Topic: “Ethical Challenges in the Finance Industry: What must you do to prepare yourself for those challenges? Identify and examine some of the major contemporary ethical issues/problems in the finance industry and critically analyse some of the main ethical challenges that you would face when working in the finance industry. In your report you must consider what you must do to prepare yourself for those challenges.”
Executive Summary
This report discusses ethical challenges in the finance industry. The introduction of the financial industry and the likelihood of ethical challenges in this report are discussed. The financial industry with its major activities based on fiduciary duties should have more focus on ethical integration in the business activities. The various challenges faced in the form of misconduct, misrepresentation, insider trading, market manipulation, etc. are discussed. For eradication of such unethical activities and to prepare for the challenges posed by it, precautions and practices which can aid are suggested.
Introduction:
Any business needs ethics to run smooth and honest. Any individual in any field of life or career always has the opportunities to get advantages which come at the expense of someone or hurt them. The decision to forego such opportunities of gaining advantage strengthens the ethics of business.
The financial industry categorizes itself as a service industry. For being a service industry, one must need to provide a specific service against some compensation. The absence of clarification in this area may aid in sliding of this industry out of control and left at the mercy of the mass hysteria (Bonvin & Dembinski, 2002, p. 190).
In any career field has its ethical challenges. Ethical challenges in the field of financial industry affect everyone. The size of the industry gets it a lot of attention now and then. This industry is very profitable, very large and has about $50 trillion in the form of assets and has a growth rate of 8% (Federwisch, 2015). With this size of the industry, the lapses do happen. There can be various reasons and causes of such lapses.
Finance as a lifeline of any economy has been affected by many ethical issues. In the financial industry, with increasingly complex business activities, being ethical is not just a choice between right and wrong, but it is about confronting with your moral dilemmas. There would not be any other industry with more conflicting interests than the finance industry (Sporkin, 1994).
Financial crises are said to be the consequence of the greed and unethical behavior of the market participants. Ethics requires the market participants to keep to the rules of the law, comply with the industry standards, and make ethical decisions. Dealing ethically should not be a sideline, but the core of any financial services firm (Winbladh, 2013).
Ethical Challenges and How to prepare for it:
Misrepresentation:
First, the standards of conduct for the stakeholders towards the ethical aspects of the financial industry are to be evaluated. In the analysis and recommendation of investment business, it is very crucial that the analyst recommending the investment is on the side of the investor and not on the side of the analyzing company. There are often cases in which worse has happened. The analysts who are required to recommend the best investment opportunity recommend buying security which it wants to abandon. The classic examples of this unethical scam are of Citigroup’s Solomon Smith, Credit Suisse-First Boston, and Merrill Lynch. Merrill Lyncy recommended its clients before the dotcom bubble burst to invest in tech stocks while they were themselves selling these stocks. They were fined USD 100 million. These three firms were accused of providing bogus research to their clients (Winbladh, 2013). The exposing of the JPMorgan Chase’s buying of mortgages not complying with the credit policy, and selling the loans at low risk when it was in really high-risk loans is the example of misrepresentation (Taibbi, 2014).
Another such example is the mortgage loan fraud witnessed by Sherry Hunt. The Citi-Mortgage bought billions of dollars of mortgage loans from the lenders which did not meet the requirement of the Credit policy and then sold it to the Government-sponsored enterprises (Waytz & Kilibarda, 2014).
An example of such misrepresentation is that of CDO and CMO which was sold as a no-risk investment. The investors took loans based on these and not only lost the invested capital, but more (Winbladh, 2013).
Suggestion:
If the employer of the analyst is also involved in banking and advisory services to the company which is being analyzed, then it must declare its conflict of interest.
Misconduct:
Other than this, the misconduct is easier to define. It can be in the form of fraud, dishonesty, and deceit. The motives for misconduct can be the greed, personal interest, the saving of job in a firm, or saving of the owning company. Cheating, lying, stealing is also considered as misconduct and is considered very bad in the financial industry.
Suggestion:
If there is a situation in which the laws are conflicting, then one must obey the stricter of the two laws. The unethical behavior or activity of the employee or company, if suspected, should be discouraged and if it is against the laws, it should be notified to the concerned authorities at the earliest time (Winbladh, 2013).
Insider Trading:
Insider trading is illegal; however, the rules vary in different markets. Anyone who has access to material nonpublic information is called an insider. Professionals who are involved in business activities which give them access to such information are bound by the rules to keep trusting and the reputation of the company intact. A classic example of the insider trading is that of Matthew Kluger, who used the material non-public information from its mergers and acquisitions company for insider trading (Rober, 2014).
Market Manipulation:
It is also another ethical challenge which comes with the knowledge of material nonpublic information. It is an illegal activity and focuses on manipulating the market to perceive something which is not fact. It means participating in the process of distortion of prices or trading volumes. Spreading of false information which can mislead a market is another example of market manipulation (Eichenwald, 1994).
Suggestions:
Concerns of Clients come first:
The brokerage and investment banks are needed to put the concerns of their clients first. The firms should treat this money as they would theirs. It is evident that people tend to be more careless with other money. The advice to the clients should also be fair.
Loyalty to Clients as well as Employers:
The loyalty of the employees to the employers is as much important as to the clients. The clients are in actuality a firm’s client. Any loss to them is subsequently the loss to the firm. IF an employer is not good enough for its employees and demands trust and loyalty from its employees towards itself and its clients, then it is not right. For gaining loyalty, trust should be first gained itself.
Difference between Opinion and Facts:
The employee should be very clear that the opinions and facts are separately identified by the client. While giving advice or recommendation, one must carefully differentiate between the facts and the opinions of the employee. The documentation of the process of giving advice is beneficial in this aspect. Communication should not be fancy, and the focus should be to make the client understand all risks and implications.
Conflict of interest:
Conflicts of interest occur if a financial service provider is also working as brokerage and analyst and providing investment banking services.
An example is that of the commercial banks who are involved in the development of the activities of the investment banks like underwriting securities. It can lead to a conflict of interest which benefits the banks and its clients but hurts the investors (Carvalho, 2014).
Conflict of interest cannot be considered as one cause of the many ethical challenges. It is evident that it is considered as one of the major causes resulting in harmful ethical and managerial effects. It is depicted through research encompassing various ethical scams resulting from the conflict of interest. An example of such situation is when the analyst of Citigroup recommended the stock of WorldCom when he had very close personal and profitable relations with the WorldCom (Bell et al., 2005, p. 5).
Arbitrage and Proprietary Trading:
It is also one of the tradings which should be avoided. It is because it is not reactive but active trading. It increases the risk of illegal activity. Similarly, if a company has some material nonpublic information, then it can start to cease trading in the underlying instruments. However, this may trigger the market.
Consideration of ESG:
Financial Services industry is mostly based on fiduciary duties. It means that often one party must exercise some specified power on the given resources in the interests of another party, giving rise to the need for trust and confidence in the relationship. It is found that the integration of the environmental, social and governance issues while making investment decision will enable the investors in making a better decision and subsequently improve their performance as per their fiduciary duties. (Sullivan, 2015). One example is that of Mark Jorgensen, who reported the frauds in real estate funds of the Prudential Insurance Company of America. He was pressured by his bosses to inflate the values to make it look better. The carrying of the properties at improper values violated his fiduciary duties to the investors. (Waytz & Kilibarda, 2014)
Conclusion:
In the end, it is evident that the financial industry with its major activities depends on the trust and the confidence relation to each other and needs to have more focus on ethical integration in the business activities. To eradicate the chances for unethical activities and to prepare for the challenges posed by it, there are certain precautions and practices which can aid. The client’s concerns should always be given the highest priority. Ambiguity and misrepresentation should be erased at best. Conflicts of interests should be managed with care and disclosed to the clients. Integration of the environmental, social and governance factors in the fiduciary duty is suggested.
References:
Bell, R.I., Friedman, H.H. & Friedman, L.W., 2005. Conflict of Interest: The Common Thread Underlying Ethical Lapses. Electronic Journal of Business Ethics and Organization Studies, 10(1), pp.4-8.
Bonvin, J.-M. & Dembinski, P.H., 2002. Ethical Issues in Financial Activities. Journal of Business Ethics, 37(2), pp.187-92.
Carvalho, A.G.d., 2014. Conflict of Interest in Universal Banking Evidence from Brazilian IPOs. [Online] Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2405510 [Accessed 5 January 2018].
Eichenwald, K., 1994. He Told. He Suffered. Now He’s a Hero. [Online] Available at: http://www.nytimes.com/1994/05/29/business/he-told-he-suffered-now-he-s-a-hero.html [Accessed 6 January 2018].
Federwisch, A., 2015. Ethical Issues in the Financial Services Industry. [Online] Available at: https://www.scu.edu/ethics/focus-areas/business-ethics/resources/ethical-issues-in-the-financial-services-industry/ [Accessed 5 January 2018].
Rober, D., 2014. LIFE BEHIND BARS: Matthew Kluger reveals all. [Online] Available at: http://fortune.com/2014/07/07/matthew-kluger-talks/ [Accessed 5 January 2018].
Sporkin, S., 1994. Ethical Dilemmas in the Financial Services. [Online] Available at: https://www.cfapubs.org/doi/pdf/10.2469/cp.v1994.n4.4 [Accessed 6 January 2018].
Sullivan, R., 2015. Fiduciary Duty In The 21st Century. [Online] Available at: http://www.unepfi.org/fileadmin/documents/fiduciary_duty_21st_century.pdf [Accessed 6 Jan 2018].
Taibbi, M., 2014. The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare. [Online] Available at: https://www.rollingstone.com/politics/news/the-9-billion-witness-20141106 [Accessed 5 January 2018].
Waytz, A. & Kilibarda, V., 2014. Through The Eyes Of A Whistle-Blower: How Sherry Hunt Spoke Up About Citibank’s Mortgage Fraud. [Online] Available at: https://cb.hbsp.harvard.edu/cbmp/product/KEL852-PDF-ENG [Accessed 5 January 2018].
Winbladh, J., 2013. Ethical Issues Facing the Financial Service Industry. [Online] Available at: http://www.cutn.sk/Library/proceedings/mch_2013/editovane_prispevky/8.Winbladh.pdf [Accessed 5 January 2018].
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