Conflicts of interest in finance: Does regulating them reduce moral judgment, and is disclosure harmful?

Relying on research from social psychology and business ethics, this paper aims to argue that the current massive regulatory regime surrounding the attempts to curb what is perceived to be damaging conflicts of interests in the financial industry is based on misguided assumptions, and that the trend of increasingly detailed rule-making, supervision and sanctioning in this area might be counter-effective. This should cause financial services legislators and regulators to be cautious when proposing more detailed rules as solutions to perceived problems. The paper argues that disclosure is no remedy for a harmful conflict of interest, and that such an obligation can only be based on the client’s right to know about the conflict. This right, however, does not, in itself, justify all the extensive and detailed regulation in the area. The paper ends with a recommendation for more research into the moral reasoning ability of financial services professionals, as well as the interplay between judgment and rules in the finance industry.

The paper relies on research within behavioural moral psychology, and applies it to business ethics with the aim of discussing the impact of regulation on moral reasoning within the finance industry.

Regulation might lead to a decrease in moral reasoning, which is the premise of proper handling of conflicts of interest. Additionally, disclosure of unavoidable conflicts of interest might even strengthen the negative consequences of such conflicts.

More research should be conducted within the financial services sector about the effect of regulation on individual judgment.

The paper proposes that care should be exercised when proposing increased and complex regulation to avoid unintended and adverse consequences for the financial services industry.

The paper synthesises existing research within different fields – such as moral psychology and analytic business ethics – and applies it to financial regulation.