How do you solve a problem like ethical misconduct?

How do you solve a problem like ethical misconduct?

Posted by Kate Whiteley on Oct 1, 2019 10:12:31 AM
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Estimated read time: 2-3 minutes
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Topics: Regulatory Compliance, Conduct & Ethics | FASEA Professionalism & Ethics CPD | Compliance Fundamentals


You’d be hard pressed to find anyone who would argue that the increased focus on ethics and professionalism in financial services is a bad thing. But, can ethics be taught? And if so, is teaching ethics enough to protect consumers?

The financial services industry has an image problem, one which it is working hard to correct. In a bid to reassure customers that Australia’s financial institutions and practitioners are not acting in their own best interests, professionalism, fairness and ethical behaviour have become the buzz words of the modern financial world.

Financial advice is front and centre of this push. There are mandatory units on professionalism and ethics in FASEA’s CPD curriculum, and a requirement that all advisers sign up to a code of ethics. But will this actually lead to long-term cultural change within the wider financial services industry? Is it enough to rely on the individualistic nature of ethics?

When individual values meet corporate culture

According to the Ethics Centre, ethics is “the process of questioning, discovering and defending our values, principles and purpose”. Essentially, being ethical is about taking responsibility for our beliefs and our actions.

It is of critical importance to consumers that the people who handle their finances behave ethically, and to demand this of financial advisers is a key step towards elevating them to the level of other trusted professionals, such as doctors and lawyers. So, it stands to reason that ethics should be both a core component of an adviser’s training, as well as a standard by which an individual’s actions are measured.

However, by its very nature, ethics training is about arming the individual with the skills needed to determine what is right and wrong in any given situation; how do you amplify this to encapsulate an entire industry?

And what happens when the individual does not believe they have the ability to make an ethical choice? That their employment may be terminated if they do not abide by the company rules? That they will miss out on opportunities for advancement if they don’t respect company culture, no matter how toxic? There is certainly evidence that this kind of behavioural manipulation has taken place in our industry before – will punishing those at the ‘coal face’ if they act inappropriately be enough to drive cultural change through to the very top of an organisation?

How do you solve a problem like ethical misconduct?

In his final report for the Financial Services Royal Commission, Commissioner Kenneth Hayne specifically called out the behaviour of the top-most tiers of Australia’s financial institutions. “There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management,” Hayne wrote.

For its part, ASIC is pushing heavily for fairness to be embedded into every aspect of a financial services firm’s business. There already exists a core statutory obligation on financial services licensees to act ‘efficiently, honestly and fairly’, but as ASIC Chair, James Shipton told the AFR Banking and Wealth Summit in March this year, “financial institutions must embrace and embed in everything they do the fairness imperative for there to be meaningful change in the industry

APRA has also taken steps to address the ‘responsibility’ element of ethical behaviour, introducing the Banking Executive Accountability Regime (or BEAR). BEAR imposes explicit accountability obligations on both the business and on individuals who are registered as ‘accountable persons’ within that business. Launching the regime, APRA Chairman, Wayne Byres, said BEAR presented an opportunity for a major strengthening of accountability among the directors and senior executives of Approved Deposit-Taking Institutions (ADIs).

Many problems that have arisen in the financial system over recent years have had, at their heart, organisational complexity and diffused responsibility. By effectively implementing BEAR, ADIs will genuinely enhance their governance and risk management through much clearer understanding and agreement on individual accountabilities,” Mr Byres said.

This will no doubt address some of the issues we have seen in the past, in which senior wrongdoers have escaped punishment. However, this is more of a stick than carrot approach. While executive accountability and risk management is at the heart of BEAR, teaching ethics to financial executives is not an explicit requirement of the regime. So, how do we guarantee organisations will act fairly and ethically in the first place?

The spectre of social licence to operate

Perhaps the answer lies in embracing the very issue which led us to the current environment – corporate greed. Failing to act fairly, ethically and professionally must be viewed as bad for business.

Thanks to the Royal Commission, penalties for failing to ‘do the right thing’ have been increased, to the point where they can be considered above and beyond the cost of doing business. But directors and executives need to understand the very real harm that unethical behaviour and misconduct pose to the organisations they oversee.

As ASIC Deputy Chair, Karen Chester, told a conference of company directors in July, “when viewed through the lens of time, factoring in community expectations and social issues should not be seen as mutually exclusive from the interests of the company.”

ESG (environmental, social and governance) issues often impact future cash flows, asset values, intangible assets and thus ultimately profitability of the company. And intangible assets such as reputation, IP and customer base today account for over 80% of total corporate value as compared to under 20% 40 years ago,” Ms Chester said.

In the new world of fairness, everyone working in financial services needs to understand and examine the interplay between corporate culture, ethics and profitability in their organisations. Ethics needs to be embedded in the values of every team acting within an organisation. And ethics should be part and parcel of the onboarding and ongoing training of all financial services employees.

When it comes to ethical decision-making how much is nature and how much comes down to nurture!


We offer a range of case studies relating to ethical decision-making spanning financial advice, capital raising, insurance, and general licence obligations. Contact us for a corporate solution.

You’d be hard pressed to find anyone who would argue that the increased focus on ethics and professionalism in financial services is a bad thing. But, can ethics be taught? And if so, is teaching ethics enough to protect consumers?

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