Background
Discuss about the Key Ethical Issues faced by the Big Four banks of Australia.
The four largest banks of Australia viz. National Australian Bank Limited, Australia and New Zealand Banking Group Limited, Westpac Banking Corp. and Commonwealth Bank of Australia are facing a series of corporate issues in the recent times. So, the news article “How Misbehaving Australian Banks Are Causing Global Pain “is focused on the accusations on these banks for giving misleading advices relating to the financial decisions to the clients and manipulating the standardized interest rates. The banks were blamed to be extracting fees from their clients to increase their profits and to pay the remunerations to their executives (Cadman, 2018).
So in this essay the various ethical issues confronted by these banks and the ethical decisions made in this behalf shall be assessed. Furthermore, the applicability and relevancy of the various ethical theories to the issue will be justified below.
The Commonwealth Bank was being alleged for breaching the anti-money laundering regulations thereby resulting in enquiry initiated by the Royal Commission .The lawyers were investigating the series of consumer case studies to consider the instances which led to misconduct and unethical behavior (Miko?ajczak, 2017).
It was discovered that the National Australia Bank was accepting bribes to facilitate mortgages which were based on false documents and it also charged fees from the consumers for advising them on financial matters which they did not receive. The Westpac financial planners gave such misleading advice that one nurse lost her house. Moreover, AMP, the company which dealt in wealth management misled the Australian Securities and Investment Commission.
As a result, the government of Australia imposed severe penalties for the wrongdoing and enhanced the power of Australian Securities and Investment Commission which can result in selling off the advice business of banks .The Chief Executive, Chairman and three board members of the 169 years old AMP have resigned post this decision of the government. To add on the misery, these all were supported by the sluggish stock market, increased competition and higher costs (Cull and Melville, 2017).
ANZ confessed in 2017 that two of its managers were accused to be conspiring with third parties to make fraudulent loans. It was found that the frontline staff was engaged in inappropriate practices in order to increase the incentives. The consumers were sold unsuitable products and some of which comprised of SME lending. It led to the authorities investigate about the marketing strategies of the bank.
Ethical issues confronted by the banks
Commonwealth Bank of Australia was alleged for deliberately defaulting the loans of consumers after it bought the lender from the failed British Bank HBOS. The consumers of Bankwest accused CBA for defaulting their loans in the years 2009 and 2010 for its own financial interest. After the investigation, it was found that it gratuitously defaulted some of the loans so that it can adjust the amount of default from HBOS under the price adjustment method as mentioned in the sale contract agreed upon between the two banks (The Guardian ,2018).
As a result the investigations have been initiated by the Banking Royal Commission and it has focused on lending to small businesses as most of them have claimed that they had lost money in the ventures because of the acts of the banks.
The key ethical issues raised in the article are the violation of ‘Corporate Sustainability Framework’ .It had claimed in its Corporate Sustainability Report of 2016 that sustainable growth, fair and accountable banking systems and social and economic participation are the core principles of Corporate Sustainability. On the contrary, the bank granted a loan of $220,000 to a couple in the year 2014 to establish the New Zealand based gelato chain outlet in Australia .The proposal was based on fake financial forecasts and clip art ice cream pictures. As expected, the business failed and the ombudsman awarded the decree that ANZ should not have approved the loan. Many mistakes were found in the data entry of the bank and they were relied upon by the stakeholders at that time. So, it had violated the Fair and Accountable Banking principle of Corporate Sustainability framework (ANZ, 2016).
Another ethical issue had arisen when Westpac had made a claim against an elderly pensioner who was suffering from multiple health disorders. In spite of her poor health, she was allowed to be a guarantor for the loan taken by her daughter which was worth of $165,000, for her business. The business failed and the bank claimed the property of the pensioner. Upon investigation, it was told by the officials of the bank that it had followed the right procedure and there was no problem in accepting guarantee from the pensioner. Later it was discovered that the documents were incorrectly filled by the staff. It was declared in the documents that the pensioner had received the legal advice regarding the business lending agreement when she had not done so and it was deceptively witnessed by one of the staff of the bank (PWC, 2016).
Actions taken by the government of Australia
As per Westpac Banking Corporation ( n.d.) the core values of the bank are integrity, performance and honesty . It is a clear issue of violating the principles of Corporate Governance and Corporate Citizenship as it had overruled its vision, mission and values. It had deceptively filled the documents of its disabled client to obtain her property. So, the banks have violated the principles of corporate sustainability and corporate governance.
According to ABC News (2018) as a result of ethical violations by ANZ, the Banking Royal Commission has formulated stricter norms for the consumers who are willing to borrow loams for purchasing houses and the small entities who want loans for running their businesses. As a result of this declaration of the commission, the bank had to sale its dealer group to the non-bank wealth manager IOOF.
The various business platforms of ADG group are being charged with number of breaches as per the Corporations Act. A penalty of $50 million was also imposed by the commission on the bank . Additionally, it is being estimated that the bank has to bear additional costs as a result of this action. There would be more legal and paper work formalities for the people interested in obtaining loans from the bank.
The bank had to sell its six retail and wealth businesses in Asia comprising of Shanghai Rural Commercial Bank which was established to set its business in China. The workforce of ANZ was decreased by 10% in the past 12 months. There were major business transformations by the bank including divesting its non-core assets, reshaping its workforce and decreasing the complexity of the products to respond to the changing marketing strategies.
As per The Irish Times (2018) Westpac along with its other Big Four Counterparts had to pay millions of dollars as a result of settlement to the stakeholders. In the year 2014 ANZ had to refund AS$ 70 Million to a consumer due to a major default on the part of the bank. In the year 2016 Westpac was fined AS$ 1 million due to its failure to make inquiries about the income of the consumers prior to increasing their credit card limits. It is the most appropriate ethical decision because the banks had violated the trust and integrity of its consumers.
The legal penalties imposed by the Royal Banking Commissions are reasonable as the banks decisively used the benchmarks set by the industry instead of assessing the abilities of the consumers to repay the loans in reality. They approved the loans even when the consumers to whom they were granted were in deficit and they failed to consider the highest repayments at the end of interest only time period.
The violations of Corporate Sustainability Framework and Corporate Governance
Furthermore, the banks also breached the trust of their consumers by misleading them and falsely witnessing their documents for which they were legally penalized which was fair on the part of the commission.
The ethical decision making processes in the corporate scandals involve the applicability of ethical theories in the banking sector .The most relevant ethical theory in this case is Utilitarianism. It believes that the foundation of morality is the greatest good for the greatest number of people. The rightness of the actions is governed to the extent to which they create happiness. On the contrary they are considered wrong if they result in sadness or misery.
In this case, where the banks are alleged of misleading their consumers, forgery and wrongfully granting loans to the consumers, thereby creating sadness and misery for the financial community as a whole. The applicability of utilitarianism theory of ethics is best suited for decision making in this scenario (Zaring, 2017).
It states that analysis of whether the act is morally upright or not is dependent on its results. So, the banks should be governed with stricter rules and regulations in order to rectify the unethical actions and to spread happiness amongst its consumers.
The Justice theory of ethics which is based upon fairness and commitment of the banks towards their consumers is also applied in this case. The organizational justice is based on three models viz. interactional, procedural and distributive justice. The organizational trust acts as a mediator between the consumers and the bank in enhancing their business relations (Iqbal and Ahmad, 2016).
The theory of organizational justice is based on the trust, commitment and citizenship behavior. Procedural justice provides the methods to determine the results by the organization. It is related to evaluation of organizational system of commitment and process satisfaction whereas the distributive justice is related to the fairness of the results which should be rewarded. The interactional justice pertains to the extend the procedures related to decision making are being legislated and the treatment which is being received from decision makers. Hence the concept of justice should be applied on the banking decision making system associated with handling of the ethical issues. Since, the organizational procedures form the basis of regulations formed in this behalf. In the context of organizational development, the employees should be allowed to participate in the decision making process which makes it easier for them to comprehend and abide by the rules (Robertson, 2018).
Hence to conclude, it can be said that ethics in banking is associated with social and environmental influence of its investing and other financial activities on its stakeholders. The ethical banking concerns the ethical investments, socially responsible transactions, corporate social responsibility, fair trade movements, ethical consumerism and social enterprising. The ethics in banking should comprise of codes and regulations which must be adhered to by the management of the banks as well as other stakeholders. There should be transparency and environmental values in the commercial transactions of the banks which will help to establish an ethical environment in the banking industry of Australia
References
ABC News (2018) ANZ profit jumps, bank warns royal commission will make it harder to get a loan [online] Available from: https://www.abc.net.au/news/2018-05-01/anz-half-year-profit/9712580 [Accessed 27th May, 2018].
ANZ(2016) Corporate Sustainability Review 2016 [online] Available from: https://www.anz.com/resources/9/9/99d1a990-7599-4dc7-87ef-ac502f327b85/accessible-corp-sus-rev-2016.pdf?MOD=AJPERES [Accessed 27th May, 2018].
Cadman, E.(2018) How Misbehaving Australian Banks Are Causing Global Pain [online] Available from: https://www.bloomberg.com/news/articles/2018-05-14/why-bad-bank-behavior-down-under-causes-global-pain-quicktake [Accessed 27th May, 2018].
Cull, M. and Melville, B.(2017) A Review of Ethics Education in Financial Planning Courses In Australia Financial Planning Research Journal [online] Available from: https://www.griffith.edu.au/__data/assets/pdf_file/0035/295766/FPRJ-V4-ISS1-pp-11-32-review-of-ethics-education-in-financial-planning-courses-in-australia.pdf [Accessed 27th May, 2018].
Iqbal, Q. and Ahmad, B.(2016) Organizational Justice, Trust and Organizational Commitment in Banking Sector of Pakistan. Journal of Applied Economics and Business.4(1),pp. 26-43.
Miko?ajczak , P.(2017) Sustainable banking. Implications for an ethical dimension of finance of social enterprise performance [online] Available from: https://www.ltn.lodz.pl/images/spe/104/mikolajczak.pdf [Accessed 27th May, 2018].
PWC(2016) Escaping the commodity trap: The future of banking in Australia [online] Available from: https://www.pwc.com.au/pdf/pwc-report-future-of-banking-in-australia.pdf [Accessed 27th May, 2018].
Robertson, A.(2018) Banking royal commission: Does this prove banks are not an ethical investment? [online] Available from: https://www.abc.net.au/news/2018-05-04/does-royal-commission-prove-banks-are-not-an-ethical-investment/9728560 [Accessed 27th May, 2018].
The Guardian (2018) Buyers – and sellers – beware as royal commission exposes banking’s risky business [online] Available from: https://www.theguardian.com/australia-news/2018/may/26/buyers-and-sellers-beware-as-royal-commission-exposes-bankings-risky-business [Accessed 27th May, 2018].
The Irish Times(2018) Australian banking inquiry exposes litany of abuses [online] Available from: https://www.irishtimes.com/business/financial-services/australian-banking-inquiry-exposes-litany-of-abuses-1.3481709 [Accessed 27th May, 2018].
Westpac Banking Corporation( n.d.) Corporate responsibility and our business [online] Available from: https://www.westpac.com.au/docs/pdf/aw/Corporate_Responsibility03.pdf [Accessed 27th May, 2018].
Zaring, D.(2017) The International Campaign to Create Ethical Bankers. Journal of Financial Regulation. 3(2),pp.187–209.
The Image of the article referred in the solution: https://www.bloomberg.com/news/articles/2018-05-14/why-bad-bank-behavior-down-under-causes-global-pain-quicktake
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