Reasons for ethical lapses in the financial services industry

Ethical issues in the financial services industry affect everyone, including the participants in the industry and the consumers of the services, writes CompliNEWS.

Unfortunately ethical lapses do occur, there are five reasons why they occur: 

1. Self-interest which is usually driven by greed and selfishness, and which is at the expense of someone else. Greed is often driven by the need to accumulate which is a habit difficult to stop. The focus shifts from the long-term to the short-term, with a big emphasis on profit maximisation.

2. Some people suffer from stunted moral development. This usually occurs for the following three reasons: a failure to be taught, a failure to look beyond one’s own perspective, and a lack of proper mentoring.

3. Some people equate moral behavior with legal behavior, disregarding the fact that even though an action may not be illegal, it still may not be moral. They content that the only requirement is to obey the law, they often conveniently ignore the spirit of the law by only following the letter of the law.  A legal framework is required as moral agreements may break down over time.  Penalties, fines and imprisonment are used as a means of punishing those who disregard the laws. 

4. Professional duty can conflict with the demands of the business. For example, a faulty reward system can induce unethical behavior. A purely self-interested representative would inevitably choose a course of action that results in the highest returns to him or herself.

5. Individual responsibility can falter under the demands of a client. In certain circumstances, the push to act unethically comes from the client. For example, many clients expect their accountants to pad their expenses where possible. How many clients expect their insurance agents to falsify their applications or claims? There is a temptation as you have built up a good relationship with your client and you do not want to compromise the relationship, this leads to a conflict between meeting the needs of the client and what is the right thing to do.

There is definitely scope to encourage a higher standard of ethical behavior in the financial services industry.  Fortunately, many participants in the industry are ethical people trying to do the right thing whilst focusing on supporting their clients to achieve their financial objectives.