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The Financial Market Integrity Index is a research survey of individual CFA charterholders developed to gauge the perceptions investment professionals have about the state of ethics and integrity in six major financial services markets, and how these perceptions evolve over time. The index measures the opinions of members about the level of integrity of various investment practitioners and about the effectiveness of regulation and investor protections to promote such integrity. The survey is done in six markets, including the UK.

Commenting on the Index’s findings, Charles Cronin, CFA, head, CFA Institute Standards and Financial Market Integrity Division, EMEA, said, “Although confidence amongst UK investment professionals concerning the integrity of the market is growing, the underlying analysis shows there remain concerns over the effectiveness of the regulatory scheme in the U.K. as well as continuing concerns about practitioners in the hedge fund and financial adviser areas. With the financial regulatory reform announced by the Chancellor George Osborne last week and the move to the “twin peaks” model, coupled with changes in regulation proposed for the retail investment and alternative investment markets, we should see improvements in market supervision and investor protection over the coming years. This annual sentiment index will prove a useful tool in measuring the performance of these reforms as well as the ethical integrity of UK financial markets”.

Highlights from the 2010 United Kingdom Index include:

• Sentiment in most areas generally returned to levels last seen before the onset of the financial crisis in 2008 (view the 2008 Index), but the overall 2010 Financial Market Integrity Index ratings indicate there is room for improvement in the integrity and effectiveness of the UK financial system.
• Ratings in nearly all categories are higher than they were in the previous year, indicating most survey participants perceive overall improvement in the ethical behaviour of market participants and effectiveness of market systems in the United Kingdom.
• Ratings for most regulatory and investor protections (“market systems”) were significantly higher in 2010 than in the prior year. But survey respondents are still concerned about the U.K. regulatory environment, which received the lowest score among market system ratings in each of the 2008, 2009, and 2010 surveys.
• Among the comments provided by survey respondents, the integrity of financial advisers was the most frequently raised issue of concern.
• The state of the United Kingdom’s regulatory system is also a primary concern, eliciting nearly as many comments.
• Based on their perceptions of market ethics and integrity alone, approximately 68 percent of survey respondents in the United Kingdom said they are likely or very likely to recommend investing in UK markets. This percentage was 58 percent in 2009 and 76 percent in 2008.
• Overall, respondents appear to regard the level of integrity and the degree of investor protection in the UK financial system as about ‘average’.

Effectiveness of Regulatory and Investor Protections
The Index revealed that despite the substantial improvement in many areas, financial professionals around the world regard the UK financial markets as ‘somewhat effective’, with room for improvement in a number of areas. Respondents continue to show concern about the state of the U.K. regulatory system, assigning it a below-average mark. However, ratings in every category improved, despite CFA charterholders’ faith in United Kingdom regulatory systems being rated the lowest at 2.9. Of the comments received on the regulatory landscape in the United Kingdom, comments were fairly evenly divided between those calling for greater effectiveness and those calling for greater enforcement of policies. Financial transparency standards earned a ‘somewhat effective’ rating of 3.0, much higher than 2009’s rating of 2.6, yet survey respondents showed a fair amount of concern regarding investor protections in this area as well.

Ethical Behaviour of Individuals
The Index asked respondents to provide their opinions on the ethical behaviour of various financial professionals, from buy-side analysts to hedge fund managers. The ethical behaviour of financial advisers and hedge fund managers were rated the lowest (2.7 on a scale of 1 to 5, 1 being the lowest), compared to pension fund managers who were rated the highest at 3.7. Results show that confidence in corporate boards and executive management has increased over the past year. However, despite higher marks given to corporate boards and executives in this year’s Index, a number of respondents thought that corporate boards continue to fall short of their fiduciary duty to shareholders. Comments aimed at executives were critical of advancing self-interests and excessive remuneration.

Willingness to Invest in the United Kingdom
When asked about their likelihood to recommend investment in the United Kingdom market based solely on their perception of ethical behaviour and capital market system effectiveness, 68 percent of investors said they were very likely/likely to do so, compared with 58 percent in 2009 and 76 percent in 2008.

More than 2,700 investment professionals with the CFA designation in 80 countries participated in the research for the 2010 Financial Market Integrity Index by taking the survey either online or by scripted telephone interview between February 1, 2010 and March 9, 2010.

To listen to a webcast on the Financial Market Integrity Index, please visit https://www.cfainstitute.org/learning/topics/Pages/ser.aspx, where Jim Allen, CFA, Matt Orsagh, CFA, and Rhodri Preece, CFA, of Capital Markets Policy, of the Standards & Financial Market Integrity Division - CFA Institute, present highlights from the 2010 edition of the Financial Market Integrity Index.

- FG