Ethics and Governance

This article explores the ethical issues in the Royal Commission report on Freedom Insurance and discusses the concept of utilitarianism. It highlights how the company pursued profits at the expense of customer interests, violating the principles of utilitarianism. The article also discusses the recommendations for promoting corporate governance and ethics in the banking sector. Find study material and assignments on ethics and governance at Desklib.

Running Head: ETHICS AND GOVERNANCE
Ethics and Governance
Name
Institution

ETHICS AND GOVERNANCE 2
Ethics and Governance
Executive Summary
The paper will investigate the Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry report on the misconduct of Freedom Insurance.
The company was accused by the commission because it did not serve the interests of the
customers. The company pursued profits rather than serving the long-term interests of the
shareholders, especially the customers who wanted to cancel their policies, but the company
declined to cancel these policies. The utilitarianism is a theory of ethics that better explains the
misconduct by the Freedom Insurance. The company’s CEOs resigned from his position and
admitted that the company used cold-calling strategies on its clients. This went against the
principle of utilitarianism that needs to promote the highest happiness. The Australian insurance
sector has now had its turn in the spotlight of the Royal Commission into Misconduct in the
Banking, Superannuation and Financial Services Industry and, as the majority expected, the
evidence has cast some uncomfortable shadows across the industry. The commissioner claims
that the cause of misconduct in the insurance industry was due to inappropriate focus of short-
term pursuit of profit at the expense long-term interests of the business and compliance with the
law.

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Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Assessment of Ethical Issues...........................................................................................................5
Utilitarianism...............................................................................................................................5
Ethical Issue-Freedom Insurance.................................................................................................6
Conclusions....................................................................................................................................11
References......................................................................................................................................13

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Introduction
The growing number of scandals in the banking industry has attracted great attention
from the Royal Commission. The Royal Commission report released in February has far-
reaching recommendations that will provide an overhaul of the banking sector in Australia. The
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services
Industry, to give it its full title, concluded with the presentation of a 1,000-page report from the
commissioner Hayne to Frydenberg in February (Agar, 2018). The report has 76
recommendations across diverse fields, specifically mortgage broking will be reformed, with
conflicted commission structures eliminated; in financial advice, in which this was already
supposed to be the case; financial institutions will no longer be permitted to trade superannuation
funds; and the regulators would be strongly inspired to prosecute more and prevaricate less. The
commission revealed that Freedom Insurance did not promote customers’ interest by declining to
cancel policies for those needed to do so (Collett & Danckert, 2018). The company’s CEOs
resigned from his position and admitted that the company used cold-calling strategies on its
clients. This went against the principle of utilitarianism that needs to promote the highest
happiness. The commissioner’s report provided insights on what should be done in regard to
recommendations towards promoting corporate governance and ethics in the banking sector that
has been rocked with numerous scandals in the latest years in Australia. The report was a strong
wake-up call for the corporate regulator ASIC to change its strategy to enforcing the law and
taking action on tough cases in the banking sector. The paper will examine ethical issues in the
Royal Commission Report on Freedom Insurance by using utilitarianism that is an ethics theory
(Battersby, 2018).

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Assessment of Ethical Issues
Utilitarianism
John Stuart Mill in his argument for utilitarianism claimed that rather than looking at the
actor or the action, one must look at the outcomes of the action. Utilitarianism is a theory of
ethics that emphasizes the consequences of an act in order to determine the morality of that
specific act (Walter, 2016). The primary premise of the theory is that an individual’s act is right
if it generates the most possible utility, with utility being happiness or pleasure. One determines
the morality of an action founded on whether the consequences of that action are considered
good or bad. Utilitarianism emphasizes that the act should optimize the greatest happiness for the
highest number. While assessing an action, a person should conclude that more good will
emanate from an act rather than bad and that the majority of individuals would be happy than
displeased before perpetuating the action. The theory asserts that the consequences or outcomes
of action must promote the happiness of the majority than those of the few individuals (Collett &
Danckert, 2018). The concept is that the society must define utility in some manner, utility being
loosely thought of as wellbeing of the entire society and then endeavour to promote the general
wellbeing of the society. Thus, whatever that maximizes the utility for everybody as an entire is
the right one. The theory offers understanding of different ethical issues that result in scandals
since wrongdoers usually promote their happiness by enriching themselves rather than that of the
shareholders in an organization. In an insurance sector, the utilitarianism fits the present ethical
issues that have been raised by the Royal Commission in its report where insurance sector have
been pointed out as unethical in its practices (Varner, 2009). The unethical practices in the

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insurance sector clearly point out the actions of executives that amass wealth at the expense of
the stakeholders (Langevoort, 2013).
Ethical Issue-Freedom Insurance
As a member of the CPA Australia, the Royal Commission report provides ethical issues
that were apparent in the insurance sector as evident in the case studies section of the report
released in February this year. The Australian insurance sector has now had its turn in the
spotlight of the Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry and, as the majority expected, the evidence has cast some
uncomfortable shadows across the industry (Rachmilevitch, 2019). The commissioner claims
that the cause of misconduct in the insurance industry was due to the inappropriate focus of
short-term pursuit of profit at the expense long-term interests of the business and compliance
with the law. This is contrary to the utilitarianism that promotes long-term benefits rather than
the short-term benefits to benefit the majority. The executives in the industry focused on short-
term pursuit of profits rather than the interests of the greater proportion of the shareholders of the
company. The executives in the industry pursuit short-term profits that would only profit their
interests rather than that of the majority making this practice wrong based on the utilitarianism. It
is clear that the executive pursuit short-term profits because of greed that made them serve their
interests other pursuing long-term goals for the business to benefit the greater industry. This act
of greed meant that very few individuals in the industry would benefit and the majority of the
shareholders will suffer in the hands of the minority who want to profit themselves (Battersby,
2018).

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The besieged life insurance distributor, Freedom Insurance, who shares have declined
lately following a scathing report from the corporate watchdog plus a gruelling appearance at the
banking royal commission, the chief executive officer (CEO), Keith Cohen, and chief financial
officer (CFO) left the company. This came at the wake of misconduct that was seen as a scandal
in the insurance sector. Freedom’s business model directly sells life insurance products via call
centers has been thrown into doubt recently by the regulatory scrutiny of the direct life insurance
industry following grilling at the Hayne commission (Agar, 2019). Investors have wiped out
nearly half embattled Freedom Insurance’s marketplace capitalization after it cautioned it can
face a liquidity shortfall and admitted it was under investigation by the Royal Commission for
misconduct highlighted by the bank royal commission. Therefore, this misconduct investigated
amounted to unethical issues as it violated the principles of utilitarianism. The act by the
company did not promote the interest of the clients and many clients were not happy in the
manner the company was operating (Chalmers, 2018).
As a member of the CPA Australia, the misconduct witnessed at Freedom Insurance as
exposed by the Royal Commission in its reports shows the corporate misdeeds perpetrated by the
directors and officers in the company to attain their interests. The report by the commission
revealed some misconduct by the life insurance company, Freedom Insurance that included
selling insurance cover to a disabled person over the phone. Figures confirmed that less than a
third of the clients who called up to cancel their policies successfully had their cover cancelled
that shows how the company went against the interests of the clients (Howse & Nicolaïdis,
2016). Craig Orton, the then chief executive admitted that the company was making it too had
for clients to cancel their cover. Freedom Insurance agrees with ASIC’s perspective that life

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insurance plays a primary objective in assisting clients to manage unexpected events and
safeguard themselves and their households against financial challenges. Thus, the company
engaged in unconscionable conduct via its systemic practice of selling specifically low-value
insurance, integrated with culture, as well as an incentive program, which encouraged the
utilization of high-pressure sales. In addition, the company engaged in misleading plus deceptive
conduct, like the description of insurance as “free” in the sale of insurance to Mr. Stewart’s son.
These practices were meant to benefit the company in terms of profits and not its shareholders, in
which this misconduct affected its customers that makes this action by the Freedom Insurance
unethical (Pash, 2018).
As a member of the CPA Australia and application of APES 110, the evidence across the
10 case studies of conduct as submitted by Counsel Assisting given in the insurance round
supports show that insurers or their representatives misrepresented product benefits in online
marketing collateral; depended on outdated medical definitions to deny claims by customers;
violated anti-hawking provisions; and engaged in aggressive sales approaches, especially
through outbound call centres. Furthermore, the evidence shows that there was misconduct
because Freedom Insurance used aggressive retention approaches with a clear objective of
fashioning a barrier to cancellation; embraced remuneration arrangements that incentivized poor
sales conduct; failed to sufficiently manage and train third-party regulators; failed to address
defects in quality assurance programs; and failed to identify and report considerable breaches of
financial services law (Heimer, 2013). This misconduct resulted in ethical concerns because the
products provided to customers meant that they were not up to the required standards and robbed
clients of the value that they were supposed to get from getting insurance services. Freedom

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Insurance pursued profits rather than the interests of the clients. The insurance firm prioritized
the financial success of their business over the benefit to the clients and the compliance with the
law. This violated the utilitarianism because the act by the insurers used their freedom to rob the
clients of their rights to get value for the products they purchase from the insurance firms. This
apparently shows that the insurance firms wanted to maximize profits at the expense of the
satisfaction and happiness of the customers and other stakeholders (Brown, 2018).
In addition, employees working for Freedom Insurance hung up on clients attempting to
cancel their insurance policies and the company charged premiums after the clients attempted to
cancel their policies. A customer consultant working for the insurance firm also labelled a father
a “bloody whinger” for complaining when insurance was sold to his intellectually disabled son
who was suffering from Down’s syndrome. The father was ridiculed by the staff when he wanted
to cancel the son’s policies that show misconduct by the company that was supposed to promote
the interests of the clients. Freedom Insurance clearly wanted to pursue profits rather than the
interests of the clients. The company in its efforts to promote profits was evident from the
inquiry when it was found that Freedom Insurance used some tactics to stop clients from
cancelling insurance policies (Chalmers, 2018). The customers were transferred to “retention
officers” who attempted to prevent the cancellations of policies, comprising asking intrusive
queries regarding the client’s personal situation to make them feel prone about having no
insurance. The company provided incentives using key performance indicators (KPIs) to
retention officers, where the primary one was the “save KPI” in order to save a policy from
cancellation. The officers were remunerated with a base salary and commissions. The goal was
to boost the profits of the company while exploiting the clients that was unethical because it

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breaches the principles of the utilitarianism that requires an act to promote the happiness of the
majority (Leese, 2017). The majority who are the clients were not happy because their efforts to
get their policies cancelled for some reasons were not honoured by the company. The act of
cancellation benefited the Freedom Insurance and the retention officers (Williams, 2017).
CommInsure managing director, Helen Troup, who was a witness, admitted that the firm was
inspired by commercial considerations when it did not update the definition earlier. She admitted
that Freedom Insurance did not sufficiently take into consideration the interests of clients in
making the decisions. This act was unethical because the interests of the majority, the clients,
were not taken into consideration by the company. According to utilitarianism perspective, the
act of not considering the interests of the clients was unethical because many of them were not
happy (Hamilton, 2016).
The emotive utilization of the Biblical sins of “greed” and “avarice), as well as their
alignment with the expression “pursuit of profit” is unsupportive. The Australian economy is a
capitalist, and the “pursuit of profits” is unquestionably primary driver of both individual and
corporate conduct in commercial dealings, especially in the case of Freedom Insurance. The
Australian system recognizes the significant role played by the law and regulation in setting
limits of acceptable conduct (James, 2016). Nevertheless, within these limits, the system aims to
promote the pursuit of profits that has seen Freedom Insurance explore this system to enrich
themselves at the expense of the customers with their products. The misconduct perpetrated by
the insurance firms in undermining the happiness of the majority, that is, its customers and
stakeholders are founded on the capitalism aspect of the society. The capitalist nature of the
Australian society seems to have encouraged Freedom Insurance to use the freedom to pursue

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profits rather than the interests of the customers who are the majority (Miller, 2017). The
consequences of the actions of the companies in the sector are that it eventually results in
unhappy clients and only profits the company. Based on the utilitarianism perspective, the action
by the insurance firms is unethical since it only benefits the minority and the majority
(customers) is affected by this act (Schmulow, Fairweather & Tarrant, 2018).
As a member of the CPA Australia and application of APES 110, the directors and
officers of the Freedom Insurance have the duty to promote the greater happiness of the
customers; however, this is not the case in the insurance sector since their duty is to pursue
profits. The directors and officers are responsible for the misconduct since they fail to comply
with the law and inappropriately favour short-term profit over the long-term interests of the
business. They disregard reputation risk in breach of their duties to the company and the
shareholders. This is apparently unethical since it promotes the interests of the directors and
officers of Freedom Insurance in retaining their jobs by making profits for their company profits
leaving the shareholders unhappy since they do not get the value for their money. This violates
the principles of utilitarianism that stresses on promoting the greater good of the majority by
making them happy. The long-term interests that could promote the interests of the shareholders
are not taken into consideration that makes the practice unethical. The commissioner’s report
clearly shows competing interests between the different shareholders in their desire to optimize
profits on one hand, and the interests of its clients on the other hand (Battersby, 2018).
Conclusions

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As a member of the CPA Australia and application of APES 110, the Royal Commission
exposed the misconduct dealings that Freedom Insurance had been undertaking where this
practice has been seen as unethical. The sale of life insurance policies to its customers was seen
as an act that benefits the company and its executives rather than the shareholders (Samuel et al.,
2018). The customers were denied to cancel the policies they had purchased and the retention
officers who did not allow the customers to cancel their policies. The consequence of the act by
the Freedom Insurance amounted to the violation of the ethics since it did not promote the
greater interest of the shareholders, especially the customers since the products they bought were
of low value. In addition, the company used the word “free” to mislead its clients yet the product
was not free. This act violated the principles of the utilitarianism that require that the act should
make people happier or satisfied, but in the case, Freedom’s customers were not happy at all.
Therefore, the acts of Freedom Insurance were unethical since it did not promote the greater
good of the shareholders. The Royal Commission report found that the actions by the insurance
firm negatively affected their clients that made the company unethical.

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halves-on-liquidity-warning-20181206-p50klg.html.

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