Application of financial_services

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Roll no: 2012090 MMS II Finance A

Business Ethics and Corporate Governance – Assignment 01

Ethical Practices of Financial Services Organisations

It should perhaps be said from the outset that there need not be anything intrinsically

unethical about the financial services organisation. The financial services organisation

provides essential services, which are fundamental to support a modern economy and society,

such as safeguarding money and providing domestic lending. However, given the vital role

that the financial organisations play, the moral hazards may be more acute and it is therefore

logical that the financial organisations and the financial services industry as a whole should

be subject to higher ethical standards than the other commercial sectors.

The question is what these ethical standards and practices should be and how we judge them,

and what we are ultimately aiming for is central to the theme. When an aspect of the law

needs to be determined, there is a mechanism for deciding what the outcome should be. But

how should ethics and its grey areas be determined? Should public opinion be the point of

reference? To do so could be a dangerous approach as public attitudes change over time,

ethics is not a static concept. While we may agree about the norms at the higher level, how

they are applied in practice will be hotly contested and bitterly fought. We can already see

this in the retail sector, where the line between ‘mis-selling’ and ‘mis-buying’ can be closely

contested. What constitutes a ‘mis-sold’ product for one person may be seen a fair transaction

for another. Clients and shareholders can also push firms to conclude transactions or pursue

profits at the expense of ethics.

The fundamental principles or practices that any financial services organisation should instil

in are as follows:

 Not pursuing profits at the expense of everything else including reputation of the

organisation.

 Behaviour that is marked by integrity, fair dealing and acting in the best interests of

the clients.

 Commitment to and delivery of the technical excellence.

 Prioritising good ethics over the instructions of clients where they conflict.

 Looking beyond the question of what is legal, that is being prepared not to act in a

certain way on the basis that it is unethical, even though is legal.

 Consistent application of positive ethical behaviour across the industry.

Financial institutions -including banks of all sorts, credit agencies, private equity firms,

pension funds, insurance companies, and the like- have long been considered by most people

to have no other object in view than the creation of wealth. The performance of financial

institutions is therefore measured solely on the basis of their capacity to maximize financial

assets, that is, it has been measured with evaluation factors that review only their monetary

bottom-line results. How much return do they get on their investment decisions? How much

are they able to maximize the assets in their custody? How much profit can they derive from

the loans and credits they subscribe, from the bonds they float, from the equity they

successfully issue on the financial markets? Banks are judged by their ability to develop

financial instruments such as complex derivatives and sophisticated credit schemes that help

Roll no: 2012090 MMS II Finance A

Business Ethics and Corporate Governance – Assignment 01

connect the money of investors with the companies in need of those financial resources in the

best possible way. In pursuing these ends, banks, and financial institutions in general, have

long defended the confidentiality of the information pertinent to their business, be it data

about their clients, the sources and the destinations of the economic resources they handle,

their credit-giving policies and procedures, and many more aspects of the banking profession

that tend to be little transparent and not very communicative about their way of doing

business.

Financial institutions have become very complex and sophisticated in the way they operate.

The products and services they offer tend to be more and more complicated. The ways they

invest resources, the way they design, promote, and implement credit facilities, all become

less evident year after year, and the speed at which they evolve is ever accelerating. This

complexity and sophistication of the industry is in part a response to the shifting and ever-

growing needs of the banks’ clients. Companies in need of financing, and of financial

services, tend to have more and more complex businesses with complex needs and

requirements of capital. Globalization also plays an important role. Banks’ customers often

do not have a localized headquarters but they operate virtually everywhere in the world.

Today, it could be argued, it is more difficult for banks to know in detail where these

customers operate and what exactly they do and how they run their businesses. Moreover,

clients change, merge, get acquired, move in and out of businesses and markets much more

rapidly than in the past. It is not only banks that change so quickly, but their clients, and their

clients’ needs also move and evolve at a higher speed.

Unfortunately, governments, regulators, and other institutions simply cannot cope with this

rate of evolution in a satisfactory manner. Banks are moving too quickly for the reaction-time

of governments and other organizations. As a consequence, many important issues are being

overlooked by the institutions charged with directing our societies toward the common good.

Were one to give only a superficial consideration to the financial institutions and the

implications of their actions in the world, one could erroneously conclude that money is just

another commodity being traded. There is a danger that money will be treated as just another

product that makes things possible, as a simple means to accomplish an end. However, such

an approach bears the risk of becoming a highly inhumane approach when we look it in

detail. Money is not just another commodity being handled. Money, both in the form of

credit and in the form of investments, makes a huge impact on the world. Money is a means,

not an end; but, it is a powerful means to do things and therefore evil use of money can

indeed create a considerably negative impact on our world.

Where money comes from, and the destination it might have (that is, the sources from which

it proceeds and the places where it ends up being used), should not be treated as “just another

business transaction”. Money, in all of its forms, has implications and consequences. The

things we do with money, and the things we allow to be done with money, are not irrelevant

from a moral and an ethical perspective. Money implies actions, money allows things to

happen, money promotes and enacts changes. Money is a very important, if not the most

important fuel for the happenings in the world. Money helps, money builds, money buys,

money creates and acquires, but money can also destroy, pollute, kill, and support evil.

Money should not be considered simply in terms of the percentage points being generated as

a return on an investment over a period of time. Given that banks are the official

intermediaries of money, we need to look at how they handle money and what they do with it.

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Ethical Practices of Financial Services Organisations It should perhaps be said from the outset that there need not be anything intrinsically unethical about the financial services organisation. The financial services organisation provides essential services, which are fundamental to support a modern economy and society, such as safeguarding money and providing domestic lending. However, given the vital role that the financial organisations play, the moral hazards may be more acute and it is therefore logical that the financial organisations and the financial services industry as a whole should be subject to higher ethical standards than the other commercial sectors. The question is what these ethical standards and practices should be and how we judge them, and what we are ultimately aiming for is central to the theme. When an aspect of the law needs to be determined, there is a mechanism for deciding what the outcome should be. But how should ethics and its grey areas be determined? Should public opinion be the point of reference? To do so could be a dangerous approach as public attitudes change over time, ethics is not a static concept. While we may agree about the norms at the higher level, how they are applied in practice will be hotly contested and bitterly fought. We can already see this in the retail sector, where the line between 'mis-selling' and 'mis-buying' can be closely contested. What constitutes a 'mis-sold' product for one person may be seen a fair transaction ...
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