Ethical and Sustainable Practices in the UK Banking Sector: A Report

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BUSIENSS ETHICS, RESPONSIBILITY AND
SUSTAINABILITY {USL}

Executive Summary
Certain virtuous principles that represent a group or an individual are called ethics. Business
ethics is defined as the study of proper business practices and policies thereby developing a
level of trust between business organisations and their customers. In this business report, the
responsibilities, business ethics, and sustainability in the banking industry have been
discussed. The report is based on secondary research that analyses data thematically.
Business ethics of various banking institutes operating in the UK and also their unethical
behaviours have been discussed. Concepts and examples of sustainable banking have been
provided. Finally, a few ways of incorporating ethical behaviour in the banking industry have
been provided in brief. Hence it can be concluded that unethical behaviour reduces the trust
of customers and deteriorates the images of the bank. Hence it is important for banking
organisations to incorporate ethical behaviour in order to gain their customers’ trusts.
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Table of Contents
Introduction................................................................................................................................4
Challenges in banking sector......................................................................................................4
Business ethics and sustainability in the banking sector............................................................6
Moral and ethical issues in banking...........................................................................................9
Recommendation and Conclusion............................................................................................11
References................................................................................................................................13
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Introduction
Business organisations face many responsibilities. Ethical and social responsibilities are the
most important responsibilities that business organisations face. Ethics are defined as certain
virtuous principles that represent a group or a person. The main motive of business
organisations is to collect revenue and be an influential organisation in their sector. However,
it is not ethical always in attaining these goals. Hence it is necessary for every business
organisation to uphold and develop business ethics. The way by which companies conduct
and behave themselves in their own policies and practices is termed as business ethics.
Companies that do not follow proper business ethics are known to lose customers and have
suffered from bad publicity.
Challenges in banking sector
There are several challenges that the banking sector may face. According to Crane and
Matten (2016), with the growth of non-banking startups, there have been changes in the
landscape of financial services. This has forced the traditional banking institutions to
reconsider their procedures of doing business. For banking organisation, driving customer
loyalty and retention has proven to be more challenging than before. This is because
customers mainly seek the most efficient and convenient ways of banking, with options
available through digital channels in abundance. The entrance of new industries in banking
sector have forced many banking and financial institutions to look for partnerships or
acquisition opportunities as a measure of a stop gap. The rise of FinTechs has even
accelerated this competition, particularly in the UK.
Fintech companies have provided customers with alternative and several lucrative services
such as investment advice, foreign exchange, and have provided customers with tools, that
have effectively prevented the customers from falling into an overdraft (Charles Jr et al.
2017). Fintech companies also encourage customers to avoid taking bad credit. Fintech
companies also have made payments procedures easier and hence due to these reasons,
customers in the UK have started preferring Fintech companies like TransferWise,
TrueLayer, Monzo and Nutmeg over traditional banking institutions. These Fintech
companies use technology to replace expensive and typical investment advisors. This has
helped them to bring down the barriers in allowing people to invest money in smaller
amounts. Natwest is such a Fintech company that has started its own online service in this
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regard. The UK has been among the global leaders that have promoted thriving business in
the Fintech sector. However, Competition and Markets Authority (CMA) has found that the
top banks of UK- Lloyds, HSBC, and Barclays have managed to retain about 70% share of
customers' current accounts (Visser and Tolhurst, 2017 ).
However, it has been also seen by Bouma et al. (2017), that app-based and online banking
have been disrupting this market. Banking sectors in the UK and all over the world have been
under pressure of rising cost capital, sustained low rates of interest, decreasing ROE and
proprietary trading decrease. These factors have contributed many organisations to build their
own service offerings in a competitive manner while looking for sustainable improvements
and developments in an efficient operation in order to gain profit. Hence, these factors have
developed challenges in the banking sector. For banking and financial institutions, regulatory
compliance has been becoming another significant concern. Due to a dramatic increase in
regulatory fees as compared to earnings, the financial organisations have been prone to a
financial crisis. The customers using financial services expect a meaningful and personalised
experience through intuitive and simple interference on any device and at anytime and
anywhere.
Although the experience of a customer is tough to qualify, customer turnover has been
relatively becoming concrete and hence customer loyalty has been becoming endangered.
The new banking rules developed by Competition and Markets authority of UK has been
watched closely by bankers and has encouraged innovation and foster competitive markets.
Due to these new regulations, banks will now have to disclose their fee and performance data.
This will enable the customers to compare results and offerings among various other financial
providers. The banking sector in the UK has also been facing a risk of the incapability in
refinancing or exchanges its old loans with more favourable loans. The bank of England, in
their report of financial stability, has revealed that several large banks of UK like HSBC and
Barclays need to refinance about 800 billion GBP worth of liquid assets and term loans. The
banks in the UK have collective interests in order to retain an accommodating as well as a
lending environment so that their business does not get choked up during the times of
financial uncertainty in market (Lehner, 2016).
However, this may lead to more relaxed standards of credit and hence lesser profits. Heavy
exposure to foreign banks has been another problem for the banking sectors in the UK. Lloyd
banking group has approximately 4% loans in Ireland. Hence there is a chance that it ends up
being an unpaid debt. Another bank of UK, Standard Chartered has Korean acquisitions of
approximately 0.46% pre-tax ROA figure. However, the tensions in Korean peninsula may
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threaten business activities and hence Standard Chartered may end up suffering financial
losses. Sovereign debt is one of the greatest risks that banks of the UK face. The price of
insured government debts has risen from default more than commercial banks. This is a great
threat to the four major banks of UK as these banks have accounted for around 10-20% of the
public debt of the UK. In the case of Lloyds banking group, approximately 50% of their
government debt in their moneybox has been obtained from the UK. Due to a rise in the
insurance costs, the profit of Lloyds has been decreasing (Jacobs and Mazzucato, 2016). This
is similar to several other banks. This harms the overall recovery of the UK's banking sector.
Business ethics and sustainability in the banking sector
According to Schaper (2016), business ethics are the factors that are taken into account while
doing business. These include business processes, production and also behaviour of the
company with the customers. Sustainability means meeting the business challenges and
ensuring that the future generations will be able to enjoy same type of lifestyles as people
enjoy at present. It involves accepting long term views on balancing environmental,
economic and social effects of business. The role of a banker is solely dependent on trust
while a bank has a responsibility towards its customers, government, staff, and shareholders.
There are certain basic ethics in the banking sector given below:
● Mutual trust: Mutual trust is a principle that plays a special role in the functioning of
a banking business system successfully. Various valuable and important details are
conveyed over the phone very often, without the presence of any witness. The
correlation between the customers and the bank is dominated and based on mutual
trust among them. It is the mutual trust of the customers that HSBC has been one of
the largest business organisations in the banking sector of the UK.
● Mutual interest and benefit: This means that no partners, shareholders or customers
of particular bank will be cheated. HSBC has a strict security system that keeps the
fixed deposits of its customers safe and secure. HSBC also has a new security device
for secured transaction of payments. Hence, customers opt for HSBC as a banking
option.
● Good intentions: It is an important principle of moral ethics. The bank should make
their customers believe that they have no immoral intentions and they shall not treat
their customers in an undesirable way. Due to poor customer service in the Bank of
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Ireland and poor undesirable behaviour with their customers, Bank of Ireland has
been receiving a great deal of backlash from their customers.
● Business compromise and tolerance: This refers to the harmonising the conflicting
views and interests of customers in a business process.
● Business behaviour improvement: This represents the bank’s readiness to take and
accept their faults and mistakes that a bank has made due to their own actions or
policies. The bank should admit their mistakes and should try to avoid such mistakes
in the future in a proper way (Visser and Tolhurst, 2017).
Figure 1: Basic ethics in banking sector
(Source: Visser and Tolhurst, 2017)
However, it has been observed that banking sector is often indulged in unethical
controversies in the UK. The five top largest banking organisations in the UK have been
hindering the efforts of tackling climate change. This is because these banks have been
continuously earning profits from some dirtiest fossil fuel projects of the world. Of these
banking organisations, HSBC has been the largest backsliders in investing in fossils.
Regarding taking actions against climate change HSBC has been the worst. However, HSBC
has increased its investment from $2.6 billion per year to $5.63 billion per year (Amaeshi et
al. 2016). One of the professional requirement for all banks is to observe the law and work
according to law. Following proper business, an ethic help banks to increase their customer
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MutualTrustMutualInterestandbenefitGoodIntentionsBusinesscompromiseandtoleranceBusinessbehaviourimprovement

loyalty and hence helps to enhance their business. There are several factors or key drivers that
promote sustainable banking. They are as follows:
● Lenders’ liability: Lenders’ liabilities are defined as the financial risks that banks face
while extending or granting loans. Banks rely on the financial statements of companies or
individual while deciding if a person is eligible for the loan. Banks must accurately cross-
check the information provided by the customers about liabilities decommissioning so as
to avoid the unacceptable huge financial crisis.
● Commitments in communication: Banks have been increasingly communicating several
major sustainable financing commitments in the long term. This provides opportunities to
link services with their corporate responsibility. For example, Lloyd Group of banking
has more than 10 years have financial commitments of $100 billion or even higher.
● ESG Metrics: Banks can communicate and establish by focusing on ESG metrics and
thereby aligning their pre-identified materialistic issues. Associated target, as well as key
strategic metrics generally integrated with performance results of the company, has been
sustainable in providing financial performance. Barclays has taken its step towards
publishing an annual report containing ESG data. This would imply increased streamline
in reporting and also provide some additional ESG disclosures for those stakeholders who
need (Forcadell and Aracil, 2017).
Figure 2: Key factors to promote sustainable banking
(Source: Forcadell and Aracil, 2017)
Sustainability in the banking industry has taken two main directions. It has pursued social and
environmental responsibilities in the operations of a bank by implementing recycling
programs or improving energy efficiency. Social responsibilities have been initiated by
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supporting several cultural events and providing donations to charities. Secondly, with the
integration of sustainability into the business strategy and process of decision making, banks
can support several socially and environmentally responsible projects. They can also support
the development of several innovative technologies as well as sustainable enterprises.
In the UK, Triodos Bank is known to be one of the most sustainable banks operating. Triodos
Bank has financed several progressive entrepreneurs. The bank has also influenced the
banking sector to transform into more transparent, sustainable and diverse. Moreover,
Triodos bank has also financed in several projects related to sustainable energy that has
resulted in a decrease of 985 kilo tonnes of carbon-dioxide emissions. Triodos bank has also
utilised its money in order to deliver a positive environmental and social change, in order to
improve the quality of life of people living in the UK (Triodos, 2019).
Another example of sustainable banking in the UK is the new banking system developed by
Barclays. Barclays has supported the United Nations Environment Programme Finance
Initiative Principles for Responsible Banking. This program has provided the global banking
industry, a framework in order to embed sustainability at various portfolios, strategic and
transactional levels across several areas of business. These principles have aligned several
banks to align with the common goals of the society such as ending poverty, tackle the issues
of climate change and ensuring world peace, stability and prosperity. Barclays is one of
several banks to support these principles and program (Barclays, 2019).
Moral and ethical issues in banking
Financial organisations such as all kinds of banks, credit card agencies, and insurance
companies have been always considered as the catalyst to maximise the financial assets of
people. However, these financial organisations have been seeking a sophisticated and
complicated approach to operations. The services and products that they offer have been
becoming complicated even more. The ways banking and other financial sectors invest
resources and implement the facilities of credit; everything becomes less evident each year.
The speed by which these banking sectors evolves is accelerating day by day. Hence banks
have defendant the secrecy of the information of their clients. However, government and
other institutions find it difficult to cope at this evolution rate (Amaeshi et al. 2016). Hence,
there are several issues that are being overlooked that may direct the society for common
good.
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Among several issues that exist in banking sector, the most difficult issues to handle are the
ethical issues. Lack of ethical standards results in loss of valuable customers. Heavy penalties
are imposed on employees convicted of criminal activities and violation of ethical measures.
Some general unethical behaviour of employees seen in banking sectors is as follows:
Figure 3: Unethical behaviour of banking employees
(Source: Chew et al. 2016)
It is very much essential to evaluate the arising ethical issues and strict action should be taken
against those found guilty as a result of unethical behaviour (Chew et al. 2016).
All the five big banks operating in the UK- HSBC, Barclays, Standard Chartered, RBS, and
Lloyds Banking group have been charged with unethical activities such as unethical selling
measures. Miss-selling means selling the customers a bank account by charging them with a
certain amount of fees that are not required (Marois and Güngen, 2016). In 2013, a £28
million fine was imposed on Lloyds Banking Group by the FCA. The fine was imposed
because Lloyds pressurised their staff to sell products to their customers that are not
important to them. The employees were threatened with demotions and pay cuts for their
failures to do so.
Along with incorrect selling, several other areas are known to exist were banks have adopted
the poor practice and landed themselves to trouble (Tolias et al. 2015). In the year 2015, the
FCA imposed a £72 million fine on Barclays. The fine was imposed because Barclays failed
to monitor some individuals classed as politically engaged persons (PEPs). These
individuals held prominent positions in the public works department. Fraudulent activities are
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also unethical activities largely known to exist in banking sector. Bank frauds have existed
throughout the world. Such activities lower the customers' trust towards the banks (Haque,
2017). The Libor Scandal, 2012 is one of the widely known fraudulent activities that
occurred in the history of the banking business of the UK. Libor stands for London
Interbank Offered Rank. Libor is less expensive and an average rate of interest that is used
by several banks globally. It is based on the interest rates submitted from banks across the
globe. In the year 2012, Barclays was charged with deliberate rigging is interest rates of UK
for their financial gain, over several years.
The entire Libor system was affected as a result of this. The problem was severe for the entire
banking industry of the US because, the banking sector in the US uses Libor for rating
several products, such as student loans. The scam by Barclays directly affected several
consumers in the US. In late 2016, a settlement of £77 million was reached by Barclays with
almost 40 states of the US for its scam. It was also discovered subsequently that RBS,
Radobank, Deutsche Bank were some other banks involved in Libor Scandal. Over time,
banks have also been charged for concerns of human rights. The 2012 HSBC money
laundering scam is a celebrated case that may be discussed in this aspect. In the year 2012,
£1.2 billion was fined from HSBC for its role in the money laundering scam that involved
Colombian and Mexican drug cartels. It is important to take care that allowing free operations
to drug cartels has severe human consequences (Amaeshi et al. 2016). Families of people
murdered by Mexican and Colombian drug cartels took legal action and sued HSBC for their
collaboration with the drug cartels.
Hindering the efforts of tackling climate change is another unethical activity mentioned
earlier. There are several banks that support oil and mining companies and provide financial
support to them. This has created a problem for environmental scientists in finding ways to
tackle climate change (Campiglio, 2016). Natwest provides financial support to British
Petroleum, while HSBC is the banking partner of Rio Tinto, a mining company. In the year
2015, people from over 60 countries protested against these banking organisations for their
investments in environmentally damaging activities and thereby earning profit from such
activities.
There have also been instances were banks were involved in sponsoring terrorism activities
(Authority, 2015). The time within 2009 to 2014, Standard Chartered Bank was involved in
transaction of worth $438 million. Majority of such transaction involved accounts linked to
Iran. This action of Standard Chartered bank violated the economic sanctions imposed by the
US on Iran. Standard Chartered was accused of falsifying records and manipulate several
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wire transfers in order to provide an advantage to its Iranian customers. Standard Chartered
was also accused of financing terrorist organisations like Hamas, Hezbollah, and Palestinian
Islamic Jihad. Both the US and the UK government imposed a total penalty of £691 million
on Standard Chartered bank for this activity.
Recommendation and Conclusion
Hence it is seen that due to several scams and scandals occurring now and then in banking
industry, there has been heavy deterioration in images of banks all over the world. It is an
urgent requirement for them to improve the image and regain the trust of their customers.
Although it is true that banks are not solely responsible for the occurrence of several scams,
there have been several ethical questions attributed to banks or some high ranking bank
executives. In order to develop ethics in their business and gain the trust of the people, banks
should develop a responsible culture that does not include profit maximisation as the key
motive. Banks should act with increasing transparency in administering funds. Implementing
these moral and ethical values, banks would be able to gain the support and trust of their
customers.
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