Ethical Issues in the Banking Industry

This article discusses the ethical issues in the banking industry, focusing on the findings of the Royal Commissioner. It explores the utilitarian theory of ethics and its application in banking. The report highlights the need for regulation and proposes recommendations for improving governance and culture in financial institutions. The article also evaluates the ethical issues associated with Freedom Insurance and the violation of ethical principles in the insurance sector.

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Executive Summary
Commissioner Kenneth Hayne argues that the banking industry is riddled with greed and
dishonesty. Most of the banking managers are under pressure to deliver to the point that they
have to resort to lying about what is really being undertaken by the banks in offering their
services. The commissioner noted that breaking of financial laws has become very prevalent.
This is encouraged by those who are responsible for enforcing the laws as they are not doing
enough to curb the run-away menace. Collectively, this has led to massive violation of ethical
guidelines that have been established in the banking sector. While the society expects that banks
and insurance companies abhor underhand methods due to the value and trust that is placed on
these institutions, the contrary is actually happening.

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Introduction
Banks and insurance companies have come under pressure after the release of damming
reports by the Royal commissioner. The report has described in details the underhand methods
that financial institutions use in order to make a profit. According to the commissioner’s report,
the banks, businesses, and insurance companies appear to have taken a utilitarian approach in
operations. The utilitarian theory of ethics describes a person ability to predict or anticipate the
consequences that may result from a particular action. Utilitarianism can be divided into two
categories, which are rule and act utilitarianism. The second category describes the behaviour of
a person or entity that seeks to benefit the highest number of people regardless of the laws or
statues that have been put in place. It is on the basis of this notion that banks and insurance
companies conduct their business according to the report (“Ethics in Law Enforcement", 2019).
Commissioner Haynes argues that as much as the banking sector benefit the society
through creating employment and financial power, allowing them to operate freely is detrimental
to progress. Over 75 recommendations were offered on how the financial industry could be
sanitised. This has caused many board directors to question the governance, ethics, and culture of
their companies in the event that they are put under extensive scrutiny ("Key findings from the
banking Royal Commission final report", 2019). Commissioner Hayne noted that misconduct in
the financial sector should be solely be blamed on all and any party that is associated with the
banking sector. This includes those who are tasked with offering services and management
boards that have established such businesses.
Theory of Ethics
Rule utilitarianism considers the existence of laws and explores how utmost fairness can
be established in the society. Rule utilitarian entities select the fairest approach of doing
something and they ensure that the highest number of people can benefit from the process. Based
on the arguments presented by the report, this is the approach that banks and insurance
companies should use. The thing with rule utilitarianism is that it appreciates the essence of
justice and beneficence. Based on arguments presented by the royal commissioner’s report,
banks precisely act on the basis of act utilitarianism while avoiding to respect rule utilitarianism

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(McGee, 2010). Utilitarianism ethics theory is also known as consequentialist or teleological
theory. This is because the theory places more emphasis on the consequences of an action rather
than the means that have been used to get to the end result. The report argues that banks and
insurance companies simply offer services at the expense of what has to be done to ensure that
results are achieved. Rule utilitarianism is the check factor for utilitarian actions. It stablishes
balance for utilitarian actors by eliciting the question, what would be obtained if all people
followed a particular rule that validates the importance of an act? However, this is an area that
business persons try to steer away from as much as possible (Ahmad, 2011).
Just like any other normative theory that is available, it is impossible to use utilitarianism
in providing solutions to all ethical dilemmas that exist in the society. Matters become even more
complicated within the scope of doing business. In certain cases, applying the utilitarian theory
may hurt a certain group of people, and in either case, those who are tasked with applying this
theory may choose to do so selectively. Therefore, it becomes quite difficult to gauge the level of
happiness that exists among those who are affected by utilitarian actions. First and foremost,
happiness is highly subjective ("Ethics in Law Enforcement", 2019). For instance, is someone
happier when they are told that they have won one million dollars or when they are given a clean
bill of health? The second problem about utilitarian theory is based on the fact that the process of
achieving an objective isn’t important. People will always choose to apply utilitarianism the way
they see it fit (Curry, 2009). When banks and insurance companies want to make a profit, they
will most definitely apply act utilitarianism. However, when offering policies to clients and
trying to market insurance policies, then they will rely on precepts of rule utilitarianism. The
latter makes institutions appear to be morally and ethically upright. Institutions of banking and
insurance have failed to realise that irrespective of the consequences of an action, there exist
various variables in the environment that make it difficult to determine the end result of an action
(Aicd.companydirectors. 2019).
The evil that has been established within the enterprise has ended up percolating into the
remuneration process, organisation culture, and approach to governance. In his report, Hayne has
placed the blame on entire organizations while also pulling in the entities that are responsible for
regulating the banking system (Zoltners, Sinha, & Lorimer, 2012). While the society expects that
banks will effectively be punished, regulators have failed in their duties. It is because the

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regulators view banks as tools for generating money. Hence, there has been a failure to obey and
enforce the law (Brown, 2009). According to the chair of Port Waratah Coal Services and non-
executive member of Caltex Australia, Hayne’s report emphasises on the need of putting to
check corporate behaviour. Failure to do so simply because of the input that these companies
contribute to the society makes the purpose of enforcing corporate laws to lose meaning (Ahmad,
2008).
Profit persuasion
Based on Hayne’s report, it is evident that all organizations that were investigated had
opted to pursue profit margins rather than adherence to legal stipulations in the banking sector.
Hayne proved this through the simplified shareholder primacy doctrines that had been adopted.
He argued that it is essential for directors to have the interests of a company at heart. As much as
it is essential to ensure that shareholders get their fair share, company directors shouldn’t gamble
whose interests should be satisfied first between shareholders and clients. In most cases, where
company interests are objected, it happens since a number of shareholders have adopted to
pursue short-term plans (Crean, 2018). Their interest lies in making a profit in the fastest
possible manner then moving on. However, when long term objectives are taken into account, it
is more likely that interests of clients, shareholders, and employees will be respected. According
to Davidson, who is the CEO, MAICD of Australian Council of Superannuation Investors, he
believes that placing a focus on profit generation is simply a falsified dichotomy. His
organization seeks to push for enhanced governance, social, environmental, and performance
from corporation for the sake of investors ("We Need to Talk About the Royal Commission",
2019).
Ensuring that the law is followed
The Bear and Twin Peaks model has largely been used in Australis as the main
framework of regulating financial institutions. However, in the final report, Hayne argues that
the method of tackling financial violation should be altered. APRA’s and ASICs operational
procedures should be entirely overhauled. ASIC should focus on law enforcement more
extensively. Hayne proposed this after arguing that the regulator had largely failed to discharge

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their duties. At one point, Hayne almost recommends that APRA and ASIC should establish
non-executive directors in the managerial boards (NEDs).
There is no justifiable reason as to why ASIC wouldn’t gain from using the input of non-
executive directors. Furthermore, this has previously helped other entities to benefit from the
same process in the past. The benefit of having NED’s would be based on the fact that this
groups of persons would help to enforce oversight. Hayne also argued that duties of the Banking
Executive Accountability should be extended to various institutions under APRA regulation
(Hanrahan, 2018). This should include Insurance companies and Superannuation corporations. In
this case, ASIC and APRA should be govern a joint responsibility. BEAR sets out liability
obligations of organization managers and top executives. This then offers organizations with a
better understanding of duties and responsibilities associated with each position of leadership.
Evaluation of the ethical issues associated with Freedom Insurance
The level and nature of misconduct that was exhibited by Freedom insurance is beyond
reproach. Most of the actions that the company engaged itself in are a reflection what is actually
going on in the insurance sector. Engaging in unprofessional undertakings made Freedom
insurance agents violate the APES110 guidelines to which insurance companies should adhere
to. By selling insurance to a client affected by down syndrome was a direct engagement in
unconscionable conduct as defined in sections 12 CA, and CB of ASIC guidelines. As an
insurance agent, one ought to have adequate information about a client to avoid violating the
fundamental principles. Understanding the needs of clients would help to ensure that whatever
service is being sold particularly suites a specific group. This prevents instances where a client
has to pay for something yet no value will be gained from the same (Hunt & Terry, 2018).
In the commissioner’s proceedings, Freedom Insurance argued that the character of the
particular agent shouldn’t be considered as a reflection of the entire company. The company
argued that this was a highly isolated incident since the company disallowed engagement of such
practices by its agents. However, section 12 CA, and CB can offer a better perspective since the
moment Freedom insurance took up the agent, any actions that he/she engaged in would directly
reflect on the image of the organization (Richardson & Avoidance, 2012). Freedom Insurance

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also encouraged unethical practises since it continually failed to offer proper guidelines for call
making until it started being scrutinised. Taking measures early enough would have prevented
acts of misconduct to be netted when conducting quality checks. This inappropriate behaviour
from Freedom Insurance is simply an indication of institutional failure rather than
representative’s misbehaviour. The company had already set out a guideline on how employees
would be reviewed in their performance. It also failed to constantly review this established
criteria’s so as to identify the existence of flaws (Richardson, 2008).
I believe that Freedom’s breach of ethical principles and promotion of misconduct
stemmed from poor remuneration, cultural, and governance engagements. Freedom Insurance
took an act utilitarian stand with regards to the delivery of services. For instance, the company
hadn’t established disciplinary procedures that could be used to mitigate aggressive selling from
its employees (Steen, McGrath, & Wong, 2016). All along, the company knew all too well that
such an approach was a violation of the insurance community guidelines. Secondly, Freedom
never trained its insurance agents on how to offer services. This led to the creation of a team of
agents whose only objective was to get clients onboard and make a profit. This is a reflection of
a company that values the end product and doesn’t appreciate the approach that is used to get the
results. The focus of the organization was simply on the short-term objectives, hence it failed to
merge the interest of clients, employees, and the society (Kidwell, 2011).
APE110 defines five major guidelines for any accountants or organization operating
within this industry. Integrity involves adopting a honest stand when offering information that is
truthful at all times regardless of the consequences. Freedom insurance didn’t uphold integrity
since it failed to explain to its representatives that selling insurance covers at certain instances
could not be valuable on the part of the clients. Insurance representatives should also be
objective. In this case, Freedom Insurance failed since the interest of the company were placed
above those of the clients. This led to impairment of judgement with regards to how services
ought to be offered (Thornthwaite & Markey, 2014). Underhand methods were simply adopted
by the agents since they wanted to be rated highly. Therefore, even if an insurance cover was
being sold to a dead person it wouldn’t mean a big deal to the company. Professionalism failed to
be upheld by Freedom Insurance since appropriate and ethical approaches of selling insurance
policies was disregarded (Waitzer & Sarro, 2013).

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A professional ought to know that cold calling is unethical when offering insurance
covers. The insurance agents failed to be diligent and adhere to laid out professional standards
while they knew that such principles existed. Finally, Freedom Insurance agents failed to behave
in a professional manner when life policy was sold to down syndrome affected clients. This
marked the lengths to which the insurance company agents would go to in order to achieve its
objectives. Generally, Freedom Insurance failed to remain trustworthy, transparent, competent,
and uphold the highest standard qualities when serving clients (Matthews, 2016).
As an insurance agent working in Australia, I would appreciate the fact that there are
guidelines that have been established to mitigate misconduct that erodes the ethical principles.
Violating fundamental principles of insurance can precisely be brought about by the failure to
recognise the threats that exist in such an industry. These threats can easily lead to engagement
in unscrupulous behaviours. The main threat that puts the work of insurance agents and
companies to risk is the possibility of falling into the trap of promoting self-interest. As an agent,
I would definitely want to make profit, but it is important realise that in the process of delivering
the services, there are people who need to be handled appropriately. Therefore, it is important to
avoid taking the act utilitarian and instead adopt rule utilitarianism. Self-interest is abhorrent
towards efforts to become objective, and upholding integrity. Additionally, it also hampers
independence of a agents (O'Brien, Gilligan, & Miller, 2014).
In an effort to uphold the guidelines of APES 110, it would be essential for insurance
agents to continually check their conduct in relation to the fundamental principles, and against
the threats to established principles. APES offer a matrix that can be used to establish this
establish safeguards that can be used to mitigate unprofessionalism in this industry. Safeguards
may be established in two major forms. They can either be a creation of the accountants or they
can be established in the environment where insurance agents work. As an insurance agent, one
is obligated to ascertain if there are any threats that may erode the fundamental principles prior to
taking money from a client. This can be achieved through research and gaining as much
information from the client as possible. This will help to secure a client’s pledge to a stable
organizational leadership control system.
When a professional insurance agent is accepting appointments, acceptance shouldn’t be
done without prior understanding of the competence that is required to handle a certain position.

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Likewise, insurance companies should undertake to absorb agents who are competent enough in
the delivery of services. It is also essential for the organization to establish appropriate guidelines
that will help to ensure that the employees do not violate the industry’s guidelines. If this
happens, then the actions of employees will solely be blamed on the organization (Pearson,
2016). Professionalism is also defined through having an understanding of why a client needs to
join a particular insurance company, especially where they are shifting. When proper information
is not gained about a client, then this may put the whole organization into trouble. The most
appropriate safeguard entails agent contacting the previous insurance company so as to gain
actual facts and history on the client.
Conclusion
Sanitizing the banking and insurance sectors would require the regulators to ensure that
remuneration, culture, and governance approaches are always scrutinised. Haynes has also
identified the importance of upholding good governance principles. The main challenge,
however, is the lack of proper channels that can facilitate the flow of information to the topmost
managerial team. Hence, this makes it difficult to make suitable decisions that can govern how
services are discharged.
Hayne’s report does not offer recommendations that could disrupt the financial sector in
Australia, rather, it brings to light areas where scrutiny should be undertaken to ensure that sanity
is achieved. The report also develops a model that can be used for financial regulation. This
model assigns the task of regulation to APRA, while ASIC is tasked with disclosure and
evaluation of conduct. In essence, the report explores the various avenues that can be used to
ensure that the financial sector adopts fair and just approaches in delivery of services. This brings
us to the basics of rule utilitarianism where the means of offering a service can only be justified
if the most people are benefiting whilst the outlined laws are being implemented properly.
Leaving the task of disclosure and enforcement to one government institution would be daunting,
and may easily lead to irregularities as is the case currently.

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