I am grateful that risk managers inside banks have more clout these days. That said, I want it to persist, and the best way to do it is to have risk managers beholden to an ethics code, like actuaries or CFAs.
This is valuable, because the risk manager can point to a body of ethics that says to his manager, “I am sorry, but those of my discipline say that this action is unethical,” when line managers complain that the risk manager is killing business by insisting that certain risk standards should be maintained.
Actuarial risk models cover the life of the business, unlike Wall Street models that measured risk in terms of days. Cash flows mater, and the ability to meet the demand for cash matters. Long-term risk models tend to surface risks better than short-term models because an intelligent businessman can ask what are the odds that we will have a crisis over the duration of our existing business?
Once on a task force of the Society of Actuaries, when discussing non-traditional actuaries going to Wall Street, I said, “Great idea, but the line managers will eventually kill anyone that gets in their way. They don’t want people who have an ethics code. It inhibits business.” After that, there were some nervous chuckles on the phone, and the conversation moved on.
Ethics codes are needed when the disparity of knowledge between the designers and ultimate consumers/investors/regulators is so great that there are many ways that the consumers/investors/regulators could be cheated.
My view is controversial but simple. Every professional in investing and finance needs to have an ethics code, making them more sensitive to their clients. The easy solution is that every investment/finance professional needs to hold a CFA charter. The three exams are pretty minimal, and can be passed by most people with some study. Give the actuaries a pass, their exams are far harder — far, far, far harder.
But set some boundary for ethics and examinations of competence, to clean up finance and send the flim-flam men to the edges of the market, where they belong.