Application of Ethical Principles in Financial Sector: A Research Report

This research report analyzes the application of ethical principles in the financial sector based on the Australian Royal Commission's interim report. It also evaluates the effectiveness of corporate governance principles and compares the Australian and US banking industries. The report emphasizes the need for better enforcement of existing laws to prevent poor corporate behavior.

Accounting
Assignment

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Submitted by –
Date – 12th December 2018

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A Research Report on
the application of ethical principles
based on the case study in the financial sector
Prepared by
Student Name:
Date:
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Executive Summary
This research report is an attempt to analyses and justify the recommendations made by the
Australian Royal Commission in its interim report submitted into the misconduct in the Banking,
superannuation and financial service Industry. Further it explains the role of the ethical principles
and the need of professionalism expected to be maintained from the professionals working in the
Banking, Superannuation and financial service industry so that to facilitate the Complex
financial decision made by them. This report forms a basis too to evaluate the effectiveness of
the Corporate governance principles in prevention of the misconduct in the finance industry. The
need of such analysis is felt only after the release of the interim report by the Royal Commission
dated 28th September,2018.
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Table of Content
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Executive Summary.....................................................................................................................................3
Introduction.................................................................................................................................................5
Main Body...................................................................................................................................................5
Why despite the corporate governance principles the number of poor corporate behavior are so many. 8
Comparison of the Australian and US Banking............................................................................................9
Why better enforcement of the existing laws seems necessary................................................................10
Conclusion.................................................................................................................................................11
References.................................................................................................................................................12
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Introduction
Based on the Australian Royal Commission’s interim report and consequent circulation of the
same in the Australian Financial Review a detailed research based analysis is done in order to
analyze the various aspects reflected including the application of ethical principles, evaluation of
the effectiveness of the corporate governance principles along with the Comparison of the
actions and behaviors of the Australian and US Financial market in response of the Global
financial crisis and why it is important to ensure the enforcement of the existing laws. All the
aforesaid things have been analyzed with the help of the three questions raised through the report
and finally by providing justifiable answers of these questions (Wellmer, 2018).
Main Body
Whether the culture of greed was the result of the remuneration disincentives
To answer whether the culture of the greed is the result of the remuneration disincentives as
concluded by the Royal’s Commission it has been decided to evaluate this conclusion of the
interim report by taking the circumstantial evidence of the three cases as provided by the
commission.
The first case being taken here was the CBA Broker relation and accreditation in which it was
clearly shown that there was conflict of interest arose between the brokers of the CBA and those
customers to whom the loan was provided (Webster, 2017). The commission or the rewarding
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structure in this case was such that it was directly linked with the size and length of the Loan,
hence higher the amount of the loan and longer the period for which it was extended, the larger
amount of the commission the broker used to obtain. In this case though these brokers were
representing the CBA, it was the commission structure of the CBA that led them to engage in the
misconduct. Further it was found by the CBA that those loans that was provided by it to the
customers through brokers were having higher debt-to-income -ratio, higher loan to value ratio.
In this case the accredited brokers were fetching disincentives from the Chait is because those
brokers which got accreditation from the CBA, their customers (borrowers) could get more
priority in fetching loans and most importantly it is to be observed that the CBA in its later
submission accepted that their commission structure was not suitably designed.
The second case that is being referred is the Aussie home loan brokers misconduct where it was
found that four home loan brokers of the AHL investment Pty limited were involved in the
practice of misconduct just because of the ill structured remuneration package implemented by
the lender. These four brokers were found guilty of falsification of the documents submitted on
behalf of the proposed borrowers of Home loan, which included the Pay in slip, letter of
employment and Bank statement of the Proposed borrowers. Here the major practice of loan
processing structure was such that for each of the loan applications submitted by the broker of
Ausbie would fetch it upfront and trail commission (Iggers, 2018). Again, a portion of this
commission received by the Aussie was passed on to those brokers I terms of their reward. While
the decision to decide that what should be the amount of brokerage to be passed through the
brokers it took the basis of the amount of the settled loan to calculate the same. Due to which
value of the settled loan became the basis, hence higher the value of settled loan higher the
amount of the passed through upfront commission received by these brokers (Kaufmann, 2017).
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Not only this Aussie imposed a minimum loan amount obligation target to be achieved by its
brokers every month. Again, out of these four brokers one broker was also found guilty of
submitting more than the 50% of the loan application to a single lender that was Westpac. Hence
again it was reflected that the principle of the agency theory was breached as the brokers did not
act in the favor of their principal’s interest (Coate & Mitschow, 2017).
The third case which is the ANZ responsible lending programmed of the home loan application
in which case too just because of the way the commission structure was formulated gave rise to
the misconduct by its broker for having higher gain in terms of commission. In this case while
extending loans to its customers ANZ highly relied on its brokers to collect information on their
financial status to decide their eligibility to get the loan. (Henriksen, 2018) For which one of the
document as submitted with the ANZ was the statement of the financial position of the
customers which were to be signed by the customer as well as the broker before submitting the
same with the ANZ. One of the element of the customers living expenses was found to be
inconsistent with that of the same element present in the statement of the financial position by
the customer. At the same time ANZ did not put sufficient effort to verify the submission made
by the customer. Rather in the given case it was the Broker who gave the reason that making
strict enquiries on the submission made by the customer would be disadvantageous for the
customer because of his inability to fulfill the relevant criteria (Charles H, et al., 2015).
In all of the above cases the major points that was common was the breach of the agency theory
by all of the agents who acted not in the interest of its principal and the second thing was that the
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greed of all these agents was the result of ill structured remuneration package designed by their
relevant principals who were the giants of the Banking and Financial Industry.
Why despite the corporate governance principles the number of poor
corporate behavior are so many
In this part an attempt has been made to justify the reason of corporate governance principles and
to evaluate whether they are at all effective to prevent such fraud in the Banking and Financial
industry which is still showing its rise level in terms of the corporate behavior.
The major reasons of the widespread poor corporate behavior are attributed to the following:
1. Monopolistic position of the Bank in the economy- In Australia Banks are licensed by the
commonwealth and none of the entity can perform the Banking business without such
license. This makes the difficult for the new entrant to enter the market (Borit & Olsen,
2012). Hence the level of competition is very weak. That puts the Banks in the
monopolistic position as customers are heavily dependent on the Bank. This makes them
non-compliant.
2. Approach of the Banking Industry- The is one of the major fact that these banks are profit
oriented undertaking whose primary motive is to earn the highest profit at any cost.
3. The weaker framing of the law that induces for the permissible behavior hence banks can
easily seek apology through the framing of words (Boghossian, 2017).
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Further lifting the corporate governance principles is not the solution but there is the need
to create an inductive environment so that these financial institutions can voluntarily go
for complying with the same by having the sense that it shall assist in their image
building in the Banking industry and provide a basis for their value addition.
Putting people before the Profits is acceptable but lifting the corporate governance
principles can never provide the permanent solution.
Comparison of the Australian and US Banking
The major difference that was noticed in the approach, behavior and actions taken by the
Australian banking Industry and United States Banking and Finance Industry in response to the
Global Financial crisis was that it was the US which first relied on the principles of the
Empower, Enforce and Educate policy to bring the Banking and finance industry in its track.
It is better to explain in brief that the meaning of empowerment is to strengthen the legal and
regulatory system in such a way that enforcement of the legal provisions be ensured which were
otherwise escaped easily by the players in the Industry. Third was one of the major thing that is
educate the people working in this industry that should be adequate to prevent the misconduct in
the industry. The need of education was felt because ignorant staff can commit much non-
compliances than a knowledgeable staff (Belton, 2017).
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Why better enforcement of the existing laws seems necessary
The change of the law through the enforcement of the new legal provision should not be
recommended unless it has a clear identified advice. In such a case the major things to be
evaluated are the existing law should be fair, not misleading, people should willingly obey it, it
should provide the services fit for the purpose, it should have the ability to deliver the services
with reasonable skill and care.
The major logic behind implementing the existing law is that additional legal provision may very
hamper the real intention behind framing the statue and can act as a burden for those for whom it
was framed. It is because people have a common tendency having seen a legal provision that
whether can I do it? If such provision provides the message that should I do it then it won’t be
proving to be effective (Awasthi, et al., 2018).
In most of the cases the common reason as found behind the noncompliance was the complexity
of the law due to which it leads to noncompliance. It is because the actual implementation of
such law is on the functional level staff. But if such staff are not able to interpret the true
intention of the legislature then it becomes difficult to implement the same.
In brief these are the major reasons why it is being suggested that existing law should be
enforced rather than framing the new one as it unnecessarily puts oversight the real intention of
the legislature (Abdullah & Said, 2017).
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Conclusion
From the above it is quite clear that the report of the Royal commission provided us a strong base
to evaluate the current miserable scenario of the Banking, Superannuation and the Finance
Industry across the world. Again, it is this report that provided us list of case studies along with
the real-life examples to justify its conclusion. It’s also can be used as a tool for preventing the
misconduct in the Banking Industry along with the financial service Industry. It forms the basis
to determine the effectives of the corporate governance principles by saying that laying down the
principle is never sufficient enough, but it the way or the approach adopted for its
implementation. But no existing law should be criticized rather an attempt is required to ensure
that if there are some lacking in the existing law then how that can be removed so that people
come voluntarily to adopt the same rather than finding the way to escape it. Again, one of the
most important factor is that it tells us what the appropriate remuneration structure tin should be
the finance industry to prevent the misconduct
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References
Abdullah, W. & Said, R., 2017. Religious, Educational Background and Corporate Crime Tolerance by
Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, pp. 129-149.
Awasthi, A., Omrani, H. & Gerber, P., 2018. Investigating ideal-solution based multicriteria decision
making techniques for sustainability evaluation of urban mobility projects. Transportation Research Part
A: Policy and Practice, 116(2), pp. 247-259.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational
Philosophy and Theory, 50(3), pp. 244-253.
Borit, M. & Olsen, P., 2012. Evaluation framework for regulatory requirements related to data recording
and traceability designed to prevent illegal, unreported and unregulated fishing. Marine Policy, 36(1),
pp. 96-102.
Charles H, C., Giovanna, M., Dennis M, P. & Robin W, R., 2015. CSR disclosure: the more things
change…?. Accounting, Auditing & Accountability Journal, 28(1), pp. 14-35.
Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in
Social Responsibility. s.l.:s.n.
Henriksen, L., 2018. Public orchestration, social networks, and transnational environmental governance:
Lessons from the aviation industry. Regulation and Governance, 12(1), pp. 23-45.
Iggers, J., 2018. Good News, Bad News: Journalism Ethics And The Public Interest. s.l.:s.n.
Kaufmann, W., 2017. The Problem of Regulatory Unreasonableness. First ed. New York: Routledge.
Webster, T., 2017. Successful Ethical Decision-Making Practices from the Professional Accountants'
Perspective. ProQuest Dissertations Publishing.
Wellmer, A., 2018. The Persistence of Modernity: Aesthetics, Ethics and Postmodernism. fourth ed. UK:
Polity Press.
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