United Kingdom Investment Professionals Regain Confidence in Financial Market Integrity

29 June 2010 - London, United Kingdom

According to the 2010 CFA Institute Financial Market Integrity Index (the Index), a survey of CFA charterholders has found that investment professionals appear to have regained some of the faith they had lost in the integrity of the U.K. financial system since the global financial crisis. However, they remain critical of the regulator’s performance and skeptical about the integrity of peers who work in hedge funds or provide financial advice.

The Financial Market Integrity Index is a research survey of individual CFA charterholders developed to gauge the perceptions investment professionals have about the state of ethics and integrity in six major financial services markets, and how these perceptions evolve over time. The index measures the opinions of members about the level of integrity of various investment practitioners and about the effectiveness of regulation and investor protections to promote such integrity. The survey is done in six markets, including the United Kingdom.

Commenting on the Index’s findings, Charles Cronin, CFA, head, CFA Institute Standards and Financial Market Integrity Division, EMEA, said, “Although confidence amongst U.K. investment professionals concerning the integrity of the market is growing, the underlying analysis shows there remain concerns over the effectiveness of the regulatory scheme in the U.K. as well as continuing concerns about practitioners in the hedge fund and financial adviser areas. With the financial regulatory reform announced by the Chancellor George Osborne last week and the move to the 'twin peaks' model, coupled with changes in regulation proposed for the retail investment and alternative investment markets, we should see improvements in market supervision and investor protection over the coming years. This annual sentiment index will prove a useful tool in measuring the performance of these reforms as well as the ethical integrity of U.K. financial markets.”

Highlights from the 2010 United Kingdom Index include:

Sentiment in most areas generally returned to levels last seen before the onset of the financial crisis in 2008, but the overall 2010 Financial Market Integrity Index ratings indicate there is room for improvement in the integrity and effectiveness of the U.K. financial system.

Ratings in nearly all categories are higher than they were in the previous year, indicating most survey participants perceive overall improvement in the ethical behavior of market participants and effectiveness of market systems in the United Kingdom.

Ratings for most regulatory and investor protections (“market systems”) were significantly higher in 2010 than in the prior year. But survey respondents are still concerned about the U.K. regulatory environment, which received the lowest score among market system ratings in each of the 2008, 2009, and 2010 surveys.

Among the comments provided by survey respondents, the integrity of financial advisers was the most frequently raised issue of concern.

The state of the United Kingdom’s regulatory system is also a primary concern, eliciting nearly as many comments.

Based on their perceptions of market ethics and integrity alone, approximately 68 percent of survey respondents in the United Kingdom said they are likely or very likely to recommend investing in U.K. markets. This percentage was 58 percent in 2009 and 76 percent in 2008.

Overall, respondents appear to regard the level of integrity and the degree of investor protection in the U.K. financial system as about "average."

Effectiveness of Regulatory and Investor Protections
The Index revealed that despite the substantial improvement in many areas, financial professionals around the world regard the U.K. financial markets as "somewhat effective," with room for improvement in a number of areas. Respondents continue to show concern about the state of the U.K. regulatory system, assigning it a below-average mark. However, ratings in every category improved, despite CFA charterholders’ faith in U.K. regulatory systems being rated the lowest at 2.9. Of the comments received on the regulatory landscape in the United Kingdom, comments were fairly evenly divided between those calling for greater effectiveness and those calling for greater enforcement of policies. Financial transparency standards earned a "somewhat effective" rating of 3.0, much higher than 2009’s rating of 2.6, yet survey respondents showed a fair amount of concern regarding investor protections in this area as well.

Ethical Behavior of Individuals
The Index asked respondents to provide their opinions on the ethical behavior of various financial professionals, from buy-side analysts to hedge fund managers. The ethical behavior of financial advisers and hedge fund managers were rated the lowest (2.7 on a scale of 1 to 5, 1 being the lowest), compared to pension fund managers who were rated the highest at 3.7. Results show that confidence in corporate boards and executive management has increased over the past year. However, despite higher marks given to corporate boards and executives in this year’s Index, a number of respondents thought that corporate boards continue to fall short of their fiduciary duty to shareholders. Comments aimed at executives were critical of advancing self-interests and excessive remuneration.

Willingness to Invest in the United Kingdom
When asked about their likelihood to recommend investment in the U.K. market based solely on their perception of ethical behavior and capital market system effectiveness, 68 percent of investors said they were very likely/likely to do so, compared with 58 percent in 2009 and 76 percent in 2008.

More than 2,700 investment professionals with the CFA designation in 80 countries participated in the research for the 2010 Financial Market Integrity Index by taking the survey either online or by scripted telephone interview between 1 February 2010 and 9 March 2010.

CFA Institute
CFA Institute is the global association for investment professionals. It administers the CFA and CIPM curriculum and exam programs worldwide; publishes research; conducts professional development programs; and sets voluntary, ethics-based professional and performance-reporting standards for the investment industry. CFA Institute has over 100,000 members, who include the world’s 88,890 CFA charterholders, in 136 countries and territories, as well as 136 affiliated professional societies in 58 countries and territories. More information may be found at www.cfainstitute.org.

CFA Institute Centre for Financial Market Integrity
The CFA Institute Centre develops timely, practical solutions to global capital market issues, while advancing investors’ interests by promoting the highest standards of ethics and professionalism within the investment community worldwide. It builds upon the CFA Institute 40-year history of standards and advocacy work, especially its Code of Ethics and Standards of Professional Conduct for the investment profession, which were first established in the 1960s.