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A troubling knowledge gap in finance

17 February 2014

Category: News, Asia, Global
By Asia Asset Management

The costly aftermath of the global financial crisis has led financial firms to focus on increased compliance to manage risks and to rely on state-of-the-art technology for risk identification and mitigation. But risk can come in the form of knowledge gaps. For instance, a number of problems from the financial crisis arose from ignorance. Managers signed off on complex investments they did not understand, which were sold to clients. Human resource departments approved pay packages that they did not realise were structured to encourage excessive risk taking.

CFA Institute, the global association of investment professionals, recently commissioned the Economist Intelligence Unit to survey 382 executives in financial firms worldwide on the value ethics and knowledge in financial services. Over half of respondents said that most employees in their firm know very little of what goes on in departments other than their own. Six out of ten respondents said that their firm faces a serious threat from gaps in employees’ knowledge. Nearly 60% accept that better industry knowledge is crucial to making their firms more resilient to risk and essential to understanding an increasingly complex risk environment. In other words, closing knowledge gaps among financial services executives could make the industry a lot safer.

But efforts to improve knowledge among financial services employees can be challenging. Dramatic cost cutting since the onset of the global financial crisis has seen hundreds of thousands in the sector lose their jobs. As firms cut back on the payroll, they rely more heavily on outsourcing partners to carry out processes that were previously done internally, which places a heavier burden on remaining staff to control the activities of outside companies.

The Economist Intelligence Unit also surveyed 50 executives working in firms that support the financial services industry, ranging from business process-outsourcing companies to legal firms. Remarkably, opinions among these respondents are split exactly in half on whether their employees have a basic understanding of the financial services industry. Only 28% report a good or excellent level of knowledge of the industry, and just 24% say employees have a good grasp of the regulations affecting the financial services industry.

This troubling lack of knowledge increases the risk for financial firms and points to an urgent need within the finance industry for a comprehensive global education program that is accessible to everyone in the finance industry.

Filling the gap

CFA Institute developed the Claritas Investment Certificate to fill these gaps by providing foundational knowledge to employees and helping them understand industry functions, relationships, and their role and professional responsibilities within the industry. The program covers essentials across the investment industry through seven modules: industry overview, ethics and regulations, tools and inputs, investment instruments, industry structure, industry controls, and serving clients’ needs. The program is intended for all professional disciplines in the financial services industry outside of investment roles, such as those in client services, operations and portfolio administration, compliance and legal, human resources, IT, and marketing and sales.

Indeed, in the Economist Intelligence Unit survey, half of respondents say their top reasons to improve knowledge of the financial services industry are the increasingly complex risk environment and the increasing role of technology and automation in finance.

Improved knowledge and competence among employees will ultimately raise standards and workforce effectiveness. The Claritas Investment Certificate provides organizations and the general public with greater confidence and trust in the decisions employers make on behalf of the business, which contributes to stronger morale, motivation, and loyalty. The Claritas Program enables organizations to stand out from the crowd by signalling an institutional commitment to ethics and helps restore public trust in the industry.

More than 2,400 participants from 70 companies in 50 countries have already successfully completed and passed the Claritas Investment Certificate examinations under a pilot program launched last year. Of Claritas pilot participants, 85% said they would recommend the program to others, 76% said they benefited by increasing their industry knowledge, and 64% said the program helped them to better understand their ethical obligations within the financial services industry.

The pressures firms faced before the global financial crisis will not go away anytime soon. But it is clear that changes in the operating environment are driving financial firms to start viewing risk management in a holistic way.

Claritas candidates can register for the exam at any time; the program requires up to 100 hours of self-study. There is no education or experience requirement, but candidates should feel comfortable with the English language. The multiple choice, computer-based exam is offered at test centres around the world. For more information on the Claritas Investment Certificate, visit www.cfainstitute.org/claritas.

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