Name Conduct costs and the need for an ethical frameworkDate 2013-12-31 00:00:00 +0000Text
3rd Year Accounting & Finance Student
‘The government said the penalties were necessary to punish the bank and Mairone and to send a clear and unambiguous message that mortgage fraud for profit will not be tolerated.’ This was a quote from the US government after BAML were found liable for fraud and ordered to pay $863.6million. The notion that financial punishments alone are sufficient to deter banks from engaging in unethical practices is totally wrong. For example despite the announcement of a possible $11bn settlement for JP Morgan in late September 2013 with regard to investigations tied to mortgage bonds, the stock price barely reacted. This indicated that despite the fine being relatively large, markets did not see it as an amount great enough to harm profits or returns to shareholders. As listed companies, one of the main incentives of these banks is to protect shareholders returns, if the threat of an $11bn fine is not enough to harm shareholder returns then clearly another approach is needed to deter unethical behaviour. Such fines rather are simply seen as the ‘cost’ of doing business. The publishing of the conduct costs review puts into perspective just how much the banking sector is willing and able to pay/put aside for damages without having profits and operations significantly affected. The publication reports a gross figure of £150bn (2008-2012), an amount greater than the budget of the 24 richest nations for international aid (£80bn).
It is necessary to implement punishments that will provide a sufficient deterrent for unethical behaviour. We first need to establish a code of conduct for these institutions that is widely accepted across jurisdictions, i.e. create a set of ethical principles for banks to abide by. Against this the activities of banks can be judged, those falling short of the ethical code should be punished appropriately. Whilst I do not suggest a complete the withdrawal of financial punishments I see fit that any sanctions should damage the reputation of the bank in question as well as provide a substantial financial loss for those implicated. On the topic of reputation there should also be greater emphasis on banks to admit wrongdoing or even criminal guilt when settlements are reached.
Another idea that is worth exploring and was mentioned at the January 2013 ‘Creating an Ethical Framework for the Financial Services Industry’ roundtable is to carry out more research around the incentives and key drivers of the behaviour of large banks. Is the competitive environment such that shareholders demand unrealistic returns which in turn encourages these banks to engage in unethical practices? Do we have a scenario where competition is so fierce that banks are willing to break the law in order to gain the upper hand against their peers? By gathering information around these incentives we in turn will be able to develop a set of clear indicators that banks can use as benchmarks to compete against each other, effectively creating competition around becoming the most ethically operating bank. The power of these respective benchmarks however will be significant only if it is commonly accepted that shareholders are clear in their expectations for the bank to act in an ethical manner.
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