Background Information
Discuss about the Ethical Issues In Relation To Financial Services Industry.
Financial services industry has great importance for the development of any nation. However, the industry is also prone to unethical conducts by the directors, management and other stakeholders in the complex governance of the industry. This paper aims at discussing the ethical issues in relation to financial services industry with regards to the article by ABC news on financial institutions “trust deficit”, analyzing the appropriateness of ethical decisions made in the article and outlining ethical decision making process with regards to the most relevant ethical philosophies in the context of the article.
ASIC provided the Code of Banking Practice and the Credit Union Code Practice. These codes deal with the aspects of fees disclosure, terms and conditions changes, guarantors’ rights and debt collection (Pearson, 2009). The banking practice code stipulates that it is illegal and unethical for banks to overly charge its clients or charge clients for services not delivered.
The promotion of financial products based on commissions, rather than their respective benefits to the client has seen the financial services industry dominated by conflict of interest, an indication of poor governance. Therefore, financial planners have an ethical duty to provide honest information, transparency, and duty of care and to avoid self and conflicting interest in delivering financial services (McDonald, 2014).
Revelation by royal commission on financial services shows lack of trust in the banking institutions in Australia, due to widespread unethical and unlawful practices in these institutions. These unethical practices include charging fees where the law does not provide it, poor transparency, self-identification and disclosure levels as far as identification, reporting and dealing with ethical issues in the industry is concerned. Profit maximization has become the key focus of the financial services companies, forgetting that they are in charge of managing another people’s money. For instance, by the Commonwealth Bank charging fees on dead customers and AMP and other big banks charging clients for services not rendered. Among its recommendations, Royal commission suggested cooperation with the commission from the financial services industry, ASIC strengthening its remedial measures to include making lawsuits against the concerned institutions and elimination of brokerage commission in order to avoid conflict of interests, as ways to deal with the situation. In the article, ASIC is criticized by the Royal Commission on the basis of the actions it takes and the adherence to eliminate unethical practices in the financial services industry. The commission suggests the use of court orders to prosecute those involved in unethical malpractices in this industry, instead of the negotiations undertakings, considering the repetitive cases of illegal conducts that have been experienced in this industry that have contributed to trust deficit.
Summary of the News Article (‘Trust Deficit’)
Australian Securities and Investment Commission (ASIC), identified the specific ethical issues in the Australian market in relation to financial services planning and provision as: emphasizing on product selling rather than tailored advice; recommendations to shifting to paying the financial planners high commission without considering the benefits to the clients and encouragement to borrow and invest for the benefit of the management rather than their pursuing their main goal of managing the investors’ money (McDonald, 2014).
The key ethical issue raised in this article relates to corporate governance of the institutions. It has been a common theme in the recent corporate governance reform movement, to instill transparency and accountability in the culture of companies’ governance in Australia, (Jacques du Plessis, Hargovan & Bagaric, 2010). According to ASIC regulatory guidelines, the company management and directors have a fiduciary duty to avoid conflict of interest and make the necessary disclosure requirements as per the provisions of the regulations. Moreover, the management of these institutions should ensure high transparency, self-identification and disclosure levels of dealing with unethical practices in the institutions. This is attainable by developing an effective internal control system that would, among other objectives, ensure that the communication mechanisms in the organization are designed to facilitate confidential reporting of ethical practices.
All directors must always pay attention to potential situational conflict of interest, like in the case of Commonwealth bank charging fees on dead clients and AMP charging clients for services not delivered. Australian Corporate Governance Working Group highlights that conflict of interest exists when the interest of the company as a whole is not given precedence (Berghel, 2009). Conflict of interest is an unethical and illegal practice that breeds lack of trust from the shareholders, employees and at large the clients of an organization. By the financial institutions shifting their interests from managing the investors’ money to profit maximization, they breach their obligations to the shareholders and to the organization as a whole to act utmost good faith and bona fide to the interest of the corporation.
Furthermore, the unethical actions leading to declining in trust in the financial services sector can also be attributed to lack of accountability on the part of the respective companies’ management. Accountability would ensure that the company decisions are aligned with the strategies of the organization thus avoiding unethical practices.
The effectiveness and credibility of an entire corporate governance system and company oversight depends, to a larger extent, on the company making informed investments that can use of their shareholder rights and effective exercising of the company’s ownership rights (Publishing, 2012).
Key Ethical Issues Identified from the News Article
Additionally, poor levels of identifying, reporting and disclosing misconducts within an organization lead to lack of confidence in the organization. This, in turn, results in increased unethical practices within the concerned organization that finally created reduced trust in the organization.
In making ethical decisions regarding ethical issues, it is important to consider the moral intensity of the ethical issue. Bruin, (2015), argues that moral intensity depends on the magnitude of the consequences of the actions and their probability of arising, as well as the concentration or disparity of the consequences of the ethical issue on the people.
Ethical issues with high moral intensity bring about greater and more adverse consequences than those of lower moral intensity. Therefore, a more drastic ethical decision is required to deal with ethical issues of high intensity. Because ethical high moral intensity ethical issues begin from those of low moral intensities, it is important to always employ drastic measures in dealing with ethical issues regardless of their intensities.
An appropriate ethical decision would help build a reputation and create trust in the industry. Therefore, appropriate ethical decisions have not been made in regards to ethical issues in the financial services industry, and it was an abuse to the banking practice code that requires legal prosecutions against breaches of this code. This is evident from the article by the royal commission’s criticizing the ASIC itself for negotiating undertakings rather than always taking court actions to seek larger penalties, as this has led to repeated unethical and illegal practices in this sector. For instance, when AMP bank was caught overcharging many customers as a result of the director’s interests, in 2006, ASIC, instead of taking the matter to court, it opted to force the bank into signing negotiation undertakings. This repeated itself in case of Commonwealth bank charging fees on dead customers, thus the continuous deterioration of ethical practices in the financial services industry. Thus leading to more and more losing trust among the company shareholders, clients, employees, the government and any other concerned parties, in the Australian financial services industry.
In ethical decision making, different moral philosophies are applied, depending on whether the decision to be made is personal or work-related. This is because the various factors that make up personal moral philosophy are measured differently in business situations. Working corporate culture is also an important aspect of corporate ethical decision making (Ferrel, Fraedrich & Ferrel, 2013).
Analysis of the Ethical Issues Identified
Moral decision making in line with the emotion versus moral philosophy involves a rational intuition of moral principles such as justice, charity, and wisdom. This entails establishing the best decision for the happiness of all. In the case of financial institutions, the decision making should impact positively on the organization as a whole, by having the shareholders’ interest at the center, without favoritism or any other biased considerations.
According to Nill (2015), a philosophical, ethical decision-making process would entail:
Recognizing the moral issue- any ethical decision should be able to recognize the moral issue in the organization. To achieve development of such a decision the decision maker is required to recognize the moral or ethical implications of the issue. It requires the decision maker to recognize that unethical practice has been done about such aspects as the regulatory requirements of the regulating body as well as the national government and the organizational code of ethics too. Common law may as well be important in recognizing the moral issue.
Making a moral judgment- the ethical decision should be able to help the organization in making a moral judgment. Here, the moral intensity of the ethical issues would be determined to be able to choose the most appropriate decision to take. Factors such as the degree, nature, and extent of the ethical issue are considered in order to make an effective moral judgment, as different ethical issues require different ethical decisions to be implemented.
Establishing a moral intent- the decision should have a moral intent. This can be attained through identifying the intentions of committing the ethical issue in relation to the ethical implications of the issue. The loopholes that may have led to the ethical issue is identified and whether or not the issue has a possibility to recur is also analyzed in order to decide on the most appropriate cause of action to undertake. Every ethical business decision should thus have a moral intent.
Engaging in moral behavior- this involves analyzing the available rules and regulations as well as the existing state laws and any other laws to determine the remedy for the ethical issue. Here, the concerned institution corrected on the issues of ethics and appropriate actions applied with regards to the issue in order to establish a lasting solution to the ethical problem. The person involved in unethical practice will, therefore, be able to act in line with the ethical code of conducts governing the particular organization.
Monitoring and Evaluation of the process- this helps uncover appropriate ethical considerations in making business decisions. These considerations include: whether the decision complies with the organization’s code of ethics; if the decision aims at promoting good and eliminating harms; if the process helps the organization in discharging its duties as a corporate citizen; whether the decision promote individual and organization’s rights; the impact of the decision in building trust in the company with regards to the clients, shareholders and other concerned parties; and if the decision helps in building company image or restoring the company’s reputation in cases where it had been involved in unethical conduct.
Conclusion
There should be a moral, ethical decision-making process to build trust and reputation in any industry. Owing to the great importance and contributions of the financial services sector in the economic development of a nation, regulatory bodies such as ASIC need to develop drastic measures, other than negotiations undertakings, to provide lasting ethical decisions with regards to ethical issues in the financial services sector. Moreover, establishing effective internal control policies and procedures would also help in dealing with the ethical issues in the financial services sector of the Australian economy.
References
BERGHEL, L. (2009) International Standardization of Good Corporate Governance: Best Practices for the Board of Directors. Boston, MA, Springer US. Available at https://public.eblib.com/choice/publicfullrecord.aspx?p=3080427 [Accessed on 17th May 2018].
BRUIN, B. (2015) Ethics, and the Global Financial Crisis: Business, Value Creation, and Society. Cambridge University Press.
FERREL, O. C., FRAEDRICH, J. & FERREL, L. (2013) Business ethics: ethical decision making and cases. Mason, OH, South-Western/ Cengage Learning.
JACQUES du PLESSIS, J., HARGOVAN, A. & BAGARIC, M. (2010) Principles of Contemporary Corporate Governance. Cambridge University Press.
MCDONALD, G. (2014) Business Ethics. Cambridge University Press.
PEARSON, G. (2009) Financial services law and compliance in Australia. Cambridge, Cambridge University Press.
PUBLISHING, O. (2012) Role of Institutional Investors in Promoting Good Corporate Governance. Paris, Organization for Economic Cooperation and Development (OECD).
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