How the finance industry can reduce unethical behaviour

September 22, 2016 Stephen Mulrenan

Questionable sales practices at Wells Fargo are under the media microscope, and the recent testimony of chairman and CEO John Stumpf before the United States Senate Banking Committee has simply added fuel to the media fire. The sales and compensation structure at the San Francisco-based bank, which allegedly incentivised staff to engage in deceptive and abusive practices, is currently being investigated by United States federal prosecutors.

Wells Fargo has been fined US$185 million to settle charges that thousands of employees secretly opened unauthorised customer accounts in order to meet sales targets, and Stumpf’s recent suggestion that it was all down to a few “bad apples” has once again raised the issue of ethics in the finance industry.

A recent survey of banking and financial services practitioners across the Asia Pacific region has shown that the practice of mis-selling to customers is considered by many as the most unethical of questionable practices in the sector.

Chartered Accountants Australia and New Zealand (CA ANZ), which is a member of the International Federation of Accountants and has more than 120,000 members, this week launched the results of its recent examination of the structural, social and individual factors endemic in the industry that have had both conscious and unconscious influences on ethical decision-making.

Entitled ‘A Question of Ethics: navigating ethical failures in the banking and financial services industry’, the Paper reports on the findings of a survey of 705 banking and financial services practitioners across Australia, New Zealand, the United Kingdom, Singapore, Hong Kong and Malaysia.

To draw attention to the Paper’s launch, the professional body hosted a panel discussion in Hong Kong to consider, among other things, whether ethical failure could simply be blamed on a few “bad apples” or whether there were wider issues within the system. “There’s no right way to do the wrong thing,” said the body’s head of members, Simon Grant, in his opening remarks.

The issue of mis-selling still resonates in Hong Kong, where many retail investors were never properly compensated for the losses incurred from their investments in Lehman Brothers-related minibonds. Those losses ultimately totalled HK$20 billion (US$2.58 billion), with many inexperienced investors subsequently complaining to bodies such as the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) that they were mis-sold the products by their local banks.

Speaking on this week’s panel, HKMA head of risk management and compliance Kim Chong said: “Banks in a global sense need to win back confidence through good ethics. There is still too much emphasis on short term profits and results. This sort of mindset needs to be changed for confidence to be regained in the sector.”

The Paper examines how and why mis-selling occurs with such regularity in the finance industry as well as six other commonly found but ethically questionable practices. They are: compensation structures and moral hazards, market rigging, data privacy, risk-based profiling, tax avoidance, and ‘clipping the ticket’.

Sitting alongside Chong on the panel was Angelina Kwan, managing director and head of regulatory compliance at Hong Kong Exchanges and Clearing Limited. She said: “Ethics is so important if we are to bring customers back to financial institutions following the global financial crisis. Ethics in business should be even more important as we go into a period of uncertainty.”

Fellow panelist Jamie Allen, secretary-general at the Asia Corporate Governance Association (ACGA), added a systemic point of view to the discussion. “Companies behave badly if there’s poor regulation,” he said. “You cannot solve the problem of unethical behaviour through self-regulation.”

Citing an occasion when he was given an iPad as a gift at an accountants’ event, only to immediately arrange for it to be returned in a very transparent manner due to it surpassing the Association’s monetary cap, Allen added: “To teach ethics effectively, you have to have clear, written policies.”

Wayne R Porritt, chief risk officer for Greater China and North Asia at Standard Chartered Bank, was the sole representative from the much maligned sector at the Paper launch. His institution operates across 70 countries, all of which have different customs, cultures and standards. “I do believe that ethics and capitalism can go together,” he said.

Agreeing with Allen on the importance of regulation, Porritt added: “I’m a firm believer that we must also take responsibility for our own ethics and behaviour.”

Porritt told the audience of CA ANZ members that Standard Chartered CEO Bill Winters was very vocal when promoting an ethical culture at the bank, and used every opportunity to make sure that his message was being received.

Winters’ initiative perfectly demonstrated the clear conclusion from the panel discussion and indeed the Paper: if the finance industry is to successfully tackle unethical behaviour, it is vital that institutions put into practice that much-used phrase of “tone at the top”.

“Leaders must walk the talk,” said Grant. “They need to be trying to identify ethical hotspots and plan around those hotspots.”

Kwan, who was hired by Hong Kong Exchanges and Clearing Limited a year and a half ago to instill a culture of compliance, added: “Our management meets just on compliance issues, and this filters down which helps us to build a compliance culture. Good, talented people are now asking questions about compliance and doing the right thing, which they may not have thought of before.”

According to CA ANZ’s findings: “Any attempt to improve ethical behaviour in the banking and financial services industry will only be successful if all of the factors that influence practitioners in the performance of their roles – both conscious and unconscious – are recognised and addressed.”

Seeking to promote debate among key industry stakeholders, as well as to challenge organisations to develop comprehensive, evidence-based ethics programmes, the Paper concludes by offering a number of what it describes as “culture-shaping interventions”. These include:

  • Harnessing data analytics to measure and reward non-financial performance
  • Engaging in conscious, principled reasoning: focusing on explicitly stated non-negotiable principles instead of cost-benefit calculations
  • Reducing the risk of insularity and groupthink by encouraging a diverse range of views, from team to board level; and
  • Making ethics part of the everyday conversation – looking at how tools such as ‘ethical moments’ and decision-making frameworks can help individuals to prioritise ethics.
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