A Critical Analysis of the Efforts Made in Embedding Ethical Approaches in Financial Service Regulation

Introduction

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Global financial crises are characterized by high interest rates, inflation, and defaulting on mortgage loans (Laudon and Traver, 2007, p. 5). Such crises usually occasion limited lending and solvency crisis. According to Argandona (2012), the 2007 financial crisis had economic, social, psychological, political, and ethical causes (p. 2). The global financial crisis in 2007 occurred mainly due to many unethical mistakes among the people who made critical decisions (Argandona, 2012, p. 1). Moral mistakes can yield economic and political mistakes among the key agents in the crisis. A study by Weiss (2014) revealed that in the case of 2007, the financial crisis took place because of greed and excessive desire for money (p. 917). In the wake of the crisis, certain managers failed to make decisions that could hurt their careers even if they were right. Consequently, they chose their individual interests at the expense of the larger public interest. Argandona (2012) further noted that certain financiers, economists, and regulators exhibited pride and arrogance and were readily willing to lie (p. 2). Against this backdrop, most governments and regulators have designed policies that can promote good organizational culture and behavior. There is a growing need for corporate culture change evident in the increasing role of ethics in financial regulation. In this paper, a critical analysis of the efforts made in embedding ethical approaches in financial service regulation has been done.

The Need for Ethics in Financial Services Regulation

The effect of the global financial crisis in 2007 was devastating across the globe. The crisis revealed the interconnected nature of economies globally. According to the association of certified chartered accountants (ACCA), financial institutions in the world have become interdependent (ACCA, 2014, p. 1). In this regard, the transactions depend on trust and high moral systems. Good ethical practices help in bolstering the trust between banks and the public. The crisis in 2007 destroyed the trust between the financial sector and the public significantly (Cohen, 2015, p. 406). Ferrell and Fraedrich (2015) observed that the relationship between bankers and the public has not improved much since 2008 due to the emergence of more scandals (p. 11). Efforts aimed at rebuilding the broken relationship are taking place gradually. Thus, ethics must play a central role in fortifying the relationship. Business can only change if a strong ethical culture is embedded in the business practice by all stakeholders.

In a separate study, Black and Anderson (2013) observed that there should not be anything unethical in the financial services industry (p. 1). The authors justified this claim by stating that the industry offers services which are essential to economic and societal growth. Because of this role, high ethical standards help in sustaining business in the commercial sector. Thus, the financial service industry should seek to instill ethical values. Black and Anderson (2013) encapsulated these values in the subsequent paragraphs:

Financial service industry should not prioritize profits at the expense of other important considerations such as the reputation of the company. Black and Anderson (2013) noted that the growth of a financial institution does not take place by profits alone (p. 1). Instead, the growth can be determined by the number of customers who approve of the institutions values and ethical practices (Cha, Yim, and Lam, 2010, p. 49). The reputation of a firm is important for its growth and sustained success.

Corporate behavior should place emphasis on integrity and actions that not only promote but also enhance a clients best interests. Black and Anderson (2013) opined that without integrity, a firm might not achieve considerable growth and success (p. 2). Financial institutions should aim at delivering technical excellence to their clients. The use of technology in the financial service delivery is efficient and effective. It also enhances clarity, accuracy, and eliminates bias. Such qualities of a technologically-efficient financial service provide a basis for good ethical practice (Roman, 2003, p. 916). In cases of conflict between the institution and the client, the financial institutions must exercise good ethical principles in solving the area of conflict. In light of the preceding discussion, there is an increasing need for acceptable ethical behavior in the financial services industry.

A Critical Analysis of the Efforts Made in Embedding Ethical Approaches

Many governments across the globe are designing new policies that can help in producing sound ethical practices in the financial sector. In the United Kingdom, the Lambert Review proposed the formation of Banking Standards Review Council. According to ACCA (2014), the purpose of the council is to raise ethical standards within the banking sector and improve the behavior and competence of all banking stakeholders (p. 3). Regarding funding, the banks in the United Kingdom fund the Council. However, this funding model is likely to compromise the ability of the Council to exercise its mandate with impartiality.

The Council should be an independent body capable of discharging its functions without undue interference from the banks (ACCA, 2014, p. 3). In this regard, the funding model does not satisfy the need for a sound ethical evaluation of the behavior in the financial sector. A study by ACCA (2014) revealed that the Council might not function effectively because it is limited only to operations within the UK (p. 3). Thus, it may not extend its supervisory role to banking operations outside the United Kingdom. Despite the criticisms against the Banking Standards Review Council, there has been greater success in the financial service performance in Britain.

The International Monetary Fund reported that Britain led other developed economies regarding economic recovery rate in the post-crisis period (ACCA, 2014, p. 3). The country performed well by indicators such as unemployment, which fell low since 2008 and the rise of small businesses which had the potential of generating about 2 million new jobs.

Education

Education of employees on ethical requirements and expectations reduces incidences of ethical noncompliance. Most organizations have recognized the role education plays in equipping employees with the desired ethical values and practices (Black and Anderson, 2013, p. 4). While carrying out the education of employees, firms highlight potential areas of conflict and instill ethical sensibility in their employees. Although education may not entirely embed sound ethical practices, it is a useful tool in influencing the right ethical outcomes.

Codification

Codes of ethics govern financial institutions. Such codes bind every employee to conform to work obligations in the organization. Employees are deemed to have read and understood the rules and regulations. Roman (2003) observed that it is not enough to have a code of ethics without carrying out an evaluation regarding their suitability (p. 921). The code of ethics prescribes protection of consumers and encompasses ethical principles that guide employees on day to day.

Motivation as an Incentive

Motivation can be used to promote good ethical behavior. According to Shaw (2016), many people and organizations feel motivated when they satisfy the shareholders and clients. Motivation is derived when individuals and firms compete against their peers in the industry. Also, motivation is achieved when the organization maintains a good reputation and public image. In this regard, a good ethical behavior may necessitate the desired change in an organization because it offers benchmarks for progress. Good reputation, healthy competition with peers, and satisfaction of shareholders act as suitable incentives that can promote ethical practices.

Weiss (2014) acknowledged the significance of motivation in enhancing good ethical behavior. The author posited that motivated employees work in the best interest of an organization (p. 32). In this regard, they are likely to evade the temptation to engage in unethical practices such as fraud and money laundering. When employees in the financial sector embrace good ethical practices, the public image of the institutions they represent improves. Weiss (2014) emphasized the use of negative reinforcement in discouraging deviant behavior in institutions (p. 43). Thus, individuals involved in ethical malpractices should be named and shamed in public to discourage their behavior.

Hierarchical Embodiment of Cultural Change

Embedding ethical approaches requires a cultural change in the organization. Organizational culture can only be adopted if it is stimulated in order of the hierarchy. Dudley (2014) stated that cultural change should start from the top to the bottom (p. 17). In this regard, senior managers cannot delegate the responsibility of initiating cultural change to the junior officers. Most organizations have policy dictates formulated by the board. The boards not only monitor the policies but also evaluate them to determine their effectiveness. The members of the board who violate the policy are used as examples for the rest if their behaviors fail to meet policy expectations. In this regard, the role of the boards in promoting good ethical approaches cannot be gainsaid.

Monitoring and Adjudication

Monitoring ethical behavior among stakeholders in the financial services requires systems. The systems help in achieving total compliance in light of the existing relevant laws (Black and Anderson, 2013, p. 4). In the case of uncertainties, the system can help in solving any questions that may arise. In short, the systems for compliance should be able to adjudicate and solve conflicts. The system, in any organization, should allow for the discussion of ethical dilemmas. These systems include clear rules and regulations that govern the conduct of every stakeholder (Roman & Luis, 2005, p. 477). Every member of the organization is bound by the rules which have consequences of violation. Monitoring and adjudication help an organization to entrench good ethical practices among its stakeholders.

Effective Interaction Between Individuals and Organizations

The interaction between individuals and organizations is important when building good ethical behavior. Black and Anderson (2013) posited that behavior could either be shaped by internal factors or external factors (p. 2). An individuals behavior may be influenced by their internal senses or outward motivation. In organizations, behavior is shaped by the existing structures, culture, and systems (Carroll and Buchholtz, 2014, p. 23). Most organizations are creating systems and structures that promote good ethical practices.

Organizational structure allows for consultation in order of hierarchy. A typical organization is headed by a Board, which supervises the management. The board may appoint and dismiss the chief executive officer at its discretion (Weiss, 2014, p. 12). In most organizations, several directors of important corporate departments answer directly to the chief executive officer. The structure is designed in a way that facilitates easy interaction and coordination among various departments. Organizational structures, systems, and culture aim at achieving a high moral responsibility for every member.

The existence of organizational structures, systems, and culture may not be the solution to ethical practices. Weiss (2014) revealed that, due to rigid organizational structures, some communication might not be understood by ever...