Promoting integrity in European financial services reform

In the past few weeks, Transparency International’s Liaison Office to the European Union (TI EU) has been very active in the European Commission’s efforts to reform financial services, led by the Directorate General “Internal Market & Services” (DG Markt), and we have become the first civil society society actor to engage with DG Markt’s working groups on financial services.

Our work has two distinctive yet mutually dependent goals:

• the promotion of internal responsible business practices; and
• the creation of robust market infrastructures and legislation that keeps financial market actors in line.

On September 1, we submitted a position paper (download) on corporate governance in financial institutions to consultations held by DG Markt outlining the main ways that we think corporate governance can be improved.

Chiefly, we called for

• stronger measures to promote board accountability,
• a stated and serious commitment to non-financial risk management (including anti-corruption policy and ethical business practices),
• robust communications channels that highlight commitment to risk management, and
• executive remuneration policies that reward responsible behaviour and long-term, stable business performance.

Our overall message is that corporate governance must manage and reduce financial and non-financial risks by embedding integrity, transparency and accountability within a company – qualities that were noticeable by their absence in the hedonistic years prior to the financial crisis.

On September 3, we outlined our initial position on financial market reforms to the Expert Group on Market Infrastructure (EGMI), a working group set up by DG Markt to, among other things, evaluate existing legislation and propose safer and more transparent regulations. TI EU will participate in the group and is set to be the first civil society actor to engage with DG Markt’s working groups on financial services.

Our initial position, which is a brief introduction to what we think are the most pressing issues in market infrastructures, focuses on

• infrastructural opacity,
• conflicts of interest between trading partners,
• systemic risk associated with bilateral transactions and over-the-counter trading, and
• the lack of resources to deal with valuation and risk management.

While the expert group is likely to be of a technical nature, the overall thrust of our work is simple: we want to promote a higher level of transparency, integrity and quality of information that can reduce the scope of abuse, expose any conflicts of interests and restore confidence in financial markets. These measures can increase market participants’ accountability as well as create preventive measures that reduce the likelihood of further crises.

Why we need reform, and how to do it

Financial institutions, whether we like it or not, are pivotal to the well-being of the economy – they touch upon every aspect of commerce and society and therefore corruption in the financial system can pose risk of severe consequences as seen in the recent financial crisis. The financial market, moreover, has assumed/seized (depending on your beliefs) the position of the backbone of the economy and the framework in which all businesses operate.

Whether one believes that the financial system should have that power is another question – however, for a more accountable financial system, but also for those that wish to reduce financial market hegemony, the priority must be to promote higher levels of transparency to reveal the corrupt and fraudulent practices that jeopardise market stability for the sake of individual profit.

Civil society engagement is crucial to the reform process but, as noted by several Members of the European Parliament (MEPs), there is no adequate civil society presence in financial reform similar to other policy areas such as health, energy and the environment. While our contribution is modest at best, we hope to operate in the same spirit as the MEPs’ efforts to create a non-industry “Finance Watch” capable of counterbalancing the lobbying influence of vested interests in the corridors of European power.

Our first step is to promote a culture of integrity and good governance at board and all levels of financial institutions and across the financial market more generally, so that we can create the foundations of a fairer, more responsible financial system – one in which vested interests are guided by strong ethical principles and kept in check by adequate and transparent regulation.

Des Carney