Report on ethics in the financial services sector argues ethics, risk and client satisfaction should be considered as well as profits in the awarding of bonuses

Banks and other financial services firms should consider issues such as client satisfaction when establishing staff pay structures, according to a report on ethics in the banking and financial services sector.

Not surprisingly the report, from Chartered Accountants Australia and New Zealand and Melbourne University’s Centre for Ethical Leadership, concludes that countries such as New Zealand remain vulnerable to a repeat of the scandals that led to events like the Global Financial Crisis.

The report, A Question of Ethics – Navigating Ethical Failure in the Banking and Financial Services Industry, argues while regulation has an important role in preventing scandals, it won’t succeed without the support of an ethical corporate culture. Remuneration structures are a key part of this.

The report notes financial institutions often reward employees for delivering specific outcomes, often without taking into account the means by which they are achieved.

“Traders in banks, for example, may receive bonuses for taking excessive risks with investors’ money with little or no regard for the interests of the bank’s shareholders or the long-term stability of the banks themselves. This creates a moral hazard, a situation in which the trader is insulated from the risk of personal financial loss, and therefore behaves differently than if they were exposed,” the report says.

‘Measure and reward the behaviour you want to see more of’

The report goes on to argue that financial institutions’ management should measure and reward the behaviour they want to see more of.

“In financial services, the measure is usually financial gain – no matter how it is achieved. Ethical considerations, including client satisfaction, should be integrated into decision making and measured and considered when remuneration is calculated and incentives awarded,” the report says.

It notes that many banks do client surveys and employee ratings by leaders and peers. These, it argues, can assess whether an employees’ performance is ethical and in the organisation’s best long-term interests, and whether they treat clients and co-workers with respect.

“We recommend the continued and extended use of such assessments across the industry to inform compensation practices. Ethics, risk and client satisfaction should be considered as well as profits in the awarding of bonuses. Practices such as compensation disclosure, consideration of shareholder input, risk management and including clawback and deferral provisions in contracts, should be explored in an effort to curb unethical behaviour and move forward in this divisive area.”

‘Establish specific guiding values and principles’

The report also suggests establishing a set of specific guiding values and principles that could include; a clear definition of what it means to be ethical as opposed to legal in specific situations and for specific tasks; and an acknowledgement that client trust underpins reputation and is a source of competitive advantage.

“Explicitly state: ‘we should never win at our client’s expense’,” the report suggests.

The report’s authors argue challenges lie in ensuring ethical standards are given their appropriate place in decision-making and action.

The full list of specific recommendations made by the report include:

· Providing a clear set of principles to guide decision-making;
· Greater diversity and inclusion in the workplace to counter ‘groupthink’;
· Including ethical considerations when calculating remuneration and incentives;
· Establishing ethical key performance indicators;
· Banning euphemisms. And;
· Creating an ethical decision-making framework to help employees identify and navigate ethical dilemmas.

The report is based on a survey of 705 people working in the banking and financial services industry across Australia, New Zealand, the United Kingdom, Singapore, Hong Kong and Malaysia. Respondents were asked about what guides them to engage in ethical behaviour at work, the nature of current industry practices and what would improve ethical behaviour in the future. They had an average of 13 years’ experience in their profession.

“Any attempt to improve ethical behaviour in the banking and financial services industry will only be successful if all of the factors that influence practitioners in the performance of their roles – both conscious and unconscious – are recognised and addressed. We also need to recognise both the positive potential and the risks presented by technological disruption,” the report concludes.