Ethics and Governance Report: Case Study of Freedom Insurance Company

This report delves into the realm of ethics and governance within the financial services sector. It begins by exploring the utilitarian theory, analyzing how it applies to ethical decision-making in the context of financial conduct. The report examines a range of issues, including misconduct by financial service providers and their deviation from community expectations. It analyzes the nexus between conduct and reward, power imbalances, conflicting interests, and accountability failures. The second part of the report presents a case study of Freedom Insurance, scrutinizing its actions, including instances of misconduct, breaches of regulations, and failures in quality assurance, remuneration, and compliance. The report highlights the importance of ethical standards, regulatory compliance, and the need for accountability within the financial services industry, drawing on the Corporations Act and ASIC Act.

Running head: ETHICS AND GOVERNANCE 1
Ethics and Governance
Student’s name
Institution Affiliation
Date

ETHICS AND GOVERNANCE 2
Part one: Theory of ethics-Utilitarian theory and how it applies to the report.
The utilitarian theory rests on the capacity of a person to foresee the repercussions of a
given action (Chonko, 2012). Regarding a utilitarian, the choice that produces the most
magnificent best to a large number of people is deemed to be the ethically correct choice.
Utilitarianism is of two kinds; one is the act utilitarianism, and the other is the rule utilitarianism
(BC Campus, n.d.). According to act utilitarianism, a person indulges in activities that help many
individuals, irrespective of individual feelings and societal set boundaries for instance codes. On
the other hand, rule utilitarianism is based on law and is focused on ensuring partiality (Lopez,
2012). According to rule utilitarian, it focuses on benefiting the most individuals through the
fairest yet just means. Thus, the accorded advantages of rule utilitarianism are based on valuing
fairness and entail doing good.
The report involves an analysis of the conduct that the financial service providers may
have been involved in that may have led to mischief and ascertaining whether conduct, behavior
or company operations by the financial entities may have fallen below the standards and
anticipations stipulated by the community (Commonwealth Australia, 2019). The conduct
recognized and described by the interim report and further conduct prescribed by the report
entails conduct by several entities that have been taking place for several years leading to a
substantial loss for many clients, however, yielding significant profit margins to the financial
entities involved. It has been reported that the conduct often breaks the law, with the conduct
lacking the type of behavior that the society not only anticipates of financial service entities but
also mandated to anticipate them contrary to the expectations stipulated in the utilitarian theory.
The analysis conducted together to demonstrate the importance of the four observations
regarding what the commission found, that is, the nexus between conduct and reward; power and

ETHICS AND GOVERNANCE 3
information asymmetry existing between the financial companies and their clients; the impact of
disagreement between providing service and interest and holding entities responsible for their
actions.
It was observed that in almost all cases, the conduct was an issue that was not only
propelled by the appropriate firm’s endeavor of profit but also by personal’s pursuit of benefiting
whether in the type of salaries for the person or profit for the personal enterprise. Offering
services to clients were prioritized and ranked as the second place. Sales eventually became an
important activity (Commonwealth Australia, 2019). The people entrusted to deal with
customers turned out to become sellers. Thus, the mix up of roles transcended front line services
offered by employees with advisers becoming sellers, and the sellers changed to become
advisers. Such conduct is recognized and reprimanded in both the interim and final report was
worth evaluation regarding how the individual conducting the relevant acts, or not exercising his
duties bestowed upon him got rewarded for the conduct (Commonwealth Australia, 2019).
Remunerating misconduct is wrong. However, the bonus and commission schemes in the market
for financial services have evaluated sales and profits but failed to comply with the code of ethics
and proper standards. The incentives were substantiated, and rewards paid irrespective of
whether the sales accrued adhered to the rule of law. Rewards were disseminated irrespective of
whether the individual awarded followed the rules to the latter.
Second, both the firms and people operated in the manner they did since they had the
power and discretion to act in that manner. The firms set the terms which were used for the
dealings and the consumers, on the other hand, had limited detailed knowledge or fathomed less
of the transactions making the consumers have little to no power to negotiate the terms
(Commonwealth Australia, 2019). The consumers at most could only choose from a wide variety

ETHICS AND GOVERNANCE 4
of services provided by an entity or by that firm and other entities and the consumer failed to
make a well-informed decision between them. This led to an identified imbalance of power and
knowledge arising between product providers and the acquirers.
The consumers only got involved in dealings of a financial service provider via third
party. The customer might assume that the individual transacting between them and the firm
would deliver a financial good or service represented the interest of the customer and the
customer alone. However, in several instances, the third party gets paid and at times works in the
interests of the provider of the service or goods (Commonwealth Australia, 2019). However, if
the intermediary fails to act on behalf of the provider, then the intermediary acts on the interests
of their own. It is imperative to ascertain that the interests of the customer, the intermediary, and
product provider are not only different but also conflicting. A middleman who aims to have a
stand-in more than one canoe will fail thus allegiance to a consumer and personal interest move
in different directions.
Following the Chapter 7 of the Corporations Act 2001, that is the Corporations Act and the
National Consumer Credit Protection Act 2009 they outline conflicting interests. However,
experience reveals that arising conflicts between duty to the client and corporate interests can
barely be managed (Commonwealth Australia, 2019). The self-interest will probably trump the
need for duty. According to Commission’s evidence, it revealed that how the individuals acting
on behalf of the client always resolved conflicts that arose entailing an obligation to the client,
the corporate interest, adviser or mediators, in the plight of corporate interests, adviser or
mediators and vis a vis customer’s interests (Commonwealth Australia, 2019). The individuals
and entities that should advance the interests of customers or members always resolve to strike
some compromise between customers’ and members’ interests and their interests or interests

ETHICS AND GOVERNANCE 5
involving a third party. An outcome that was deemed to be good enough was advanced as
opposed to the best interests of the appropriate customers and members. Perceptions of the best
interests and conflicts entailing duty and interest are evaluated further in the nexus with
mortgage brokers, financial consultation and superannuation.
In the fourth situation, the providers of financial services that acted in contravention to
the law were not held to accountability (Commonwealth Australia, 2019). It has also been noted
that misconduct gets deterred only when companies believe that the misconduct particularly
mischief generating profits, fail to be prevented by stipulating those found to have done wrong to
do nothing more than pay compensation. Also, there is no indictment of wrongdoing by giving a
press release.
The Australian community anticipates and is entitled to expect, that if a company breaks
the law and brings damage to customers, it has to compensate the affected clients. However, the
community also anticipates that financial service providers that violate the law to be held
responsible and accountable for their offenses (Commonwealth Australia, 2019). Thus, the
community identifies and anticipates that its regulators to recognize that there are two distinct
phases: one is having the wrongdoer paying retribution to the harmed client, and the other is
having the wrongdoer held responsible and accountable.
Part two: Freedom case study
Following submissions to the commission, Freedom recommended that in instances
where ASIC was involved in reviewing practices by reviewing, ASIC would be deemed as the
most appropriate body to review and make last determinations with regards to the previous
conduct of Freedom insurance as opposed to the commission. The actions by Freedom may have
led to misconduct in several ways.

ETHICS AND GOVERNANCE 6
Freedom may have engaged in gross misconduct. With regards to Freedom selling its products to
vulnerable customers, and in particular, insurance of sale to Mr. Stewart’s son in situations
where the sales agent fathomed, or should have known that Stewart’s son had no understanding
of what he was consenting to. The criminal conduct that Freedom engaged was found in the
sections 12CA or 12CB with regards to the ASIC Act (Commonwealth Australia, 2019).
Freedom admitted that indeed its sales agent should have known that Stewart’s son did not
fathom what he was consenting to and this inappropriate conduct should not have been used to
paint the picture of Freedom insurance with regards to its operational behavior (Commonwealth
Australia, 2019). In situations where the sales agent was representing Freedom, within the sales
frameworks that had been established by Freedom, the CEO refused to accept such allegations.
Freedom agreed that indeed this was an isolated case that should not have been employed to
feature the overall conduct of the company.
Freedom also got involved in unconscionable conduct in three other instances where it
sold insurance to culpable consumers the were victims of Freedom’s current breach notification
to ASIC.
Freedom accepted the breach notification to ASIC and in its confession to the
commission that the conduct with regards to its sales agents in association to the four culpable
customers may have led to a breach of sections 912A(1)(a),912A (1) (ca) or the 912A(1)(f) with
regards to the Corporations Act.
With regards to quality assurance practices by Freedom, it failed miserably till mid-2018
to relevantly manage its call marking framework to facilitate that most kinds of grave
misconduct with the inclusion of legislative breaches entailed a quality assurance fail
(Commonwealth Australia, 2019). The CEO confessed that the company’s call marking

ETHICS AND GOVERNANCE 7
frameworks was one perspective of the quality assurance and risk management era. However, it
is clear that they were a substantial component of that regime since they stipulated the process by
which the performance of representatives would be evaluated at Freedom. Based on the defects
eminent in Freedom’s guidelines before July 2018 indicate that Freedom has historically been
associated with failing to have sufficient mechanisms in place that could deter legislative
breaches regarding sales procedures (Commonwealth Australia, 2019). Thus, Freedom was
unable to implement reasonable procedures to facilitate that its representatives adhered to laws
governing financial services for the sake of section 912A (1) (ca) enshrined in the Corporations
Act, or to establish appropriate risk management framework as stipulated by section 912A(1)(h)
of the clause.
Regarding remuneration and incentive operations by Freedom, it accepted in one of its
breaching notification to ASIC as of May 2018, Freedom may have breached section 963E of the
Corporations Act with regards to the variable element of its sales agent remuneration framework.
Also, Freedom confessed to both ASIC and the Commission that it might have been involved in
a breach of section 963 of the Corporations Act with regards to the non-monetary benefits that it
bestowed to its representatives in the first quarter of 2018 (Commonwealth Australia, 2019). In
submitting to the Commission, the company consented that it may have historically failed to
establish appropriate arrangements for the control of conflicts of interest that prevailed between
its agents and its policyholders with regards to a breach of section 912A(1)(aa)of the
Corporations Act.
Lastly, with regards to the compliance with the anti-hawking regime, the company
highlighted particular breaches of the anti-hawking provisions enshrined in the Corporations Act
to the commission.

ETHICS AND GOVERNANCE 8
The submissions to the commissions only catered for only one of the findings that had been
pointed out by Senior Counsel Assisting and were regarded as open with regards to the evidence
adduced (Commonwealth Australia, 2019). The issue was linked to three scenarios of conduct
that fell below the expectations and stipulated standards set by the community with regards to
how Freedom treated consumers who were deemed vulnerable as acknowledged by the
commission though excluded from the entity’s breach notification to ASIC. Freedom’s
submission to the commission acknowledged that such cases were identified adequately as
conduct that was far below the standards and anticipations by the community.
Freedom failed to respond to the other four issues that had been pointed out by Senior
Counsel Assisting as being transparent on the part of the evidence. However, each of those issues
has the capacity of being identified as conduct that fell below anticipations and standards of the
community.
In the first case, it is related to the 27 examples of retention-and cancellation-linked conduct that
Freedom previously recognized to the Commission as rating below the standards and
anticipations by the community.
The second case is linked to the retention mechanisms regarded as heavy-handed that was
used by Freedom that led to policyholders experiencing and encountering difficulties to cancel
such policies that they were no longer interested in. Mr. Orton confessed how robust the
company’s retention process had been (Commonwealth Australia, 2019). According to the
information on Freedom, it was clear that over one year, the company had received
approximately more than 70 cancellation requests daily with the holders of the policy being
successful in terminating their policies in 28.5% of the calls they made to Freedom. The
retention campaigns were aimed at dissuading policyholders from ending their policies and from

ETHICS AND GOVERNANCE 9
winning the holders of policy following their cancellation. According to Mr. Orton, such
campaigns should not have surfaced and promised that Freedom would stop engaging in such
campaigns. From the community perspective, it did not anticipate that an insurance entity would
make it hard to have a policy canceled that was deemed as unnecessary or undesirable.
In the third scenario, it entailed the disciplinary measures that were deemed inadequate to
manage the problematic conduct that had engulfed its sales agents (Commonwealth Australia,
2019). A good illustration is the sales agent who was involved in selling a policy to Mr.
Stewart’s son as he was motivated to sell aggressively even in situations where Freedom held
grave concerns regarding his sales activities. Ineffective disciplinary measures characterized
freedom. For instance, the sales agent was served with an initial written warning that was issued
in January 2016 and a last written notice in February of the same year. In the other months of the
year, other concerns regarding the practices of the sales agent got raised (Commonwealth
Australia, 2019). By far and large, such fears and warnings were not addressed with regards to
the fortnight feedback that Freedom offered its sales agent. Contrary, the supervisor of the sales
agent went on motivating the agent to continue aiming big and sell many policies. Mr. Orton
accepted that the disciplinary mechanisms at Freedom failed to address the misconduct portrayed
by representatives adequately and there were significant problems in the feedback channel
employed by Freedom insurance in monitoring and managing such situations of misconduct.
The fourth case was associated with failure of Freedom to appropriately identify and
address the harm encountered by Mr. Stewart’s son. It was portrayed in several aspects for
instance when the insurance company failed to call back Mr. Stewart after it promised to call
back. Also, the failure of Freedom to facilitate that Mr. Stewart owned the call recordings at the
right time was also a breach of conduct and the internal communications that belittled Mr.

ETHICS AND GOVERNANCE 10
Stewart, and his son was unethical. When all these matters are summed up, they demonstrate the
lack of recognizing the harm that had befell Mr. Stewart’s son and lack of attention in delivering
an appropriate redress.
Conduct
The conduct by the insurance company can be linked to its culture and practices of
governance and remuneration. As revealed by Orton, the remuneration and incentives framework
at Freedom promoted sales activities to be highly aggressive and inappropriate (Commonwealth
Australia, 2019). The quality assurance framework coupled with the disciplinary mechanisms
were not enough to stop and detect such improper activities. Such problems were exacerbated by
the failure of Freedom to accord the necessary training to its employees on how to address and
deal with the vulnerable consumers till early February in 2017. Generally, such matters led to a
culture where the sales agents were motivated to sell aggressively at the expensed of consumer
needs with the inclusion of culpable consumers.
In conclusion, it is evident that financial service entity such as Freedom was involved in
several misconduct cases that acted in contravention to the utilitarianism theory of ethics that
prioritizes on according to maximum benefit to people and ensuring fairness and justice at all
times. Freedom seems to be grappling with providing quality assurance mechanisms in place to
ensure that its sales agents could be monitored. The aggressive campaigns by the insurance
company exacerbated matters as it made the sales agents unresponsive and insensitive to
customers’ needs. Such issues seem to affect the customers and made the company look bad in
the eyes of the community.

ETHICS AND GOVERNANCE 11
References
BC Campus. (n.d.). Ethics in law enforcement. Retrieved from open text:
https://opentextbc.ca/ethicsinlawenforcement/chapter/2-1-major-ethical-systems/
Chonko, L. (2012, July). Ethical Theories. Retrieved from Dsef: http://www.dsef.org/wp-
content/uploads/2012/07/EthicalTheories.pdf
Commonwealth Australia. (2019, February 1). Royal Commission into Misconduct in the
Banking, Superannuation. Retrieved from financial services:
https://financialservices.royalcommission.gov.au/Pages/reports.aspx#final.
Lopez, E. (2012, September 6). A Summary of the Terms and Types of Ethical Theories.
Retrieved from owl location: https://owlcation.com/humanities/A-Summary-of-the-
Terms-and-Types-of-Ethical-Theories-and-their-Critiques