Why Ethical Standards are Key to a Strong Financial Future

Posted On Monday, Nov 21, 2016

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Financial markets today are continuously evolving. Structural, regulatory and technological changes are in a state of almost perpetual motion. Competition seems to intensify by the second while the potential gains get correspondingly slimmer. In this seeming maelstrom of shifting and clashing landscapes, do ethics still have a place of prominence? What should the priority be, make money or play by the rules? Does the end truly justify the means?

The world of finance is often equated with clandestine deals and cutthroat competition. The 2008 financial crisis further endorsed this image of “agent gone rogue”, as it is believed to have been largely perpetuated by the desire of money managers and investment professionals to make more money. Ethical standards were compromised and financial reporting became increasingly opaque. Rooted in the United States, it soon had a domino effect and lead to a complete collapse of the global economy, destroying businesses, companies and careers in its wake.


Ethics is not just about having moral value at an individual level. For firms and money managers it is about having an uncompromising code of conduct, strict adherence to risk management and compliance with the regulatory framework. The Josephson Institute of Ethics aptly describes ethical behaviour as, “how we meet the challenge of doing the right thing when that will cost more than what we want to pay.” Transparency on the other hand is all about communicating information. It is about the receiver having full access to complete and unfiltered information.


The financial industry is at the centre of the economy and acts as a conduit between savers and consumers of money. It is akin to a financial lever which facilitates flow of capital in the economy. The role of the financial industry, in the growth and productivity of the economy, cannot be overemphasized. It is the common thread that ties together all facets of the economy and has a significant socio-economic impact. The financial industry has myriad stakeholders and it is for this very reason that ethics and transparency should assume higher importance for the industry.

A large part of the financial markets is based on trust – trust that both or all parties involved will honour their part in their agreement – and prices are decided accordingly. If that trust breaks down, so does the contract and so does its pricing. A destruction of confidence leads to spiraling counterparty risks, demands for a higher risk premium and raises the overall cost of capital in the economy. We have seen this play out in the multiple crises that keep hitting our markets, from Harshad Mehta to the Dot com bust, from Enron to Lehman Brothers, from the Libor scandal to the 2G Spectrum scam. The hits keep rolling in. Bubbles or scandals, there’s usually a breakdown of ethics behind the mess as some individual or group exploits loophole that was there for the taking.


So the question arises: what is more important? Limited time gains achieved by any means necessary, or steady gains and a steady relationship over the long term? Do we focus on quarters or decades? The answer to that would depend upon the importance of ethics. If the focus is on maximising revenues for one or two quarters and no more, then certainly, ethics might not be that important. Take the money and run. However, if you intend to be around for decades and intend to build your relationships to last several decades, then you would need to be able to weather multiple downturns, not just ride the upturn. In that case, ethics will need to be your priority. A long-lasting relationship is built and strengthened on trust. Trust between you and your customers, your regulators and your competition. Good ethics is like the equity that you can bank upon.

Generally it has been observed that there is not just intangible, but also tangible value to an organization of ethics and management transparency. Good ethics and transparency is also good business. The reputation that a firm builds for ethical and transparent behaviour can be a more valuable asset than any financial gains. Ethics and profitability are not mutually exclusive and can co-exist, as demonstrated by a number of firms across industries that have chosen to stay true to their values in the face of lucrative and quick financial gains. Firms that have been able to create a robust moral fabric enjoy good credibility and respect from stakeholders.


In that regard, the mutual fund industry offers much solace to its stakeholders. Since all mutual funds are required to register with the Securities Exchange Board of India (SEBI), they are obliged to adhere to strict regulations, designed to protect investor interest. Additionally, periodic review and reporting ensures maximum transparency by the fund house which in turn assists investors in making informed decisions about their investments.

At Quantum, we are pleased to have taken the torch and blazed forward in a number of ways. For one, we could have followed the system which neglects to show investors their true cost of investment, and could have grown far more rapidly than we have. We’ve faced a very real cost in that decision but couldn’t be prouder of what we’ve accomplished after a long battle: recently SEBI passed new regulations demanding greater transparency from the industry, a huge win for investors.


We will always pursue those fights, since it’s always ethical to treat the investor fairly, regardless of what it means for our own growth. We trust that our disciplined, investor-friendly stands like that will give you confidence that as we push these fights forward outside our own walls, internally we adhere to those very same standards as we manage your investments every day.



Disclaimer, Statutory Details & Risk Factors:


The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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