Excerpt
Table of Contents
List of Abbreviations
1. Introduction
2. Ethical concepts
2.1 Deontology
2.2 Utilitarianism
3. Conflicts in the Banking Industry
3.1 Mis-selling of Financial Products
3.2 Artificial Intelligence in the Credit Scoring Process
4. Critical Discussion and Conclusion
Reference List
List of Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
1. Introduction
Todays’ business world is often characterized by “VUCA” – volatility, uncertainty, complexity, and ambiguity. In such a world, managers are faced with constantly changing challenges that can lead to ethical conflicts within business environments. Therefore, more than ever before, guidelines are needed to prevent business behavior that destroys relationships between stakeholders. Business ethics, as a field of academia, can be defined as “the art and discipline of applying ethical principles to examine and solve complex moral dilemmas” within corporations (Weiss, 1988, p. 7). As the internet and in particular social media increase transparency, ethical behavior within companies is of significant priority to build and hold relationships that are both profitable and sustainable.
At least since the global economic crisis in 2008, the banking industry is in strong criticism due to unethical and partially illegal actions. Even though this strong criticism created high pressure on regulators and banks to prevent these business practices, banking scandals do not seem to subside. Thus, it cannot be denied that the banking industry has problems dealing with moral conflicts (Crockett, Harris, Mishkin, & White, 2003). Or, as the former president of the Federal Reserve Bank of New York Bill Dudley puts it, “there is evidence of deep-seated cultural and ethical failures at many large financial institutions” (Dudley, 2013).
This paper aims to clarify ethical dilemmas within the financial sector according to the concept of moral discernment. Moral discernment is “the ability to evaluate actual or potential actions from an ethical point of view with regard to its consequences or (pre-)conditions in order to respect legitimate expectations, win others for cooperation, maintain integrity, and avoid ethical risks or regretfulness” (Suchanek, 2019, p. 15). To achieve the goal of this paper, it is structured the following way. First, two ethical theories, namely deontology and utilitarianism, are briefly explained. Then, two banking industry-specific situational ethical conflicts are illustrated. The first conflict, mis-selling of financial products, is analyzed by the concept of deontology. The second conflict, the use of artificial intelligence in credit scoring is analyzed from a utilitarianism perspective. Additionally, various ethical concepts are introduced to give practical measures on how firms can cope with these situational conflicts. Lastly, a conclusion summarizes the findings of the paper.
2. Ethical concepts
In the following, two popular ethical theories are introduced. As already mentioned, these concepts will be applied to the two situational conflicts afterward. Nevertheless, there will also be other theoretical concepts used in the analysis that do not require additional previous explanations.
2.1 Deontology
Deontology is an ethical theory that states that “we are morally obligated to act in accordance with a certain set of principles and rules regardless of outcome” (Shakil, n.d.). Following the concept of deontology, actions must comply with a predefined set of rules in order to be virtuous while consequences do not have to be considered. One of the most important proponents of deontology is Immanuel Kant (1724–1804). In his book “Groundwork of the Metaphysics of Morals”, he introduced the concept of the categorical imperatives. The first categorical imperative is the most popular as it states one should “act only according to that maxim whereby you can at the same time will that it should become a universal law without contradiction” (Kant, 1785). Kant based his theory on the idea that humans have the unique ability to think rational (in contrast to animals). Thus, this ability is the reason why humans should act in accordance with moral duties and not let emotions come into play when dealing with moral dilemmas. According to Kant, a set of categorical maxims should be a guidance for humans in order to determine whether an action is morally virtuous or not.
2.2 Utilitarianism
An opposing theory from deontology is utilitarianism. Utilitarianism represents the view that “the morally right action is the action that produces the most good” (Driver, 2014). Thus, the virtuousness of an action is understood only in regards to its consequences. When evaluating the goodness of an action, one shall always evaluate the overall good – not only one’s own benefit. Jeremy Bentham (1748– 1832) is one of the most popular classical utilitarians. In 1776, he postulated the “fundamental axiom, (that) […] the greatest happiness of the greatest number […] is the measure of right and wrong” (Bentham, 2008, p. 393). Since utilitarianism is a very logic and reasonable concept of ethics, it is widely used in business environments in which benefits and costs are compared. However, utilitarianism has limitations in regards to questionable future predictions and not considering values such as individual rights and fairness.
3. Conflicts in the Banking Industry
3.1 Mis-selling of Financial Products
Studies show that large parts of the population have little knowledge of financial products and markets (Bergstresser & Beshears, 2010; Bucks & Pence, 2008; Lusardi & Tufano, 2009). This financial illiteracy is one reason for information asymmetry that exists between consumers and financial advisors. In the following, the conflict of financial advisors giving inappropriate or even misleading consultation to the customer is explained in greater depth.
Misleading information can be defined as the “deliberate hiding or falsification of a material fact which, if known to the other party, could have aborted or significantly altered the basis of a contract, deal, or transaction” (Franke, Mosk, & Schnebel, 2016, p. 5). There are multiple reasons why an advisor might give misleading information. First, from an economic point of view, retail advisory can only be profitable if the customer fulfills minimum investment volume. If that is not the case, the bank can only spend little time capacities on a customer and offer standardized products that are not fully tailored to the customer’s financial situation and risk aversion. Second, sometimes banks try to sell low performing stocks from their own portfolio to the customer in order to increase the performance of the inhouse asset management (Fecht, Hackethal, & Karabulut, 2018). Third, if financial advisors have strong incentives (such as sales bonuses on special products), they tend to increase the perceived value of the product or recommend the product, even if it is not appropriate for the customer (Inderst & Ottaviani, 2009). All these conflicts of interest give rise to financial mis-selling.
Since the third example is one of the most popular situational conflicts, it will be the subject of deeper analysis. Generally, if the financial advisor is in that situation, he has two action alternatives: (i) sell incentivized products even though they do not fit to the customer’s needs, (ii) do not sell incentivized products if they do not fit to the customer’s needs. In the following, both action alternatives are analyzed from a deontologist point of view. After that, multiple measures are explained that could be introduced to cope with this problem and help the bank maintain its reputation.
The general concept of laws does mainly work because there are consequences in the form of punishment if actions do not comply with the law. Regarding financial advisory in Germany, there are legal regulations in the German Banking Act (“Kreditwesengesetz”) and the German Securities Trading Act (“Wertpapierhandelsgesetz”) which stipulate that the bank and the advisor must be familiar with the customers financial knowledge and experience, the investment objectives and financial circumstances of the customer in order to recommend a suitable investment plan. From a deontologist perspective, one could argue that since consequences are not part of deciding if an action is ethically right, the law can be disregarded. In that case, the bank employee could sell incentivized products even though they might not fit the customer’s needs. However, applying the categorical imperative by Kant, this choice of action would imply that the bank employee would accept this type of action to become a general law. Since it does not make any sense that breaking the law is acceptable as a general law, this choice of action cannot be followed from a deontologist point of view.
Furthermore, there is a trust relationship between the customer and the financial advisor. Generally, the trustor (customer) has trust expectations, is vulnerable (in forms of monetary loss), and has alternatives (e.g. other banks). The trustee (advisor) finds himself in a situational conflict and needs to be self-committed in order to have a cooperation for mutual advantage. According to the theory of deontology, the “good will” is the only good without limitations. In the example, the “good will” can be interpreted as the purpose of the advisor to help the client in the best possible way. An essential requirement is to build a trustful relationship with his client. In order to gain trust from the customer, the advisor needs to communicate and signal consistently his good intentions to verify his trustfulness. From a deontologist perspective, abusing the trustor’s trust cannot be declared as a general law and thus cannot be considered an action alternative.
Therefore, only the second action alternative is ethically acceptable. However, the financial advisor, as an employee of the bank, is obligated to provide the services, which are recorded in the service contract as enshrined in the German Civil Code. The financial advisor has the job to make use of his expertise, advice the customer, and also generate income through the sale of certain products for the bank (and is even incentivized to do that). One tool to derive measures that would help the advisor and the bank to cope with this situational conflict, according to the concept of "moral discernment", is the perspective of the partial spectator. If the process of investment advice is viewed from that perspective, one can define action guidelines that not only comply with the law but also ensure ethically correct behavior.
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