Major Cause of Improper Conduct Financial Intermediary - Case Study Example

Major Cause of Improper conduct Financial Intermediary Name Professor Institution Course Date Major Cause of Improper conduct by Financial Intermediary Introduction In the previous three decades, conduct of financial intermediaries has drawn a lot of public interest due to its obvious significance for the economic and social health of firms and general society (Arjoon 2005, p.3). The news in of the previous four years has depicted a distressing narrative of improper conduct or lack of ethical conduct by a systematically significant UK financial intermediary. In the period, one of the financial intermediaries which have been strongly mentioned in misconducts is the Royal Bank of Scotland in the UK. Sanusi, Rameli & Isa (2015, p.108) opined that their conduct has adversely affected societal stakeholders and investors hence lowering thus lowering their confidence. In this essay, the paper will explain the major causes of improper conduct by a systematically significant UK financial intermediary, Royal Bank of Scotland. The essay will focus the company’s mis-selling of the payment protection insurance. Some of the causes that will be discussed include compensation structure, vulnerable clientele and firm culture. The essay will also discuss how societal stakeholders could be adversely affected by such behaviors. Mis-selling is a morally questionable practice in which a salesperson or business mislead or misrepresent an investor or societal shareholder regarding the product or the service features (Investopedia 2016). Mis-selling of a financial product is misconduct that many financial intermediaries have been involved with due to different reasons. According to Financial Times, studies carried by established the mis-selling of the payment protection insurance by several UK financial intermediaries which was worth £37.3bn (Dunkley, 2016). One of such financial intermediaries was Royal Bank of Scotland, which high mis-sold, the payment protection insurance to several clients including ones in the US. In 2016, Financial Times found that Royal Bank of Scotland had agreed with National Credit Union Administration Board to compensate $1.1bn in order to settle its legal case in the United States for supposedly misspelling the mortgage securities prior to the economic crisis (Arnold and Dunkley 2016). The research by Financial Times established that RBS had actual pay up to £6.5bn for its misconduct charges yet its shareholders has never received any dividend from the financial crisis time. Studies have found out that financial intermediaries that engage in misconduct or fraud are often encouraged by need or greed (Reurink 2016, p.16). Palmay and Di Lorenzo (2012, p.9) argued that compensation structure created by a financial intermediary offers an extra drive for the company to involve itself in fraudulent behavior or misconduct. The reality that a Royal Bank of Scotland broker or payment protection insurance salesperson gets the commission on each sale, an opportunity is created for him or her to increase the number of sale on the particular account (Wells 2001). Furthermore, some Royal Bank of Scotland insurance sales person get different rates of commission, reliant on the form of the securities they sale. Such situation also creates the opportunity to change the account features towards the investment that yield high commissions. Palmay and Di Lorenzo (2012, p.9) contended that this form of the compensation structure may put the interest of sale company or salesperson and that of a customer at odds in their relationship. This is what happened at Royal Bank of Scotland when selling payment protection insurance. Boateng, Boateng and Acquah (2014, p.44) asserted that individuals selling the insurance may be driven by greed or need to earn high commissions, they try to only communicate attracting features which may lure the customer and leave some information to enable the customer buy. However, this cause of misconduct conduct entirely be blamed on one financial intermediary and in this case Royal Bank of Scotland. The insurance sector players contributed to creation of such compensation structure in the previous century making hard for single financial intermediary to change it. The second argument of the cause major cause of improper conduct by financial intermediary is the vulnerable clientele (Palmay and Di Lorenzo 2012, p.10). The inadequacy of complexity and dependency of customers of the financial intermediary also sometimes allures the company to involve itself in misconduct. Foreigners or new immigrants who are unfamiliar with the company’s products are often in danger of dishonest financial intermediaries (Egan, Matvos & Seru 2016, p.12). Some sales people can take advantage of the foreigner to enrich themselves without even forwarding clients application to the financial company. Similarly, Egan, Matvos & Seru (2016, p.12) claimed that insurance sales people take advantage of the clients’ unfamiliar with the product or depend on them for good faith not to issue the policy. This could have been the case with Royal Bank of Scotland which miss-sold payment protection insurance to several US customers. However, from another ethical perspective the actions of the firm may not be wrong. Insurance is a game of chances which is not only done out of greed but also by need. Most of the insurance policy sellers are paid through commission and they income highly depends on how people are sold to (Palmay & Di Lorenzo 2012, p.10). Hence the decision to sell to vulnerable clientele may have been driven by need to get more profits to meet his personal needs. Furthermore, the ethics of selling to vulnerable clientele depends on individual. Some use consequantialist approach where consequences for their actions are how they judge what is right or wrong (Coughlan 2005, p.46). Palmay and Di Lorenzo (2012, p.11) found out that firm culture can also influence its involvement in misconduct or fraud. Hamilton and Gabriel, (2012, p. 116) argued that if the employees are allowed to deviate from ethical codes, internal policies and external standards, and misbehavior are not strictly punished; there are high chances that the staffs will likely be involved in misconduct. The research shows that to some extent Royal Bank of Scotland organizational culture had condoned misconduct hence its involvement in mis-selling of the payment protection insurance to the US customers. Dunkley (2016) stated that Royal Bank of Scotland had also been involved in misconduct such as mis-selling of interest rate which happened from 2012 to 2015. Palmay and Di Lorenzo (2012, p.11) posited that in situation where the company has been dishonest, if the company had internal controls and effective policies on misconduct had been adhere such fraudulent act would have not been successful. Nevertheless, firm’s culture is influenced by industrial structure and culture. Financial industry both banking and insurance has highly become competitive and now market players compete for profits. As such, the company’s culture of misconduct could have been influenced by industry culture. How Societal Stakeholders could be adversely affected by Such Behaviors The misconduct of Royal Bank of Scotland had left adverse impact on the Societal Stakeholders including the creditors, shareholders, communities, employees and investors among others (Sanusi, Rameli & Isa 2015, p.108). The company’s misconduct had been discovered and reported to the department of justice for prosecution. The by Financial Times’ Dunkley (2016) established that RBS has been forced to pay up to £6.5bn for misconduct charges in the recent times. This situation has happened when its shareholders are yet to get their dividend from the financial crisis time. According to Picou and Rubach (2006, p.57), it implies that financial intermediaries’ misconduct can lead to stakeholders’ financial loss. Apart from keeping money, people save their money with financial institutions and expect profits in the form of dividends. If this is not forthcoming, they become financially and emotionally affected. Without getting from their savings, they have to postpone projects that they had planned with the money (Agrawal & Chadha 2005, p.379). Similarly, when shareholders and depositors are told of the losses they feel stressed and may get mental illness. Customer save their money in the bank and also apply for insurance to secure their future. However, when the people they trust with their money lose it court charges, they become stressed due to uncertainty. The society may not trust the company hence reputation loss (Palmay & Di Lorenzo 2012, p.12). Other companies banking with also get adversely by the misconduct of the financial intermediaries. For instance, when RBS is forced to pay large sum to misconduct charges, he cannot meet its financial obligation such as lending money to companies. As such, companies which need loan may not continue their operations. Conclusion Misconduct or dishonesty of financial intermediaries has become a big threat to the existence of such companies in the near future. The consequences of financial intermediaries have shown that their existence highly depends on their conduct. Despite the risks of consequences, some financial institutions still find themselves involved in misconduct due to need or greed. The employees or sales persons for major financial intermediaries like Royal Bank of Scotland have been taking advantage of compensation structure, vulnerable clientele and firm culture to involve in misconduct. Even the financial institutions thrive in dishonesty, they must know that they are adversely affecting the societal stakeholder and at long last hurt their reputation. References Agrawal, A & Chadha, S 2005, ‘Corporate Governance and Accounting Scandals’, The Journal of Law & Economics, vol.48, no.2, pp.371-406. 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