Ethcial Issues in the Financial Services Industry - Term Paper Example

Ethical Issues in the Financial services Industry The report deals with ethical standards that are there in the industry of financial services. It also seeks to state that ethical issues can play a significant role in the performance of financial services industry. It is considered that general people tend to consider the field of financial services as more unethical as compared to other areas of business. This is considered as such mostly because of the fact that the industry is considered to be quite large. Contents 1 Ethical Issues in the Financial services Industry 1 Abstract 2 The report deals with ethical standards that are there in the industry of financial services. It also seeks to state that ethical issues can play a significant role in the performance of financial services industry. It is considered that general people tend to consider the field of financial services as more unethical as compared to other areas of business. This is considered as such mostly because of the fact that the industry is considered to be quite large. 2 Contents 3 Introduction 4 Discussion 4 Conclusion 11 References 12 Introduction Ethical issues are considered to have a huge importance in the industry of financial services because numerous people are considered to be consumers of such services. General people tend to consider this field as more unethical as compared to other areas of business. This is mostly because of the fact that the industry is considered to be quite large. It comprises mortgage lenders, pension funds, investment banks, mutual fund organizations, insurance organizations, securities firms, and banks. The industry is considered to make lot of headlines which tout for its ethical lapses due to its vast size. Intermediaries that operate in the field of financial services must follow standards of the industry, rules of law, and act in an ethical manner. The organizations operating in the financial services industry conduct numerous meetings with regard to marketing of financial services, investment analysis, technology training, and new product training but there is very less importance placed with regard to ethical training. The thinking of organizations must be changed in this regard such that ethical training forms part of conferences in financial service organizations and should have a significant number of attendances. The financial services industry is considered to provide essential services which can be considered as fundamental to modern society and economy. It provides services such as safeguarding money of the general public and providing them with domestic lending services. In this regard, it can be said that considering the vital role that financial service organizations play, it is logical to subject the industry to higher ethical standards as compared to that of other commercial sectors. Discussion The main question in this regard is to determine what should be the ethical standards and how anyone can judge them. It is also equally important to consider what the ultimate aim is in this regard. It is very difficult to address ethics and its grey areas because it is not considered as a concept which is static in nature. The link between ‘mis-selling’ and ‘mis-buying’ in this industry of financial services can be contested in a significant manner because what is considered as ‘mis-selling’ by one person can be considered as a fair transaction to another (Beugré, 2007). The fundamental principles of organizations operating in the financial services industry must include the following points: I) They should not pursue profits as their main objective at the expense of all other factors including reputation. II) Their behaviour should demonstrate integrity and they must act in a fair manner and in the best interest of their clients. III) They should have a high degree of commitment with regard to delivering technical excellence. IV) The organizations operating in the financial services industry must consistently demonstrate positive ethical behaviour in their performance across the industry. V) They should not act in any unethical way even if it is considered as legal. The culture of organizations operating in the financial services industry must be ethical. The implementation of ethical cultures in organizations operating in the financial services industry is considered as very difficult (Dartey-Baah, 2011). It is considered as difficult as ethics are considered to be defined. Behaviours of organizations are considered to be shaped by the interaction of external and international factors. Internal factors in this regard can be considered as cultures, systems, and structures. External factors are considered to be those factors that arise from social context. An organization’s ethical culture is not considered to be the sum of ethical cultures of those people who are considered to work for the organization. Organizations consist of people but people alone are not considered to withstand ethos, processes, and structures of the organization (Booker, 2006). As a consequence, it is quite possible that individuals who are considered to be quite ethical in their lives outside of work may have a tendency to behave in an unethical manner in their professional and corporate lives. The running and management of organizations are considered to be quite difficult. Leaders of organizations face considerable difficulty in this regard. They should provide transformational leadership in an attempt to maintain ethical standards in the performance of organizations. Transformational leadership involves motivating and guiding followers in the direction of organizational goals by clarifying task and role requirements of employees. It involves inspiring followers to transcend their self interest for the betterment of the organization. Transformational leaders are considered to have an extraordinary and profound impact on their followers. They are considered to pay attention to the developmental needs and concerns of individual followers in the organization. They guide followers in changing their awareness of issues by helping them to have a new way of looking at old problems (Mintzberg, 1994). They are quite capable of inspiring, arousing, and create excitement in followers such that they put an extra effort with regard to achievement of organizational objectives. Transformational leadership is considered as quite efficient in this regard because individuals who are considered to be lower down the hierarchy have a tendency not to trust senior management of an organization to behave in an ethical manner. Moreover, what it takes to be ethical is considered as not that much clear to individuals in an organization. It is advocated that there is an urgent requirement for introduction of more significant legislation in the industry of financial services. It is thought that organizations must have a legal obligation with regard to their unethical behaviour and that they should be held responsible for any unethical behaviour. An important objection in this regard could be that introduction of legal requirement would not provide guidance as to how individuals should behave in order to be termed as ethical. Ethics are considered to vary according to different issues at hand and are considered as mostly a matter of judgement (Greenwood, 2002). The role of information technology has also assumed an important role in the delivery and access of financial services. It has provided people with the scope of accessing financial services without the help of brokers, financial advisers, and dealers. The dependence of people on insurance companies, financial services personnel, and fund manager has decreased to a considerable extent with the advent of information technology with regard to financial services. The organizations operating in the industry of financial services must place the interests of clients above their own interests. They should carry out transactions in the best manner possible given the market situation, current knowledge, and other factors. Discretion and caution should also be exercised by organizations while they seek to serve their consumers in an efficient way (Griseri and Seppala, 2010). The guidelines and limits that are set by consumers should be strictly observed by the organization and they should focus on the client’s overall portfolio. Intermediaries that are operating in the sector of financial services must not consider any trade as an isolated event. They must choose to treat all clients in a fair manner. They should not focus on offering benefits to certain clients at the expense of other clients. However, fair treatment in this regard does not imply providing equal treatment to all consumers. There may be existence of a large number of clients who receive other benefits, lower commission, and better service in a way that do not have a negative impact on the interests of other clients. Different clients can receive different levels of service but that should not negatively impact the interests of other clients. If an intermediary is in the process of providing different levels of service, he/she must clearly state such service levels. Intermediaries operating in the industry of financial services should not focus on selective disclosure and it is considered as unfair (Toten, 2006). They should not make available information to certain clients earlier while disclosing such information at a later date to some other clients (Heath, 2006). Such acts are not permitted and are considered as discriminatory. The organizations that are operating in the industry of financial services must provide primary as well as secondary offerings to all their clients suitable to their investment choices. They should not consider taking advantage of their industry position and their knowledge in an attempt to exploit their clients. Manipulation of market is considered to be an illegal activity with the sole aim of misleading the participants of market. It is considered to be involved with the selling and buying of same securities such as to increase the volumes that are considered to be traded. It also involves the practice of spreading information considered as false in an attempt to mislead market participants such that they undertake transactions which they are considered to not have undertaken under normal circumstances. Moreover, transactions that are considered to artificially distort volumes or prices leading to a false impression of price movement or activity are considered to be unethical and hence considered as not allowed. The translation of principles into practice with regard to ethical issues is considered as very challenging for organizations and can vary from organization to organization. Certain suggestions in this regard are as follows: I) Cultural change: The impact of corporate and professional culture acquires more importance as people tend to adapt to a profession and also workplace. Companies tend to have a set of values, norms, and beliefs that are considered to be distinct and this separates it from other organizations. These differences are sometimes considered to be as distinct as the national culture. This reflects that the behaviours and leadership styles that are adopted by an organization are culture bound. If a cultural change is to occur with an organization, the top management of an organization should take the main initiative in this regard (Schein, 1992). The responsibility for cultural change should not be delegated to organizational members. The board must understand its importance and implement an ethics policy. It should also stay committed in this regard and monitor the effectiveness of such a policy. II) Codification: There are numerous financial organizations that have already in place codes of ethics and require their employees on a consistent basis to certify that they have read such codes of ethics and have complied with it. However, it is considered that having only a code of ethics in organizations is not enough. Financial organizations in this regard should focus on periodical review of code of ethics. They should address such factors as how consumers and not just only shareholders should be protected. They should go beyond to comply with the regulations and laws in this regard. III) Education: Organizations operating in the industry of financial services must stay committed to conduct regular trainings with regard to ethics in all areas where there is significant potential for conflict of ethics and interests of business such as to develop ethical sensitivity. It is considered as very difficult to change the direction in which individuals act and think, but education is said to play a very important role in this regard. IV) Adjudication and monitoring: Organizations operating in the industry of financial services must have appropriate systems in place to monitor compliance with existing regulations and laws. They must also try to resolve questions with respect to uncertainties. Organizations should conduct efficient reviews such as to determine whether their systems enable proper resolution and adjudication of unethical behaviour. They should also determine whether their systems identify in a proper manner unethical behaviours and also detect technical non compliance. Organizations operating in the industry of financial services should ensure that there is proper mechanism in place such that employees can discuss their ethical dilemmas and at the same time report unethical behaviour without running any risk of being penalized. V) Secondments: The secondment of organizational members in business roles and into compliance functions could go a long way in aligning business interests with compliance/ethics. If this is made compulsory with regard to development of career, it can be considered as a potential source to infuse ethical responsibility in those persons who are looking for senior management positions in an organization. Organizations as well as approved persons are continuously subject to various regulatory duties. But it is very difficult to determine the balance of responsibility between the two. Organizations are considered to be mainly responsible for the actions of their employees. Organizations in this regard need to encourage employees to take more responsibility for their attitudes with regard to ethics. But the determination of the extent of enforcement and supervision with regard to behaviour of employees is the main question that needs to be answered by organizations operating in the industry of financial services. It is considered to be of immense importance to know the cultural values of an organization and the views of employees in this regard such that senior leadership of an organization can focus on a more intense discussion on organizational values that are considered to support success (Stephenson and Bradley, 2009). Such values are considered to form the main basis of code of ethics for an organization. They are considered to be used in a wide manner in making correct decisions and in recruitment of right people for an organization. They are considered as the road map of success for an organization. Conclusion It is considered that non compliance to higher level of ethics has the potential to lead an organization to large losses including bankruptcy. The main issue in this regard is not to make rules stricter but to ensure compliance and adherence to the standards that are developed. The implementation of ethical standards across the financial services industry is considered to have an important influence in deterring of unethical means and to promote appropriate behaviour. But what it takes to be ethical is considered as not that much clear to individuals in an organization. It is advocated that there is an urgent requirement for introduction of more significant legislation in the industry of financial services. It is thought that organizations must have a legal obligation with regard to their unethical behaviour and that they should be held responsible for any unethical behaviour. In this regard, it can be said that ethics are considered to vary according to different issues at hand and are considered as mostly a matter of judgement. The organizations operating in the industry of financial services must place the interests of clients above their own interests. They should carry out transactions in the best manner possible given the market situation, current knowledge, and other factors. Intermediaries considered to operate in the sector of financial services should not consider any trade as an isolated event. They must choose to treat all clients in a fair manner. Organizations need to have clear remuneration structures to ensure that ethical conduct is rewarded in a proper manner. References Beugré, C.D. (2007). A Cultural Perspective of Organizational Justice. New York: IAP. Booker, J. (2006). Financial Planning Fundamentals. Toronto: CCH Canadian Limited. Dartey-Baah, K. (2011). The impact of national cultures on corporate cultures in organisations. Academic Leadership Journal, Vol. 9(1), pp. 12-15. Greenwood, R. P. (2002). Handbook of Financial Planning and Control. London: Gower Publishing Ltd. Griseri, P. and Seppala, N. (2010). Business Ethics and Corporate Social Responsibility. London: Cengage. Heath, J. (2006). Business Ethics without Stakeholder. Business Ethics Quarterly, Vol. 16(4), pp. 533-537. Mintzberg, H. (1994). Rethinking Strategic Planning: New Roles for Planners. Long Range Planning, Vol. 27(3), pp. 22-30. Schein, E. (1992). Organizational Culture and Leadership: A Dynamic View. San Francisco, CA: Jossey-Bass. Stephenson, C. and Bradley, H. (2009). Business in Society. London: Polity. Toten, M. (2006). Financial Planning. Melbourne: Career Finance. Read More