Andrew Canter on financial ethics: “1 in 5 will pay a bribe”

Biznews’ Alec Hogg sits down with Futuregrowth’s Andrew Canter with a specific focus on ethics in the financial services sector. Canter says it is key to managing people’s money, primarily because as much as people want good investment returns they first want to make sure their money’s being looked after by somebody they can trust. The conversation refers to two recent surveys, the first a global one where 1,200 US and UK CFA  individuals answered questions around ethics, and the second a local survey with 1,000 CFA holders. The results varied between regions but one question showed consistency, 1 in 5 respondents felt that sometimes you must engage in illegal or unethical activity to get ahead. As Canter bluntly puts it, “20 percent of the time a bribe will be paid.”

Alec Hogg is with Andrew Canter the CIO of Futuregrowth Asset Management. His first question looks at the Chartered Financial Analyst qualification.

The CFA (Chartered Financial Analyst) designation, which is measured by the CFA Institute is a global standard of investment credentials and technical credentials, but also ethical standards and best practices in the industry. There are key proponents of ethics in the industry. It’s a core part of the curriculum and a core part of the testing procedure and one of the things the industry really stands for.

It’s a tough qualification to get. If you are in a crooked firm and you have a CFA, you’d better leave the crooked firm because you don’t want to lose it.

That’s true. In fact, every time that any sort of corrupt behaviour becomes public in South Africa, we do a quick check to see if there are any CFA/Charter Holders Candidates in those firms, and rarely are they – rarely. It does happen, but it’s a really nice sign to see that the people who have had some basic training in ethics, know when to run.

Ethics is therefore a very important part of being a CFA and you like to survey and see what the CFA’s themselves, think. There have been some international surveys. What did they discover?

Managing people’s money is really an ethics thing. People want good investment returns but first, they want to make sure their money’s being looked after by somebody they trust. That’s just core. That being taken as read, a recent survey earlier this year about four or five months ago of 1200 financial services professionals in the U.S. and the U.K. asked a series of ethical questions. We actually echoed some of those questions at the CFA South Africa Conference in Johannesburg last month to see how local players thought about ethics and whether it was the same as the global players were thinking. I think we should maybe have a dialogue about that. Can I give you some statistics?

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Yes. Well, let’s start with the first of those important questions.

Sure. Interestingly, of the global 1,200 people surveyed in the U.S. and the U.K., 47 percent of the people surveyed believed that their competitors engaged in unethical or illegal activity to get ahead. Forty percent of people believed their competitors were cheating. In the South African context, as many as 58 percent of about 100 people surveyed, said the same thing. They were indicting their competitors and indicting the industry around them. Fifty-eight percent is a scary number.

Particularly, seeing that it’s out of line with global averages.

Higher than global averages, which is a little bit surprising but maybe there’s a lot of stuff going on in South Africa. Maybe there’s a bit of rot going on at the moment.

Do you agree with that? You’re in the same industry.

No, I don’t, not in the financial services industry. Broadly speaking, when I look at the FSB, the regulation and the testing requirements, requirements for education credentials are going up and up here. Being a board member of CFA SA, we rarely see a lot of malfeasance – certainly, amongst CFA – and statistically, probably not even in the broader financial service industry so I don’t agree with that. I’m on the buy side of the business, i.e. Pension Fund Trustees, consultants, asset managers, multi managers, and service providers. My view is that probably, 90 percent of the people in this business are straight, ethical, and honest, doing a good, diligent job in an ethical and fiduciary manner. Then there’s ten percent who think it’s a game and it’s about what they can line their pockets with, and it’s those ten percent who actually create a problem.

All right, so they felt that the competitors were bad. What about their fellow employees?

Interestingly, of the 1,200 U.S. people surveyed, 23 percent believed slightly that their fellow employees engaged in illegal or unethical activities.

Do they work for better firms than the market as a whole?

Yes, everybody believes they’re better. Thankfully, in the South African context, only 14 percent said ‘yes’ but in the room, I could see this question cause a bit of head scratching – people who knew they were ethical, but they really had to question their colleagues. Still, 23 percent globally and 14 percent locally is not a good number. It doesn’t make you feel warm and fuzzy.

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The last question of the three that you focused on is the one that perhaps is the most relevant of them that the respondents were asked “Do you have to be crooked to get ahead?”

The global data says that nearly one in five or 20 percent of the respondents felt that in the financial services business, you must sometimes engage in illegal or unethical activity in order to get ahead. Twenty percent said that you have to do it on occasion. Now interestingly the South African data was the same, 20 percent of that audience of 100 people felt that sometimes you have to cheat and that’s pretty daunting. That means that 20 percent of the time a bribe will be paid. Twenty percent of the time you will go over the line and give the excessive gift or engage in unethical or illegal activity, just to get the job done. That to me is most worrying thing. It is a statement of intent or a statement of a basic acceptance of how the market is and ‘in order to get on in the world I need to do this thing’.

Andrew if they had written that in their exams, given that ethics is such a big part of the CFA then they would clearly have failed their exams, but in the real world they saying ‘well, our exams might be suggesting that we should be ethical but the reality is different’.

I want to be generous-spirited and we were very careful when we did this survey. We did it pure analogue. It wasn’t by cell phone SMS response, it was on paper with ‘tick the box’, because you wanted an honest answer from people. I must say just because 20 percent of the people said that sometimes you have to do it doesn’t mean they do do it. It means they’re saying there may be a time when I have to turn down business because I won’t do it. I want to be generous-spirited about that answer. I know that Futuregrowth and other firms take that view. We will do good business or we will do no business. We won’t pay the bribe, but we know that our people ask for it. I acknowledge I’m part of the 20 percent. I know that sometimes it happens. To get ahead, I should do it, but we don’t do it so let us try and read that in a generous context I think.

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Define a little what unethical conduct would be?

I think on the buy side of this industry you get everything from Trustees being bribed by Service providers to favour a particular product. I mean I have heard consultants speak about purchased Trustees who will sell their vote at a Trustee meeting for a bit of money or soccer tickets, that’s one example. There are stories about Trustees of funds getting kickbacks from the consulting firms as part of the fees that are paid to the consulting firms. There’s conflict in how some consulting firms provide actuary asset management services while they’re consulting to the fund. That’s more conflict than actually straight out unethical. There’s that kind of stuff. There are requests from Trustees and Boards of Pension Funds for sponsorships for annual functions which have nothing to do with Trustee education. It’s at all about a party or chance to get together with their mates, out of the pocket of an Asset Manager who is now supposed to pay this annual fee to support such a party.

Then there’s the petty stuff, like request for cell phone airtime, drinks, and whiskey. It could extend as far down the line as you take a client out for dinner, because socializing is important in our business, to have relationships. Then they get hold of the wine list and it’s the expensive red wine and the Johnnie Walker black all night, that’s unethical, immoral or just bad taste as a matter of judgement there but it can extend quite far down

Where do you draw the line?

We draw the line at the FSB’s rules. No more than R1000 can be spent per person, per year. We keep track of that and that is not a target. That is a limit and by the way, that law applies specifically to our registered persons therefore it does not technically apply to Pension Fund Trustees who are not registered reps, but we apply it. We take the view that we have to have relationships. People don’t trust you to manage R100m or R1bn of their Pension Fund unless they get to know you, look in the whites of your eyes and have a conversation with you. Sometimes, that is best done over dinner. Now, a dinner must be at a reasonable place, in a local place, at a reasonable cost and not like ‘let’s fly to Mauritius for dinner’. People do that. ‘Let’s go to Mauritius, we’ll take you for an investment conference there’ or ‘geez, the Trustees really need iPads. Let’s give them iPads’.

We see that sort of behavior. It’s outrageous behavior. I think this is not so much in the eye of the beholder but just really what makes good common sense.

As someone who is very concerned about CFA’s and their future how are you going to use this information?

Obviously we going to put it in front of the FSB for a start. I think one of the challenges is that people in the industry know a lot of stuff, but we rarely talk about it and I don’t think the FSB has a framework to accept this anecdotal information because most of it is anecdotal. Those stories I have told you are all anecdotal, I hear it second-hand, third-hand {from reliable sources) but it’s all anecdotal. I can’t take it to court, so that’s a challenge. The FSB needs to have a framework for Tip Line which gathers up all of this anecdotal data. When we start seeing a trend of four people say the anecdotal thing about one counter party, you know there is something wrong in that counterparty. I would tell you that when things go bust or blow up or there’s a big fraud that afterwards people say ‘yes we knew they were up to something’. I mean I can tell you it happened with J Arthur Brown.

The people in the industry knew there was something up there. There were weird things happening and we said it to each other but nobody did anything about it. Nobody reported it and certainly the FSB didn’t do anything about it and then the money disappeared. We should have known. We should have reported it. The FSB should have had their antennae up and they should have been looking into it before that bus hit the tree. That’s what needs to go on in the future.

Andrew Canter is the Chief Investment officer at Futuregrowth Asset Management.

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