chinese australia

Apply to TOP Courses Now

For our next intake!

Register your interest3

Rebuilding Trust in Financial Services and Institutions


The current US Presidential election is notable for the low levels of trust which many US citizens seem to hold for either main candidate. Yet, human beings are increasingly interdependent. For society to function effectively citizens need to trust in their basic institutions—government, banks, educational institutions, law, the political process, fairness of regulation, etc.

As Shakespeare wrote in Hamlet, 'When sorrows come, they come not single spies. But in battalions.' (Hamlet, Act IV, Scene 5). Events such as the Global Financial Crisis (GFC), corruption and growing disparity between the few who are rich and the many who are poor, and many other factors appear have led to a collapse in the level of trust in relation to institutions in many capitalist economies. This is the central argument in an excellent recent book written by a group of multi-disciplinary experts and entitled: Capital Failure: Rebuilding Trust in Financial Services, edited by Nicholas Morris and David Vines and published by Oxford University Press.

Trust in institutions such as financial services matters. For example, without trust people won’t put aside their savings, entrepreneurs desiring to create the next Apple will not have the capital to fuel their risk taking and new jobs and industries will not be created. Beyond the economy, in almost every profession - whether law, accounting, journalism, finance, medicine or academia or running a small business - people rely on professionals to do their jobs. When that trust is breached, especially on a significant scale, society as a whole suffers. As popular writer, Stephen Covey, writes: “Trust is the glue of life. It's the most essential ingredient in effective communication. It's the foundational principle that holds all relationships.”

The Case of Financial Institutions and the GFC: Why Did the Breach of Trust Occur?

Even measured against past financial crises, the GFC was shocking because of its global effects, the degree that financial institutions got wealthy by taking enormous risks and the apparent lack of both remorse or accountability for the breach in trust and consequent harms.

Many factors led to this crisis. Financial institutions were seen solely in terms of ‘market’ and ‘products’ with the goal of maximising return to shareholders. Financial institution relationships with customers were replaced with a focus on ‘sales’ , employee bonuses and high commissions that eroded trust had little regard to long term sustainable investments. Financial institutions and other players engaged in excessive risk taking while taking advantage of information asymmetries as a result of products that were increasingly complex and involved excessive risk. Ironically, the protections (such as secured deposits) put into place to counter past financial crises led to consumer complacency. Ratings agencies further compounded the problem by giving AAA Ratings to investment schemes they had to have known were unacceptably risky.

This environment resulted in multiple conflicts of interest that eventually collapsed upon themselves and shattered the trust between citizens consumers and established financial institutions. The subsequent government bailout of institutions deemed ‘too big to fail’ added to public scepticism as did the failure of regulators to hold people accountable for the harms caused.

Strategies to Re-build Lost Trust:

The authors suggest a number of strategies to rebuild trust in our financial institutions. Most of these strategies apply as well to the professions and other institutions in society. Multi-faceted and complex issues require multi-faceted approaches. Solutions to the trust failure must be comprehensive and multi-layered. The issues must be studied from multi-disciplinary perspectives and solutions should reflect the many and varied factors leading to the GFC and general breakdown in trust. This means that solutions should be derived from the perspectives offered by multiple disciplines such as law, economics, anthropology, politics, sociology and history.

1. Systems approach. In a world that is increasingly inter-connected our approach to solutions should thus see society and the financial system as a system and address the various relationships between components and stakeholders in that system.

2. Learning from the Past. It is important for us to understand how and why the GFC happened. Students commencing their university studies in economics, and whose present and future will be impacted by the GFC, want to understand how economists got it so wrong. Sadly, most economics curricula today give scant attention to economic history. Yet, we must remember as novelist William Faulkner said, ‘The past is never dead. It isn’t even past.’

3. Profit Plus Purpose. The authors also point out that part of the problem leading to the GFC was the fact that leading companies lost their business purpose. The long term interests of customers gave way to obsession with return to shareholders and short term results.

4. Strengthen Competition Laws. Mere change in regulation while not in itself enough, is nevertheless important. In recent years, the US Justice Department has not been terribly active in enforcing competition law. If institutions were too big to fail they should not have been allowed to become that big to begin with. Areas needing law reform are more invigorated laws governing fiduciary relationships, stronger laws in relation to unconscionability and unreasonable contracts, and reconceptualised laws governing duties of ratings agencies and financial institutions to members of the public whom they know rely upon their information.

5. Developing Ethical Organisational Cultures. Regulatory reform, however, will have limited impact unless we also address organisational cultures. Unfortunately organisational cultures such as that parodied in The Wolf on Wall Street put greed and profit above everything else. The values reflected in this type of culture must be replaced as financial and other institutions revert to values and a culture that puts the customer welfare first.

6. Enhancing Professional Ethics. Lawyers, accountants and other professions working in the financial industry also must renew their values which emphasise the protection and promotion of their client’s interests coupled with a wider duty to the highest professional ethics and service of the profession to society. As the authors note, A ‘professional’ is someone who ‘professes’ to a set of beliefs and values that are larger than themselves and which re-enforce obligations to serve a client, a patient, etc and the good of society as a whole.

7. Use of Technology for Auditing and Transparency. There are many different types of trust. One form of trust comes with having in place a system of audits, reporting and transparency. New and ever more powerful technology, enhanced regulatory processes and big data analytics will play important roles in rebuilding trust in our institutions.

8. Global Governance Principles. In a global economy with its greater risks of contagion, governance can no longer be confined to one nation. Instead, we need the adoption of global governance principles that will be reflected in the legal and regulatory regimes of all countries. Playing an important role in building trusted institutions and organisations are international bodies such as the United Nations, UNCITRAL, OECD, APEC and the World Bank as well as groups focused on the private sector, such as the International Corporate Governance Network.


Trust having been breached and seriously eroded will take time to be restored. However, just as a wild fire can lead to future new growth, I am hopeful that from the financial fires of the GVC, may emerge new forms of institutions, professions and cultures that enhance trust by focusing on responsible and sustainable growth for the benefit of their immediate stakeholders and society as a whole.

Dr Eugene Clark is Dean and Professor of Law, Sydney City School of Law:


31st August 2016