Application of Ethical Principles in Financial Sector: A Case Study Analysis

This report emphasizes the need for the application of ethical principles and decision-making models in the financial sector based on a case study analysis. It highlights the culture of greed, poor corporate behavior, and the comparison of the Australian and US banking sectors. The report is based on the Australian Royal Commission into the misconduct in the Banking, Superannuation, and Financial Service Industry.

Accounting
Assignment

A RES E AR C H RE P OR TS
ON THE AP P LI C A TI ON OF E THI C A L PR I N C I P LE S
I N THE FI N A N C I A L SE C TOR BA S E D ON CA S E S TUDY
Prepared By
Student Name:
Date:
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Executive Summary
Our research report emphasizes the need of application of the ethical principles and decision-
making models in arriving at a responsible and ethical judgment in routine and complex finance
decisions for which the effective communication of the stakeholders’ interest to the concerned
professionals is a mandatory requirement. The best strategy in this regard is the integration of the
ethics and professionalism in financial services from corporate and individual perspectives in
national and international setting as could be evident from our research. Our research report is
based on the report submitted Australian royal commission into the misconduct into the Banking,
Superannuation and financial service industry.
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Table of Contents
Executive Summary................................................................................................... 2
Background.................................................................................................................... 4
Main Body..................................................................................................................... 4
How and Why the culture of greed is the result of remuneration disincentives..................................4
Reason of poor corporate behaviour despite Strong corporate governance principles..........................7
Comparison of the Australian and US Banking sector................................................................8
How can the regulatory authorities ensure the enforcement of the Laws?........................................8
Conclusion................................................................................................................ 10
References................................................................................................................... 11
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Background
Our report is an attempt to make realize the relevance of the principles of corporate governance
and the application of the ethical principles to be applied in making the complex financial
decisions so that to prevent the misconduct in the Banking, superannuation and finance service
industry. To facilitate our study, we have taken the reference of the interim report furnished by
the Australian Royal Commission dated 28th day of September 2018 in this regard together with
the subsequent release of the article in the Australian financial review after the submission of the
aforesaid report (Kusolpalalert, 2018). Further our report is primarily confined to provide the
solution to the set of a questionnaire consisting of the three questions, i.e., the first being how
and why the culture of greed is the result of remuneration disincentives, the assessment of
effectiveness of the Australian corporate governance principles as provided by ASX corporate
council and deciding whether putting people before profit as suggested by Mr. Freedenberg can
be of great help to lift these principles and finally making a comparative study of the Australian
banking and financial sector with that of United states so that to evaluate the suggestion as made
by Mr. Freedenberg to prevent the repetition of the interim report of Australian royal
commission in future (Norberg, 2018).
Main Body
How and Why the culture of greed is the result of remuneration disincentives
To answer the above question, the reference of the Volume 2 case studies of the interim report of
the Royal commission and the application of the agency theory have been resorted to.
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A brief discussion on the same is made hereunder:
The first case being referred here is NAB introducer Home loan case in which after making
enquiries the bank itself accepted the fact that the fraud committed by the Bankers (its
employees) and introducers were caused due to some of its system related issues one of which
more badly was the ill-structured incentive programmed for both of its employees and the
introducers as well (Wellmer, 2018).
As it showed that NAB was all aware of the fact since April 2015 that its star sales incentive
programmed was the reason for the potential misconduct by its employees which used to reward
its employees with bonuses for the achievement of the target in respect of the sale of home loan
plans (Johan, 2018). Hence as per the reward structure more weight was provided to the financial
matter in terms of targets with the less weight to the compliance related matters while disbursing
such loan. That gave birth the sense of greed amongst its employees to achieve such home loan
disbursal targets under any circumstances to have such incentive (Dan, 1995). Again, the
structure of paying commission to those introducers also required committing the target of
referring a minimum amount of $2 million in a year on personal lending and $10 million for
business lending as the commission paid to the introducers themselves tied to the amount of
loans that caused the collusion between employees and introducers resulting into the
inappropriate behavior on theory part (Webster, 2017).
In this case the employees or so-called bankers were nothing but the agents of the NAB and
though expected to work in the best interest of the bank itself ignoring their self-interest, but the
conflict of interest occurred and finally the bank had to pay for it (Coate & Mitschow, 2017).
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The second case being referred is the Westpac car loans in which the inappropriate structure of
rewarding the dealer of the Company’s Car and the application of the agency theory both were
correctly found fit. The Westpac itself acknowledged that their current system of remunerating
its dealers in terms of flex commission may cause a conflicting interest between its dealers and
the customers as dealers who acted as intermediary shall ignore the compliance requirement as
prescribed by the Westpac. As it further supported the viewpoint of the ASIC that the flex
commissions paid to the intermediaries became the root cause of the increase in the price of the
credit contract, because of which consumers were paying excessive interest on their car loans. As
in the given case such flex commissions were simply contrary to the principles of the community
and industry standards as suggested by the ASIC (Charles H, et al., 2015).
Our third reference while satisfying the above statement is the case of Citi international
transaction fees details in which case it was clearly found guilty of misconduct from the two
different perspectives, the first being the breach of the licensee’s obligation of doing all things
necessary to ensure that credit activities authorized through the license are fair, homestand
efficient and the second being there was lack of professional ethics noticed in the activities of the
city as it failed to act fairly and reasonably towards the customer. As the in the enquiry it was
clearly found that city did not reveal its customers the nature and basis of charging the
international transaction fees clearly and accurately, In the given case the city was acting as a
member of master and visa card based payment scheme in which when a city credit card
customer entered into any foreign currency transaction at that time international transaction fee
was charged on the same. It was observed that on the part of the city failed to make the following
disclosure expressly that it shall charge the international transaction fee for the transaction with
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the offshore merchant in case where the website operated by the offshore merchant either quoted
prices in AUD or used Australian website etc., Though in january,2017 it recognized the need to
make perfect its disclosure status but in between there would have been more customers found
whose international transaction fee should have been refunded that was not done and finally it
benefitted the CITI (Bouret, 2017). So, we see that regulations become important to make sure
that banks are fulfilling their obligations to make proper disclosures as and when needed and
support the company and its overall operations. In case they fail they would be penalized for that.
Hence it can be seen that on various occasions and situations these banking companies who were
in power to manage the affairs of the customers, they failed on any grounds as they were
concerned with making profits first and then serving the customers who are working for them on
continuous basis. So, we see that there are many amoral grounds on which the companies had
failed to perform their duty for the customers (Yadao, 2018). 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 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 and destroying the authenticity of the same.
Reason of poor corporate behaviour despite Strong corporate governance principles
There are certain reasons due to which despite the core corporate governance principles as laid
down but still the banks and other financial organizations in the Australia are found the guilt of
misconduct. These reasons are explained in brief as hereunder:
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The bank is finally a profit-making unit like any other business in which case based on its
financial figures published its successfulness of the business is being measured (Norberg, 2018).
Therefore, they are certain areas in which the company cannot function accordingly as they are
also thriving to make their business a success, so they often end up taking their customers for
granted and making decisions that might affect the customer position (Williams & Adams,
2013).
The second reason is the Australians are highly dependent on these banks as there are only four
major players in the market. Hence in the given case they are utilizing their position to achieve
the desired level of profit by ignoring the requirement of its customers. Since there are not too
many banking companies there these banks have an upper hand with their operations and the
customers have no option then to come and fulfil their financial needs from there.
They can easily hide their misconduct using well decorated apology (Boghossian, 2017).
Again, whatever the law was framed the level of permissible behavior.
Hence it is being suggested that the corporate governance principles should not be lifted rather
than attempt should be made that banks need to see these compliance requirements that shall
cause the value enhancement for them, the banking industry should feel free from the
competitive pressure for which the regulatory authorities need to create an environment to ensure
the application and effectiveness of these eight laid down principles. If banks are compliant
enough it would reduce a lot of issues that the general public faces when they operate in these
banking operations.
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Comparison of the Australian and US Banking sector
The US banking sector basically relied on the policy of the empower, enforce and educate policy
to deal with the Global financial crisis. The term enforcement simply talks about the approach of
the regulatory authority so that it can consider its moral duty to ensure the compliance for which
it is mandatory that it should be adequately empowered to enforce the law and finally it is the
need to educate the people that cover the common man so that the sense of awareness can be
generated to prevent such incidents as were reported in the Royal commission’s report. These
things were completely missing in the Australian banking sector that became the major reasons
of its weak banking and financial industry structure (Awasthi, et al., 2018).
How can the regulatory authorities ensure the enforcement of the Laws?
The major points to be considered are hereunder:
i. There is no need to change the existing law or bring a new law, but there is great need
to make it as simple as possible so that to ensure that people should be encouraged to
obey the law, it should be misleading, the law should be fair enough, it should fit for
the very purpose, it should ensure that service delivery should be with the appropriate
reasonable skill and care. It is because at times it is the complexity of the law that
unnecessarily creates pressure on the regulatory body’s resources and because of this
the tendency of non-compliances goes on increasing (Kusnadi & Wei, 2017).
ii. The major reason why new law framing is to be avoided is nothing, but it shall
unnecessarily lose sight of them. It is because while interpreting the law the first
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question that is asked is whether I or we can comply with it or can I do this? because
there are two approaches for ensuring the compliance, the first being should I do this
and the second being can I do this and the latter is the best way to ensure the
compliance (Kaufmann, 2017).
iii. For this the attempt should be made to see the complexities in the existing law so that
these can be removed. Because finally it is the line staff who action shall ensure the
compliance, hence the Banks need to be careful that how these legal provisions are
being interpreted before its staff (Romney, 2012). Hence proper knowledge about the
existing regulations should be there so that it can be used effectively for the leading
operations of the banks and ensure that they follow all such regulations when doing
their work. Laws are very complex, and they often can cause a lot of issues in the
conduct of operations, thus it is necessary that care should be taken that they do not
hamper the legal operations of the company on any end.
iv. It can be compared with the situation when a lot of policies, procedures have been
developed as a layer upon layer upon layer which finally destroys the true purpose of
framing the law (Naci & Hasan, 2012). The crux must be that the basic law and
operations should be followed and applied effectively and should be true to their
conduct.
v. Finally the gist is that the sense of moral persuasion should be encouraged through
the regulatory provisions so that the sense of willingness can be generated amongst in
Banking and Finance Industry organizations so that they can start perceiving the
compliance as source of the value creation and image building for them rather than
considering it an imposition to be treated as a burden that makes the compliance too
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difficult and encourages the ever-increasing incident of the misconduct by them
(Abdullah & Said, 2017) .
vi. The banks should realize their responsibility towards the citizens who are working for
the company. There are many ways in which nowadays corporations are not working
accordingly and harming the society in which they are operating through amoral ways
and ways in which there might be loss for the citizens. Taking care of the citizens is
the most important thing for the banks and they should fulfil all their obligations in
compliant ways.
Conclusion
From the above analysis and detailed study it is to be concluded that all those incidents that was
described in the Royal commission’s report simply emphasized the need that in order to ensure
the compliances with the principles of the corporate governance, there is an urgent need to make
people aware working in the Banking and financial industry that how does the ethical principles
matter in making financial decision and finally it is the professionalism of those who are making
the complex financial decisions that is going to be a key factor and the integration of these
ethical principles with those of the professionalism of the people working in this industry is
inevitable. At times a well drafted regulatory provision simply fails just because of the lack of
the application of these ethical principles and the standards of professionalism that cause the
fraud and embezzlement in this industry. The approach should be a persuasive one rather than
imposing the same.
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