A-Z of Ethics in Financial planning practices
Ethics is based on standards of right and wrong, however your standards are not the same as my standards. Do you think if you own a brewery you can be ethical? Or would you consider a person who has a different culture to you ethical? Ethics is a product of our environment and culture. Ethics as a standard can be taught.
We are going to explore the following questions in this article.
Let us take these questions one by one.
Is the FSP’s CEO’s main responsibility to maximize profits and shareholder value even if that means having low ethical standards?
Companies exist primarily to make money for their owners and shareholders and that concept applies to FSPs. Does the question remain do CEOs of an FSP have a higher social responsibility to conduct business ethically even if that means a lower return on investment? Do ethical concerns take precedence over shareholder interests?
Corporate compliance and ethics have become an increasingly important topic in many jurisdictions around the world. Global top business schools teach ethical corporate behaviour by redesigning their curriculum by offering courses emphasizing ethics.
How much does ethics versus profitability play into your decision-making come down to your company’s values and mission statement? The question is how do you apply the mission statement?
A mission statement may be a wordy document espousing high ideals but in actual practice, do these values remain as “words on paper”??Are the “mission and vision” statements or codes of a business ignored when it comes to the practice of business?
Organisational ethics must be broader than individual integrity. Individual integrity is the alignment in what a person thinks, says and does. The ethics-based alignment for an organization is the application of values which when applied creates the organisational ethical culture. Company leaders are the key to values alignment – they model and reinforce values and hold people accountable for following them. Companies with a strong ethical identity at the top tend to maintain a higher degree of stakeholder satisfaction, positively influencing the financial results of the company. Representatives in these FSPs will hold themselves to a higher standard and feel comfortable in refusing business or declining clients that will not fit the corporate culture. From a fiduciary perspective, ethics will improve the bottom line due to risks being minimised
Ethical Investment Research Service, https://vigeo-eiris.com/ ?states that companies with high levels of customer satisfaction quite logically tend to generate a higher degree of customer loyalty, repeat business and more market share.
However, this ethical behaviour must be rational as well as reaching a higher standard.
The CEO and the board must look at the reward systems in the company. A faulty reward system can induce unethical behaviour even though the company ethics code is exceptional.
At a Macdonalds for example as a vegetarian, I am often asked to move away from the pick-up window in order to improve the statistics of service delivery. When I asked why, I was told it is because vegetarian burgers take longer to prepare and if we stay by the window it holds up the other customers. Is this ethical for the vegetarian to have to expect to wait longer than the meat eater but not reflect this in the statistics?
In this case, ethics has to make way for a practical solution to continue to create profit. Ethical no! Understandable – yes!
To change the ethical aspect to yes, the CEO should make sure it is shown in the marketing that some dishes will take longer to prepare.
Is the CEO’s main responsibility to maximize profits and shareholder value even if that means having low ethical standards? ?The answer is no.
The board of any FSP should appoint and resource an ethics department to be sure the company can tick the blocks for corporate governance in South Africa. This can be an ethics committee in which the required three people are doomed to fight a losing battle.
Not only should the ethics committee be legally formed but the board should go a step further. Questions the board should ask include:
It is the board CEO's responsibility to ensure there is a system of internal controls, reasonably designed to ensure the maintenance of fair and accurate books, records and accounts.
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Fair work practices and employee treatment is expected as well as environmental constraints considered as well as the profits required. The Board must ensure the systems must be regularly monitored and re-assessed as necessary to ensure the enterprise's internal controls, ethics and compliance programme or measures are adapted and continue to be effective.
Where does compliance fit with ethics, should they be the ethics watchdog?
Often compliance is made the custodian of ethics, but we do not walk the talk if we run a risk-based compliance practice. If we are the ethical custodians then compliance has to be zero risk-based with all the resources and support for this higher standard. Additionally, Compliance can only advise business and as such we can not be the custodians of ethics in a business unit.
To be ethical means to enable others to be ethical even when the business requirements and risk appetite do not support that ethical behaviour. This puts unfair pressure on compliance as following the applicable privacy laws and regulations is a continuous process.
To practice compliance in an ethical manner means we put in place internal controls, ethics and compliance programmes and measures which include a system of financial and accounting procedures.
In practising compliance ethics minimum standards apply such as:
These items listed above are part of the minimum standard we should expect from compliance.
Can I ethically sell a financial product that ticks the boxes and makes me money?
The answer is yes and no. A common practice in the financial services industry is for a representative to be told to write a certain sum in a particular insurance product and return receive an entry into an all-expenses-paid holiday or another event with the bells and whistles.
Is it ethical? Yes, if declared to the customer upfront. The customer should always know what you are getting in return for them buying a service or product from you. Now, this may seem unfair for a financial service provider or representative, because we don’t get a doctor to disclose how much they earn from an appointment with us. However, ethics includes obeying the law and the FAIS act states the customer must be told this in the FAIS General Code.
Ethics goes beyond employment.
It is not just in employment that a person will pick up bad ethics. Consider this:
The best way to question your ethics in a personal space, is to ask would you be happy if your actions were done in the public on social media or television?
In closing
Ethics is never going to be an easy topic to practice. However certain basic principles need to be observed.
Companies need to ensure ethics starts at the top and filters down the organisation.
The compliance team should not be the guardians of ethics. Their role is to advise the business.
Individual ethics apply at the rock face of dealing with the customer. If you would not be happy receiving the treatment you are giving yourself, the chances are it is not ethical.