Many companies in financial and insurance sector are making their way towards the ethical awareness however; this is a long way to go as there are many improvements that are required at regulatory, organizational and personal level towards unethical behavior and business practices.
The report focuses on the use of ethical theory to explain the responses and what the Royal commission report states towards the misconduct and unethical business practices by the financial entities.
The report also makes use of ethical theory and ethic standard, APES 110 to explain the ethical issue with Freedom Insurance Group with its outlook towards use of hostile and inappropriate sales tactics by their sales agents and the available safeguards under this ethic standard. The ethical theory chosen is utilitarianism theory under consequentialist theories.
It is mandatory for the firms to have good governance in their business and adopt the ethical practices to conduct the business properly. The key objective of this report is to develop the understanding and knowledge about the ethical issues by Royal Commission Bank in financial sector.
This report enlightens on the reasons for the Royal Commission and some of unethical practices that it found. At the same time, it also highlights the problem associated in practices of using mortgages. It also includes an ethical theory and its use in explaining what the Royal Commission is saying in its report.
Apart from this, this report also uses the APES 110 to find the ethical issue with Freedom’s expectations of its agents to use aggressive and inappropriate sales tactics with explanation of the availability of safeguards of using APES 110.
Ethics can be defined as the moral principles that are crucial factor in governing the behavior and conduction of an individual. There are different theories including consequentialist (Teleological) theories, non-consequentialist (deontological) theories and virtue theories.
All these theories have their own advantages and limitations for discussing the ethical aspects of the decision and strategies to avoid any ethical issue. For the given case of the Royal Commission’s responses on ethical issues, utilitarianism theory under consequentialist (Teleological) theories is selected that is based on the results or consequences of the decision or action taken by the organization.
This theory holds that the ethical decision is helpful in maximizing the benefits to society and minimizing the harm (Portmore, 2011). This theory is effective to explain the decisions taken by the management of Royal Commission with perspective of social benefits to conduct the business in ethical way.
As per this theory, the majority should not rule always because the certain minority groups whose interests clash with the majority may be at a disadvantage on adopting this theory while making decisions. It will be unfair to people who do not agree with the norms of society.
However, this theory does not consider all stakeholders equally and requires a balance between the majority and minority groups (Arntzenius, 2014). This theory may be effective in the given case because it is valuable to explain which moral beliefs are true and which are false.
Through this theory, it will be easy to decide the ethics of the decision when the management of the organization predicted the amount of the utility or good outcomes caused by possible right or wrong actions.
It is required to obtain and quantify the facts to decide the ethics in the decision made by the management. This theory is also based on the facts that need to be used to decide the ethical decisions and the ethical dilemma at the workplace.
The consequences of the decision can be determine din the case of Royal Commission to decide the ethics of the responses made by the organization. This theory is also based on the generation of the most happiness and the least unhappiness for the maximum number of people (Renouard, 2011) so
it will be easy to decide that how many people or stakeholders are happy with the decision or responses made by the organization. It is simple to use and appeals to common sense for the managers to make decisions and seems too easy to understand based on common sense.
The utilitarianism theory can be used to explain what the Royal Commissioner is saying in the final report towards the conduct of financial services entities in relation to the misconduct, unethical practices and behavior in their business activities that affects the community.
The Royal Commissioner say that due to the unethical behaviour by financial entities there is large loss to many customers but at the same time, it gives in large profits to the financial entities even if they break law or have low behavioural standards towards community.
Here, the consequences or the outcome of the financial entities needs to be considered towards the cost vs. benefit of the action taken (unethical behaviour and practices) to take the decision to be morally correct (Boatright, 2013).
It can be explained that this does not maximise the good for maximum customers thus, the decision making is not under the ethical framework where the economic terms is not only considered but the cost and benefits to customer can also be taken into account.
Here, value based judgement can be made to support the Royal Commissioner statements as majority customers are affected by unethical decision of the financial entities (Jones & Felps, 2013). It can be said that the impact of unethical action is negative and opposed to the interest if the larger public.
Toward the explanation on the link among the conduct and reward, it can be said that the misconduct by financial entities does not fulfil the utilitarian objective of generating an overall benefit.
The business conduct is for profits and individual gains in form of remuneration, sales incentives or bonus as rewards where to pursue it the law has been broken and proper standards were not being followed.
Thus, rewarding misconduct is not morally correct. Also, the lack of information to customers does not give them choice to take decision what is best for them. There is a lack of customer engagement thus, there is lack of utilitarian content is given to the customers which can result utilitarian benefits (Boatright, 2013).
The information asymmetry is avoiding the customer to obtain utilitarian benefits from the financial services thus, the consequences for the financial entities is large as they are losing the customers chances to become loyal to their brand or services.
In relation to the reason for the effect of conflicts among the duty of intermediary towards client and the interest of intermediary and the client, it was found that the customers work with an intermediary thinking that the duty of intermediary would be to work in the interest of the client and offer product choice that service the purpose of client good.
However, even if the intermediary is paid by the client, and may not act in the interest of client but in the interest of own or the service provider where all interest if different parties are opposed to each other interests.
Here, the utilitarianism theory can be used in application to the serving behaviour towards the action of intermediary and behaviour which is represented with reasonable ethics towards social welfare (Mathieu & Brandouy, 2011). Thus, from the utilitarian standpoint the intermediary action should be in maximizing the customer utilities.
Towards the accountability of financial entities, that was found to be ‘not adequately’ held in relation to the violation of the law by these entities. Here, it can be said that the course of action is not given relevance in utilitarian view as long as the action generate maximum benefit for maximum people.
Thus, it does not think about whether the benefits were generated through manipulation or force. However, when the course of action is not bringing maximum good it is wrong thus, a public accountability is required towards the damage to customers due to entities misconduct (Teramoto & Jurčys, 2014).
The Royal commission support their reactions towards application of law and its enforcement to the financial entities and where the societies are being governed by the rule of law. Here, the theory of utilitarian faces a central challenge in reasoning towards the requirement for the people to have moral obligation to obey the law.
This is because it is stated that under certain situation when a person disobey to bring more benefit to society and the consequences is positive then the reasoning is morally correct. On the other hand, to support the report it can be said that when more individual do not obey the law there will be substantial consequences and may be negative one (Trevino & Nelson, 2016)..
It can be said that law enforcement is required for the financial entities to generate their positive contribution to the customer and societies at large.
Also, the Royal Commissioner found that the mortgage aggregator and broker do not act in the interest of the borrowers and have their interest inclined towards the loan provider, bank. Thus, according to the utilitarian considerations the purpose of morality will not be fulfilled to make client improved by increasing the amount of happiness.
The ethical issues associated with Freedom insurance case is evaluated using the theory of utilitarianism and the ethics standard, APES 110.
The fundamental principle of professional practice for Freedom insurance agents are identified in relation to integrity, professional skill and due care and professional behavior (APESB, 2010).
The sale agent that sole the life insurance product to Mr. Stewart son was not honest as well as straightforward in the professional dealing with the customer and has created doubt in the mind of customer family. Here, the fundamental principle of dealing with integrity was not shown by the sales agent but was not fair in the dealing and business relations.
The sales agent has not taken the professional skill & due care seriously as he has not maintained the professional skills required to make sure that a capable professional service is received by them and have not acted as per the applicable professional standards.
The core ethical duty was not taken into consideration by the sales agent. Apart from this, the sales agent lack demonstration of professional behavior as expected by the customers or acted like a sales professional in dealing with customer such as to gain information about the customers or undertake sales practices that are expected from a professional.
Thus, from these threats are identified in relation to these three principles which are self-interest and advocacy.
It can be evaluated that issue of sales agent self-interest has led to inappropriate behavior to consider the self- interest over the interest of the customer with the intent to increase sales of company products that can result in rewards/ incentives (Pasdar et al., 2014).
This is a problem in relation to the integrity of the sales agent. Likewise, risk of advocacy for the sales agent is to being sales for the employers at the cost of his own professional judgment (Han Fan et al., 2013) such as selling the life insurance product to vulnerable customers like Mr. Stewart’s son who suffers from disability.
At the same time, the sales agent as a professional member has responsibility to act ethically and promote an ethics based culture that do not encourage inappropriate sales tactics and unethical sales (Pezhman et al., 2013). There exist ethical issues when the sales are made by aggressive and improper ways by salesperson/ agents in Freedom.
The ethical issue in this case clearly highlights the ethical issue in sales techniques and approach where the company has targeted vulnerable customer groups as they can be easily influenced by the sales agents owing to their less understanding towards sales pitch and products (Han Fan et al., 2013) and less ability to recognize the policies terms and conditions. The sales agent caused the dilemma towards the rights and wrongs of sales practices adopted by them.
Another ethical issue is towards their product of accidental death policies and accidental injury policies which raise question about the professional behavior of sales agent in selling to customers. Here, the product do not cover life insurance as alternative as promoted in selling these policies to customers.
Here, the principle of utilitarianism can be also be referred as Freedom was promoting and selling the accidental death or injury policies on Freedom’s website ‘as low cost option for life cover’ that does not deliver a sizable benefit of these policy as true life cover would have given as there is limited option given to person to make a claim.
This is not consistent with the views of utilitarianism of maximum good elements thus, this is not ethical right sales practices followed/ encouraged at Freedom. In related manner, the deceptive sales practices in freedom leads to unethical practices in doing business as the customers are made to believe in the value provided by the financial product towards accidental claims where they do not clear what they cover in the concept of accidents.
Thus, the misrepresentation as well as omission of relevant facts about accidental claims highlights ethical practices (Pasdar et al., 2014). Also, because of these mentioned risks there is an ethical issue in regards to the Freedom expectations of its sales agents in promoting the use of aggressive professional behavior and inapt sales tactics.
The following safeguards are available in this case which are essential to lessen the threat to an acceptable level and gradually remove it.
It is important for the sales agents to gain knowledge of the ethics standards for professional members i.e. awareness of APES 110 fundamental principles to shield from different threats at the professional level. This also requires the sales agents to obtaining experience with significant regulatory authorities.
Another safeguard is to improve the culture and governance at the level of organization work environment. Thus, to do this requires implementation and enforcement of work polices and ethical procedures and develop a support system for sales agents to seek professional guidance in situation of dilemma.
Also, at organizational level, the sales agents can be provided training to understand and develop required skills and competencies for ethical business dealing and business relationship with customers. To uphold against the risk to ethics principles, the sales agents need to develop a strong understanding and wisdom to differentiate whether or not an action or decision is ethical. This would provide protection at the personal level.
It can be summarized that the use of utilitarianism was employed to state the Royal commission report and responses. The APES 110 and utilitarianism theory was used use as guidance to evaluate the ethical issue at Freedom Insurance towards unethical sales tactics and behaviour.
The fundamental principles of ethics such as integrity, professional skill and due care and professional behavior were evaluated which lead to threat of self-interest and advocacy. The safeguards towards the risks at professional, organizational and personal level were made that can be available for Freedom Insurance Group.
Accounting Professional and Ethical Standards Board (APESB). (2010). APES 110 Code of Ethics for Professional Accountants. Melbourne, VIC: APESB.
Arntzenius, F. (2014). Utilitarianism, decision theory and eternity. Philosophical Perspectives, 28(1), 31-58.
Boatright, J. R. (2013). Ethics in finance. US: John Wiley & Sons.
Han Fan, Y., Woodbine, G., & Cheng, W. (2013). A study of Australian and Chinese accountants’ attitudes towards independence issues and the impact on ethical judgements. Asian Review of Accounting, 21(3), 205-222.
Jones, T. M., & Felps, W. (2013). Shareholder wealth maximization and social welfare: A utilitarian critique. Business Ethics Quarterly, 23(2), 207-238.
Mathieu, P., & Brandouy, O. (2011). Efficient monitoring of financial orders with agent-based technologies. In Advances on Practical Applications of Agents and Multiagent Systems (pp. 277-286). Springer, Berlin, Heidelberg.
Pasdar, E., Chamanzamin, M. R., & Sotudeh, M. R. (2014). The Linkage Between Professional Ethics and Organizational Performance Iran Insurance Branches in Guilan Province. J Econ Theory, 8(1), 14-8.
Pezhman, R., Javadi, M. H. M., & Shahin, A. (2013). Analyzing the influence of ethical sales behavior on customers loyalty through customer satisfaction and trust in insurance company. International Journal of Academic Research in Business and Social Sciences, 3(9), 754.
Portmore, D. W. (2011). Commonsense consequentialism: Wherein morality meets rationality (Vol. 2). OUP USA.
Renouard, C. (2011). Corporate social responsibility, utilitarianism, and the capabilities approach. Journal of business ethics, 98(1), 85-97.
Teramoto, S., & Jurčys, P. (2014). Intermediaries, trust and efficiency of communication: a social network perspective. In Networked Governance, Transnational Business and the Law (pp. 99-126). Springer, Berlin, Heidelberg.
Trevino, L. K., & Nelson, K. A. (2016). Managing business ethics: Straight talk about how to do it right. John Wiley & Sons.