Capital Failure: Rebuilding Trust in Financial Services

ISBN : 9780198788089

Nicholas Morris; David Vines
432 Pages
156 x 234 mm
Pub date
Sep 2016
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Adam Smith's 'invisible hand' relied on the self-interest of individuals to produce good outcomes. Economists' belief in efficient markets took this idea further by assuming that all individuals are selfish. This belief underpinned financial deregulation, and the theories on incentives and performance which supported it. However, although Adam Smith argued that although individuals may be self-interested, he argued that they also have other-regarding motivations, including a desire for the approbation of others. This book argues that the trust-intensive nature of financial services makes it essential to cultivate such other-regarding motivations, and it provides proposals on how this might be done. Trustworthiness in the financial services industry was eroded by deregulation and by the changes to industry structure which followed. Incentive structures encouraged managers to disguise risky products as yielding high returns, and regulation failed to curb this risk-taking, rent-seeking behaviour. The book makes a number of proposals for reforms of governance, and of legal and regulatory arrangements, to address these issues. The proposals seek to harness values and norms that would reinforce 'other-regarding' behaviour, so that the firms and individuals in the financial services act in a more trustworthy manner. Four requirements are identified which together might secure more strongly trustworthy behaviour: the definition of obligations, the identification of responsibilities, the creation of mechanisms which encourage trustworthiness, and the holding to account of those involved in an appropriate manner. Financial reforms at present lack sufficient focus on these requirements, and the book proposes a range of further actions for specific parts of the financial industry.


Nicholas Morris nd David Vines: Preface
What Went Wrong?
1 Sue Jaffer, Nicholas Morris, and David Vines: Why Trustworthiness is Important
2 Sue Jaffer, Nicholas Morris, Edward Sawbridge, and David Vines: How Changes to the Financial Services Industry Eroded Trust
3 Thomas Noe and H. Peyton Young: The Limits to Compensation in the Financial Sector
4 Richard Davies: A Short History of Crisis and Reform
5 Sue Jaffer, Susana Knaudt, and Nicholas Morris: Failures of Regulation and Governance
Trustworthiness, Motivations, and Accountability
6 Natalie Gold: Trustworthiness and Motivations
7 Avner Offer: Regard for Others
8 Onora O'Neill: Trust, Trustworthiness, and Accountability
Problems with the Legal and Regulatory System
9 Joshua Getzler: Financial Crisis and the Decline of Fiduciary Law
10 Justin O'Brien: Professional Obligation, Ethical Awareness, and Capital Market Regulation
11 John Armour and Jeffrey N. Gordon: Systemic Harms and the Limits of Shareholder Value
Crafting the Remedies
12 Boudewijn de Bruin: Ethics Management in Banking and Finance
13 Dan Awrey and David Kershaw: Toward a More Ethical Culture in Finance: Regulatory and Governance Strategies
14 Seumas Miller: Trust, Conflicts of Interest, and Fiduciary Duties: Ethical Issues in the Financial Planning Industry in Australia
15 Avner Offer: A Warrant for Pain: Caveat Emptor vs. the Duty of Care in American Medicine, c. 1970-2010
16 Sue Jaffer, Nicholas Morris, and David Vines: Restoring Trust

About the author: 

Nicholas Morris is Academic Visitor and Senior Research Associate at Balliol College, Oxford. He is an economist with 35 years of wide-ranging experience: in the finance, water, energy, transport, telecoms, and health sectors; in infrastructure provision; and in the design of regulatory structures. He was a co-founder and then Chief Executive of London Economics, for a period of 14 years, and, prior to that, was Deputy Director of the Institute for Fiscal Studies. Nicholas has an M.A. in Engineering and Economics and an M.Phil. in Economics from Balliol College, Oxford. He has been a visiting Professor of City University, a Governor of the charity 'Research into Ageing', a Fellow of Melbourne University and a Guest Professor at the China Executive Leadership Academy, Pudong. During the last 12 years he has worked extensively in Australia, South East Asia, and China advising governments, regulators, and companies.; David Vines is a Professor of Economics and a Fellow of Balliol College at Oxford University. He obtained a BA in Economics and Mathematics from Melbourne University, and an MA and PhD in Economics from the University of Cambridge. His research has been on international macroeconomics and on global governance and his early work was with James Meade in Cambridge on the construction of inflation-targeting regimes. Between 1994 and 2000 he was the Director of an ESRC Research Programme on Global Economic Institutions, and from 2008 to 2012 he was the Research Director of a European Union Framework Seven Research Program, PEGGED, on the Politics and Economics of Global Governance: the European Dimension. Fifteen years ago he organized an interdisciplinary seminar on integrity with the philosopher Alan Montefiore, the proceedings of which were published as A. Monetefiore and D. Vines, Integrity in the Public and the Private Domains (Routledge, 1999).

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