Michael C. Bodson, DTCC President and Chief Executive Officer
The global financial services industry continues to struggle as a result of economic headwinds that are hampering the ability of many firms to grow as well as a challenging, complex and increasingly costly regulatory environment. However, there may be an even more troubling issue facing the industry right now – the deep cynicism and skepticism the public feels toward financial services. This lack of trust in the industry has the potential to be more damaging than any economic trend or regulation.
Michael Bodson, DTCC President and CEO, discussed the issue of trust during his keynote speech at the DTCC Client Forum 2015. His remarks are captured in a three-part series on rebuilding the public’s trust in financial services. In the first part, Bodson explains the extent of the current trust deficit and suggestions on how to restore trust in financial markets and institutions.
The Trust Deficit
Many of us in financial services tend to talk about the 2008 crisis in analytical terms or its impact on the industry – the collapse of Lehman Brothers, the near meltdown of the financial system, and the re-regulation of global markets and the heightened requirements we now face as a result of new mandates. In doing so, we oftentimes forget the human toll of the crisis – the dramatic decline in housing prices that forced many hard-working homeowners into foreclosure, the local shopkeepers and merchants who had to close their stores due to a lack of business, and our friends and neighbors who have had to put off retirement because they can’t afford not to work.
It’s no wonder that over the past seven years the perception of financial services has changed for the worse. We’ve gone from being seen as a respected industry that valued its clients and acted in their best interests to an industry singularly focused on increasing shareholder value at the expense of its clients.
This perception continues to define the industry despite important steps that we have taken since 2008 to regain public confidence. Over the past 7 years, banks have become stronger and their balance sheets have gotten smaller. Trading practices have improved and capital positions have been strengthened. Still, trust in financial services is at an all-time low.
Our industry now ranks dead last as the least trusted sector in the global economy, according to the 2014 Edelman Trust Barometer. This is particularly troubling because the currency that underpins financial services is trust – trust that when you invest in a mutual fund you will get your money back…trust that when you apply for a mortgage your broker is honest and not setting you up for financial ruin…trust that the money you put away in a 401k plan or pension fund will be there for you during your golden years.
For all our efforts to strengthen the financial system and implement controls to protect the end investor, only 50% of respondents in the Edelman survey expressed trust in financial services – well below industries like healthcare, Big Pharma, Big Tobacco, chemical companies and even the media.
This trust deficit is a problem for financial services in all regions of the world but is most pronounced in the European Union, where only 29% of respondents expressed trust in financial services.
Unfortunately, there are some very good reasons why this is the case. For example, we’ve had the Libor scandal, FX rate fixing, money laundering, tax evasion, misleading product descriptions. To quote a comment I heard at a meeting at Davos and which is powerful in its simplicity, “It probably would help if we stopped having scandals.” Obviously, but saddening that it had to be stated. Furthermore, the public no longer fully understands what we do because financial products have become so complex and, in some cases, appear to only serve the best interest of Wall Street.
Rise of the Sharing Economy
While there have been many important changes in our business, the financial crisis sparked a dramatic transformation beyond the financial industry – most significantly with the rise of the sharing economy in which people are monetizing assets and leveraging technology to sell goods and services directly to their peers.
This represents dramatic change – both in society’s attitude and behavior and in the desire among consumers for a more personalized transaction. It also reflects a shift in trust from corporations to individuals. Can you imagine 10 years ago someone feeling more comfortable using Airbnb to rent a room, or even just a mattress on a floor, in your house for a night over staying at the local hotel? The thought that my daughter would gladly seek out a stranger for a car ride home at midnight in New York City would have appalled me a few years back; now it is a norm.
While services like Airbnb and Uber have the potential to revolutionize entire industries, Kickstarter and other similar platforms, which effectively allow entrepreneurs to bypass the capital markets to raise capital directly from friends, family and strangers, could one day do the same to finance. Since 2009, Kickstarter has funded 77,000 projects with pledges of $1 billion from 7.7 million investors, and 44% of projects have achieved their funding goals. While Kickstarter is not intended for investors to profit financially, does anyone doubt that a new platform will soon emerge that is designed to do just that?
Rebuilding trust with the public is a business imperative in my view because, just like regulations or changes in market structure, the advent of new technologies and the expansion of the sharing economy will impact the role of financial services in society and, ultimately therefore, the long-term viability and relevance of financial firms.
How to Restore Trust
Restoring trust in our industry will take time, but the Edelman Barometer did offer insights and recommendations into how we can go about this task. The survey identified 16 attributes, organized into 5 categories, which can serve as a roadmap for our industry to improve our reputation with the public and, over time, strengthen our bottom lines.
At the heart of this effort is the need for us to enhance engagement and demonstrate integrity. In simple terms, this means that we need to listen to our clients and employees, we need to act in a manner that is honest and authentic, we need to be transparent and ethical in our actions and we need to take responsibility to address an issue or crisis.
The other three categories from the survey are equally insightful, including the need to deliver high-quality products and services and drive innovation; the need to have a larger and more meaningful purpose beyond our business goals and objectives, such as corporate social responsibility initiatives, and the need to develop outstanding operations, including having the ability to deliver consistent financial returns to investors and have highly regarded and admired leadership. Innovation must be seen as serving the interests of our clients and not simply as a means of increasing margins through complexity. We, as an industry, must also understand that we do serve a public good, be it through providing access to worthy investments or through risk management, both on a retail and institutional level. And lastly, a proper profit motive overseen by management and governance which understands what “doing the right thing” means is key to starting the change in public perception.
In short, if we are going to fix the trust deficit, we need to focus on developing a deeper understanding of our clients and their goals, dedicate the time to learning their values and priorities, and then ensure they are at the center of our focus.
In the second part of the series, Bodson will discuss the unique role financial market infrastructures can play in rebuilding trust in financial markets and institutions.
Related reading: The Path Forward: Perspectives from DTCC Client Forum 2015