was "I do not accept responsibility but I would like to keep my job please". That to me is the antithesis of leadership, the opposite of taking responsibility. When something goes wrong, particularly when its impact is felt by millions, society needs to see that actions have consequences.
Reflecting on Ross's essay, I was reminded of a book that I read at school – Charles Kingsley's 'The Water Babies'. It was a Victorian morality tale for children and I didn't enjoy it very much. But the name of one of the characters has stuck with me: a fairy called Mrs. Do As You Would Be Done By. The clue to her character and her approach to life lies in her name: behave towards others as you would like them to behave towards you. Maybe it sounds a bit simplistic, but I think it captures the basic ethical principle that should underpin our financial services industry. I think Ross would approve. And I think it's a principle that we would do well to remember as we work for a financial services sector built on strong foundations that is worthy of European citizens' trust.