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You can teach ethics to financial advisers, study confirms

Commissioner Kenneth Hayne makes his opening statements to the Banking Royal Commission at the Commonwealth Law Courts building in Melbourne, Monday, August 6, 2018. (AAP Image/The Australian Pool, David Geraghty)

Australia is still reeling from the explosive Banking Royal Commission that uncovered systemic misconduct among financial services professionals across the board.

The inquiry saw dead clients charged, vulnerable and disabled Australians taken advantage of, and coercive, heavy-handed and often unlawful sales tactics used on consumers.

One question that has risen is whether financial professionals’ behaviour can be changed – because it sure can’t be faked, according to experts.

But new research has found that ethical behaviour can, in fact, be taught.

More training means better behaviour

A new study has found that investment advisers who have more rules and ethics training than others are less likely to commit misconduct such as fraud, theft or deception.

research paper written by three researchers from US’ University of Notre Dame, MIT and the London School of Economics studied 1.2 million US-based investment advisers and financial representatives. 

It assessed the impact that a 2010 change in a key exam – which individuals had to pass before becoming professionally qualified – had on workers’ behaviour.

The exam had two components to it: a ‘rules and ethics’ section, which covers allowable forms of compensation, disclosure requirements and unethical business practices; and a ‘technical’ section, which covers capital market theory, investment vehicle characteristics, ratios, and financial reporting.

Prior to the 2010 change, the rules and ethics section had an 80 per cent weighting while the technical section only had a 20 per cent rating, but after the change both sections were weighted equally (50 per cent each), meaning ethics training was reduced.

The researchers looked at the misconduct of licensed advisers with similar current employers, locations and qualifications, but had taken different versions of the exam – and found that the change had had an adverse impact.

“We find significantly less misconduct among those passing the more rules- and ethics-focused exam,” the paper said.

“Our estimates suggest that taking the old exam is associated with a one-quarter reduction in advisers’ 0.86 per cent average annual propensity to commit misconduct.”

How did the change in the exam affect behaviour?

It’s simple. You’re less likely to do something wrong if you know what’s right and what’s wrong.

“One compliance-based interpretation is that advisers passing the new exam are more likely to engage in misconduct simply because they are less aware of the rules.

“A second, not mutually exclusive, explanation is that the exam’s focus on ethics alters individuals’ perceptions of right and wrong conduct.”

Additionally, the exam had ‘primed’ advisers, where early exposure to rules and ethics had led to appropriate behaviour down the track.

The study also looked at what happened when advisers who had more ethics training found themselves surrounded by miscreant colleagues.

“We study this effect both across organisations and within Wells Fargo, during their account fraud scandal,” said report co-author Zach Kowaleski.

US banking giant Wells Fargo was embroiled in a scandal in September 2016 when it was found that millions of fake deposit and credit card accounts were created without clients’ knowledge under a high-pressure sales culture within the firm.

“Advisers with more rules and ethics training are less likely to tolerate bad behaviour at their firm, and seek employment elsewhere,” the paper said.

“That those with more ethics training are more likely to leave misbehaving organisations suggests the self-reinforcing nature of corporate culture.”

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