‘Financial Amnesia’ a Factor Behind Crisis

Fund managers and financial advisers should be forced to study financial history to reduce the likelihood of future market panics and crashes, according to a leading trade body for investment professionals.

Credit Crisis
Credit Crisis

A report by the Chartered Financial Analyst Society of the UK condemns “financial amnesia” among institutional investors, arguing that a failure to heed the lessons of past bubbles was a key factor behind the global financial crisis.

CFA UK, which represents 9,000 investment professionals, argues that the study of financial history should form a major part of all compulsory education for retail and wholesale investment professionals. “Financial amnesia disarms individuals, the market and the regulator,” the body said. “It causes risk to be mispriced, bubbles to develop and crises to break.”

The education requirements for investment professionals in the UK do not oblige them to have “any understanding of financial history”, added Will Goodhart, chief executive of CFA UK. While the UK’s Financial Services Authority sets the framework for the Investment Management Certificate, the country’s most widely recognized qualification for investment professionals, CFA UK sets the questions. Goodhart suggested that about 15 percent of the syllabus focus on financial history.

The British CFA program should be reformed to include “a practical history of financial markets, designed to remind us about the effects of liquidity, psychology and regulatory failure”, the report said.

It also advised the boards of financial institutions to undertake an annual “amnesia check”. “It would be reassuring to know that once a year the board of a financial services firm had reminded itself that this time it is not different,” Goodhart said.

The FSA said that it recognized “the importance of having appropriately skilled and experienced people working in financial services”, but declined to comment on CFA UK’s advice to test financial professionals’ knowledge of history.

It pointed to new requirements for professionals providing advice on retail investment products. Sheila Nicoll, director of conduct policy at the FSA, said in a speech that the changes would oblige advisers to undertake a level of specialist training equivalent to the first year of a bachelor’s degree.