Business Ethics

Lessons From The Banking Royal Commission

The Australian public have always suspected banks of behaving badly. The notion of bankers abiding a code of ethics has always been a bit of a joke, yet we implicitly trust them with our savings.

The current Royal Commission has laid bare just how bad the culture of the finance and banking industry (and their conflicted interests) has become.

Should we expect ethical business decisions from finance professionals? 

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Misconduct, Manipulation & Conflict of Interest

Officially titled 'The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry', it's an investigation that has taken years of political infighting, as well as public pressure, to get established in the first place.

So far the Commission has uncovered a level of fraud and unethical business behaviour that was probably greater than the skeptical public believed possible:

  • Forged/fudged documents for loan applications
  • Charging fees to deceased clients
  • Lying (repeatedly) to ASIC
  • And conflicts of interest that have barely been concealed in a system of “vertical integration” of providing financial advice to buy their financial products.

Despite claims from the banking sector that they are over-regulated as it is, the Commission has made it ubundantly clear that existing regulation and powers confered onto ASIC are inadequate.

The Role of Culture in Decision-Making

Scandals over the last three years have shown time and again that the banking industry has taken liberties with customers and ASIC (see Fees, Fines & Fraud, inset). The Royal Commission has been particularly effective at extracting damning confessions from top banking executives and directors detailing just how often companies misled ASIC.

When confronted with multiple examples of AMP misleadingly telling ASIC that its fee-for-no-service was a mistake, rather than internal policy, AMP’s head of financial advice, Anthony Hodge admitted, "I think they show a culture that’s not as robust as it should be.”

That was an understatement.

Policies and regulation can only do so much for an organisation. It's the people and culture of an organisation which ultimately guides how policies are implemented, or how regulation is abided by. 

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Shareholders v Stakeholders

The mantra of maximising shareholder wealth is instilled in business students across the world and repeated across boardrooms by rote as the guiding principle for decision-making.

Maximise shareholder value

Maximise shareholder value

Maximise shareholder value

The value is clearly in dollars, not purpose or meaning or impact or even status. It's a rather dry, outdated way of looking at a company's decision-making options.

Banks play a very public role and have a great responsibility in managing wealth and debt in our society. For this reason alone, they can no longer answer only to their shareholders. They must be answerable to the public, and the government regulator acting on behalf of the public, who are their stakeholders. 

Former CBA Board Director (and now erotic fiction novelist), Harrison Young, stated in 2015 that there was a need to illuminate the technical, ethical and psychological challenges in the industry:

"(B)anking is not as simple as it looks...(B)anks should not be profit-maximising institutions. They have duties to the community that oblige them to forego a certain amount of upside."

Regulate or Educate?

It's clear, even before the Royal Commission has ended, that regulatory reform is required. ASIC's limited powers to enforce a fingers-crossed promise from the banks time and time again, however, is proof that the internal workings of the banks themselves are at fault. Regulation will only help in retrospect unless the culture within financial institutions changes.

The corporate culture that has encouraged these institutions to charge customers for services not provided, to place customers in debt beyond their means, and to lie to the government regulator, is a toxic one.

While some have called for greater consumer education, the longer term, responsible solution points to finance professionals getting a better education in business ethics and ethical decision-making. 

Fees, Fines & Frauds

The finance industry has prior form.

August 2017AUSTRAC accused the Commonwealth Bank of breaching money laundering and anti-terrorism financing laws.

April 2016 - ASIC fined a subsidiary of Westpac $493,000 for breaching consumer protection laws.

April 2016 - ASIC sues against Westpac for unconscionable conduct and market manipulation.

March 2016 - ANZ to refund approximately $5m to 25,000 customers after failing to properly apply fee reductions and waivers.

March 2016 - ASIC imposes conditions on Macquarie Bank's Financial Services licence due to compliance breaches.

Still in March, ASIC finds that ANZ breached responsible lending laws. It also sues ANZ for alleged unconscionable conduct and market manipulation.

January 2016 - Westpac fined $1m for failures to make reasonable inquiries about some consumers' income and employment status before increasing their credit card limit.

November 2015 - CBA to refund approximately $80m to 216,000 wealth package customers as compensation for failing to apply fee waivers, concessions since 2008.

November 2015 - ANZ to provide $13m in compensation to 200,000 customers after failing to apply bonus interest earned on savings accounts.

October 2015 - Westpac to refund premiums to 10,600 insurance customers who paid for cover they did not need.

April 2015 - ANZ to reimburse $30m in fees to customers who were sold advice packages but did not receive services included in them. 

Business Ethics, Philosophy & Workplace Culture

It's Time for Banks to Grow Up

The ideologies and assumptions that have permeated the banking and finance sector need to be addressed. 

"Business tends to seek one rationalised conclusion at the expense of others. This closes opportunities, rather than opens them. Philosophy, on the other hand, can through critical reasoning continually question and rethink the assumed certainties and its basic premises." (Anders Poulsen)

It's time for the banking and finance sector to update their skillsets and add philosophy and ethical decision-making to the mix. This is something that Harvard Business School graduates have recognised through their MBA Oath. Business schools are slowly adopting ethics subjects (mostly as electives), because it makes good business sense to encourage critical and creative thinking.

It not only makes good business sense for the future VUCA (volatility, uncertainty, complexity, ambiguity) environment, but can also address the wider needs of the society in which they operate. In which they hold great responsibility. 

CSR, Not a Marketing Exercise

Executive director of The Ethics Centre, Dr Simon Longstaff suggests that it is in the banks legal interest to adopt ethical business practices, too. If financial institutions are promoting their CSR (corporate social responsibility) activities to enhance their reputation in the community, "it is actually counter-productive,” Dr Longstaff says, as, “people will see through the veneer”. It is misleading and deceptive to crow about CSR when the culture within banks has demonstrated such unconscionable and unethical behaviour as the Royal Commission has revealed.

So, will the banks grow up and think beyond their own needs to maximise shareholder value? Only time, and the powers bestowed on ASIC, will tell.

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