Investor Trust Must Improve to Make Financial Services Sector Viable, Industry Warned

Terry Flanagan

As 2013 fast approaches, investor confidence in capital markets remains at a low ebb.

A raft of high-profile financial scandals have rocked markets this year including the Libor rate rigging incident, JPMorgan’s $5.8 billion ‘London Whale’ losses, the trading snafus involving the IPOs of Facebook and Bats Global Markets and the near-catastrophic software glitch suffered by Knight Capital.

“The financial services industry has not done itself any favors,” Kee-Meng Tan, managing director and head of agency broker Knight Capital’s trading group in Europe, told Markets Media. “It has to start to work to win back the trust of the general investing public.”

All these incidents have contributed to eat away at this investor trust, which is in a fragile state anyway due to ongoing global macroeconomic fears.

“The global economic outlook is extremely challenged; the eurozone debacle, the ‘fiscal cliff’ in the U.S., the tsunami of regulation and lack of investor confidence, as well as the ultimate search for yield—where do you go?” a London-based source told Markets Media. “Investors are very challenged where to put their money, there is a cacophony of challenges.”

And, in terms of scandals, some think that it is likely to only get worse before it gets better.

“In the last few years we have seen money laundering, market manipulation and rogue trading hit the headlines, which has done nothing to rectify the negative perception of the banking industry,” Fred Boulier, director of compliance for Nice Actimize Europe, a provider of financial crime, risk and compliance software, told Markets Media.

“Unfortunately, it doesn’t look like this has been the last of this and the industry needs to think bigger about how it can overcome and protect against such activity.”

Then there is the issue from an investor viewpoint of underperformance, hidden costs and a perceived lack of transparency in the financial services industry.

“Investors and financial consumers currently have very limited trust in the financial services sector,” said Steven Maijoor, chair of the European Securities and Markets Authority, the pan-European regulator, in a recent speech in Wiesbaden, Germany.

“First and foremost, investors and financial consumers have too many times experienced poor service performance resulting from a lack of transparency, promises of unrealistic expected returns and unexpected hidden costs. In some cases, this has resulted in financial consumer scandals and the payment of compensation to investors.

“The reputation of the sector has also been harmed by the poor behavior of some financial sector executives and traders. Regaining the trust of investors and financial consumers is primarily a task for the financial services sector.

“I am convinced that a sector can only be viable in the long term when it is trusted by its consumers, therefore it is also in the self-interest of the financial services sector to restore this trust. Regulation and supervision can support the industry in its moves towards regaining users trust and confidence.”

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