Ethical Issues Facing Organizations in the Financial Sector in the UK - Case Study Example

Ethical Issues facing organizations in the Financial/Banking sector in The UK Student: Tutor: Course: Date: Table of Contents 1Speculative banking 3 2Exploitive interest rates and interest rates-based products 5 3Financing Entities with little or no concern to environmental and social sustainability 6 Conclusion 7 Recommendations 8 References 9 Ethical Issues Facing Organizations in the Financial/Banking Sector in the UK Ethics can be defined as the moral principles and rules that govern a person’s or group’s life[Rob01]. Business ethics is the application of a moral code of conduct to the strategic and operational management of a business (Applied Corporate Governance, 2014). The banking sector has more than any other industry come under close public scrutiny due what many consider unethical conduct. Banks, private equity firms, insurance companies and other organizations in the financial sector are generally regarded as profit-oriented entities with no any regard to social and environmental impact of their activities. In the UK, Ethical Consumer, a not-for-profit magazine lists Coventry, Cumberland and Leeds as the top ethical banks. According to the magazine, the three banks scored 13.5 out of 20 mostly because they do not get involved in controversies such as food speculation, funding arctic oil exploration, and complex but exploitive financial structures. The Co-operative Bank in the UK is ranked as one of the many unethical mainstream banks in the country (Murray, 2013). To the consumers and society at large, ethical priorities and areas of concern in the financial and banking sector include but not limited to; speculative banking, exploitative products and financing of controversial projects[Fid10]. In this paper, issues in the mentioned areas of ethical concern will be discussed exhaustively. 1 Speculative banking As banks compete to meet profit targets set by the executives and satisfy the shareholders, they engage in very risky investment deals that more often than not lead to huge losses to the shareholders. Engaging in excessively speculative investments and irresponsible credit lending practices is morally unacceptable as it results in loss of money and disruption of economic growth just like it was the case with the financial crisis in 2008[Fid10]. Banks have a responsibility to do a background analysis on the risk level of an opportunity before committing customer’s money into a short-term scheme. In most of the short-term dealings, it is the banking executives who make the most profits and not the customer. The 2008 financial crisis exposed the irresponsible speculative banking in sub-prime mortgages, adjustable-rate-mortgages and other high risk projects that do not go through the due process of analysis (BBC, 2013). The banks worsen the situation by providing scanty details on how client’s money is being invested in different sectors. Some banks provide investment information to their clients in a rather complex manner to a layman with a view of hiding the negative results from irresponsible investment decisions[Fid10]. After the 2008 crisis, the banking and finance sectors are under close scrutiny by regulatory authorities mainly in Europe and North-America this is meant to ensure that banks are more responsible in handling clients’ wealth to avoid losses to the latter (BBC, 2013). In addition, irresponsible investing practices have proved to have a destructive implication on the economy considering the effects of the 2008 financial crisis. The government in the UK set up an independent commission to regulate investment activities in the banking sector. Banks are also required to separate their retail and investment arms completely to avoid customer losses. Banks are also required to maintain a sufficient capital buffer to absorb losses in case of poor investments (BBC, 2013). These regulations will, therefore, go a long way in protecting the economy from artificially created shocks. 2 Exploitive interest rates and interest rates-based products Recently, consumers have shown more resentment for banks that offer low interest rates for deposits, yet they charge as high rates for their loans in the market (Jones, 2013). This is morally unethical considering that low interests result in impoverished depositors while the bankers make super normal profits particularly in high risk markets in Asia and Africa[Fid10]. To handle money as a commodity with no ethical implications and impacts is to overlook moral issues (Fidelis International Institute, 2010). The Co-operative bank in the UK does not offer any interest on money deposited in its current accounts. Coventry and Nationwide banks offer between 1% and 5% conditional interests on deposits of more than 1000 pounds a month. Banks are more willing to give an interest rate of up to 2% on money deposited in savings accounts. Charity bank, Ecology building society and co-operative bank offer between 1.5% and 2% for deposits made in their savings accounts (Murray, 2013). Apart from the low interest rates paid to depositors, banks offer predatory interest rates on loans advanced to borrowers. Additionally, some products such as payment protection insurance (PPI) are used by banks to exploit consumers[Fid10]. Before the ban on PPI, UK’s major banks had sold more than 10 million Policies to their personal loan customers. The insurance was worthless and unnecessary to the customers but the banks encouraged them to pay high premiums on the same. Barclays bank was at the centre of the controversy which led to resignation of its CEO Bob Diamond. Senior executives were paid high bonuses for promoting PPI to the public. The Financial Services Authority has since imposed huge fines and conditions to several bankers in order to compensate consumers and uphold morality (Kollewe, 2010). Other products such as mortgage endowments, overdraft charges and interest rates swaps are viewed as morally unacceptable but profit-oriented bankers engage in them. The image of Co-operative Bank of the UK as an exemplary bank was badly tarnished when a deficit of 1.5 billion Euros was discovered in the bank’s balance sheet. In addition to this 70% of Co-operative bank in the UK was subsequently sold to American Hedge Funds which is a profit driven company creating more questions about the banks ethical standing (Jones, 2013).This went contrary to the bank’s policy of being customer driven in addition to the bank being involved in a number of scandals(Jones, 2013). When a bank offers credit cards or loans to people who will have difficulty paying or even selling highly profitable but unpredictably expensive financial products[Fid10]. Some banks have been accused of excessive credit card marketing in communities with less credit card penetration. The marketing campaigns encourage irresponsible consumerism using credit cards and charge high interests on credit card expenses. This can be considered a morally unacceptable profit-oriented agenda by the banks. In the UK, 30 million customers have credit cards accounting for 56.9 billion pounds in debts (Reuters, 2014). 3 Financing Entities with little or no concern to environmental and social sustainability Banks and private equity firms have been accused of funding or helping some socially and environmentally irresponsible firms to raise capital. These companies are mostly in the third world. Such companies have been accused of child-labour, environmental degradation, tax avoidance and unfair working conditions. Arctic Oil exploration projects have been viewed as major pollution source in the affected regions. Despite this concern, banks continue to fund oil exploration companies due to the high profits generated from the interests charged[Fid10]. Bankers do not look into the social and environmental implication; the risk-return ratio and profitability become more important than social or environmental sustainability[EIR14]. Banks are ethically irresponsible by helping such companies to expand and sustain their activities. A report by EIRIS, found that 49% of British adults agree that their bank should lend to businesses that meet minimum ethical, social and environmental standards[EIR14]. Conclusion An economy’s financial markets are critical to its overall development,the banking systems and stock markets enhance growth which is one of the core area in poverty reduction.Presence of a strong financial systems in a country provides reliable and accessible information that lowers the transactions cost which leads to better resource allocation and economic growth in a country To handle money as a commodity with no ethical implications and impacts is to overlook moral issues. According to Ethical Investment Research Service (EIRIS), 2013, 49% of people agreed that their banks should only lend to businesses which at the very least meet the minimum ethical social and environmental standards required. This shows that a significant number of customers are concerned about the environmental, social and ethical issues with regards to their banker’s activities. Customers and regulators are now more sensitive and concerned about usuriously practices by banks such as high interest rates, huge bonus to executives for promoting exploitive products and irresponsible lending. customer’s loyalty to a bank is also affected by how much the bank is seen to be ethical (Ethical Investment Research Service, 2013).In the UK 46% of the people surveyed said that they would trust their bank more if it made public details pertaining to their ethical, social, and environmental lending policies and the difference they had made practically. Recommendations The UK Government needs to embolden the regulatory function of the Financial Services Authority (FSA) in order to control irresponsible lending by bankers. The authority should also monitor the conduct of senior executives in the banking sector to eliminate usuriously practices such as exploitive products to consumers. The various players in the financial sector need to come together and form an umbrella organization to develop a social and environmental sustainability policy to guide its members on terms lending to companies all over the world. These policies need to be legally binding and enforced by trade and regulatory authorities across countries. Fines can be imposed on bankers that violate codes in social and environmental sustainability policies. Such measures will deter major banks from financing unethical projects and organizations just for profit considerations. Consumer bodies need to put more pressure on legislators to come up with laws that protect customers in the banking sector from high interest rates and credit charges. Ethics in itself is a complex field of philosophical study with divergent views on what ethics really is and its applicability to human life[Rob01]. However, Regulations and enforcement of laws as suggested above can uphold ethical practices in the banking sector. References BBC (2013 February 4) Banking reform: What has changed since the crisis? BBC News [Online] Available from: http://www.bbc.com/news/business-20811289 [Accessed 2014 November 25] Rob01: , (Zeuschner, 2001), Fid10: , (Fidelis International Instoitute, 2010), EIR14: , (EIRIS, 2014), Read More