Kembara's Financial Solutions - Financial Services Ethics
The rigging of LIBOR (the London Interbank Offered Rate) and other interest rate setting processes around the world is one example of how recent scandals have damaged the integrity of people and practices in the financial services industry, as we indicated at the beginning of this chapter. In order to establish benchmark interest rates (such the LIBOR rate), banks are required to submit the actual interest rates they are currently paying or anticipate paying for borrowing from other banks. It is essential to have a fixed interest rate since it acts as a standard for pricing corporate and government bonds, mortgages, student loans, credit cards, and other financial goods. However, it was found that some bank traders at institutions including Barclays, Lloyds, UBS, Deutsche Bank, JPMorgan Chase, Bank of America, and HSBC had been manipulating interest rates to make trades more profitable or to appear more creditworthy than they actually were. Benchmark interest rates are used to calculate financial products for people trying to obtain a mortgage or take out a student loan, so this had significant negative effects on consumers and financial markets around the world, even though it benefited banks and specific traders involved in the scandal. In the end, this led to billions of dollars in fines for the participating banks as well as prison terms for some of the culpable parties. The result of this strategy was the exact opposite of how the relationship should be; the interests of the consumer became subordinate to those of the banks and individual dealers. The banks and those complicit in the scandal did not act in a fair and unbiased manner, or in a clear, simple, honest, or transparent manner. Sales is another area of financial services that is especially vulnerable to the possibility of unethical behavior. The examples that follow go into more detail about the morals of marketing financial services. Example A business has created a respectable product and is figuring out the best way to market it in the face of competition. The business determines that the best way to accomplish this is to compensate sales representatives for each item they sell. Performance-based compensation is provided to the sales staff. They make more money the more they sell. One could argue that there is nothing wrong with such a structure because it merely reflects a practiced way of conducting business that is used for practically every large or even relatively small commodity. However, there are fundamental distinctions in the financial services industry that could especially impact the interaction between the salesman and the client. For instance, if you buy a car, you may see it, test it out, and find out very quickly if it functions as described and as you anticipate. In the case of a new car, the manufacturer will also give you a warranty. Thus, even if you are aware that the salesman will almost likely receive a commission as a result of your purchase due to the compensation structure in the automotive business, you may make your decision to buy with a great deal of confidence. Compare that to a hypothetical financial product: Example You, the customer, want to secure your financial future. You can do this by purchasing a product in one lump sum or by making a series of payments over time. You notice an advertisement for a financial instrument that looks appealing; it guarantees a return of 5% annually, as opposed to the 2% your bank deposits will earn. Despite never doing business with the well-known company before, you get in touch with them. A salesperson visits you and provides a general overview of the product, paying special attention to the return policy. They lay out the process through which the business raises your return above and above what you would get from your bank. Because you lack financial literacy, you may not fully comprehend all the salesman says. You are now in the zone where salespeople have the most potential, particularly in the financial services industry, to either demonstrate adherence to ethical beliefs and behaviors or to disregard them. When a buyer purchases a financial product, they are generally purchasing something whose performance will be evaluated over time. In order for you to be relatively certain that you know what the product is and who you are purchasing it from, the ethical salesperson will walk you through its structure. They will outline the risks that affect the rate of return being given and clarify whether it is a real rate or an anticipated rate that depends on the occurrence of certain other events that the product's creator might not be able to predict. They will also disclose the compensation they will receive if you purchase the item. In other words, the honest salesperson will provide you with all the information you require to decide whether you want to invest. They will be upfront and transparent, plain and honest, direct and honest, knowledgeable, and fair. A dishonest salesperson, on the other hand, would try to sway you by saying things like, "No one else has questioned me about that," "Don't worry, I wouldn't offer a product that I didn't have trust in," or "No, I don't understand it either, but we have rocket scientists to create these things." Or they can say that you only have a short window of time to decide whether you want to take advantage of this chance. The salesperson may reassure and persuade you using uninspiring language that actually says little, and you'll be urged to make a decision before you have enough information. Think about whether they are being fair and knowledgeable, unbiased and transparent, open and honest, and clear. Pretty clearly, no. Does the salesperson exhibit moral principles, traits, and actions? Once more, it is obvious that they are not.
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