Different meanings of financial ethics:
A) Ethics as the fulfillment of a professional function
An ethical behavior would be a professional, diligent and responsible behavior within the main purpose of the financial activity. Simply put, doing a good job, managing risks professionally, and promoting the legitimate profitability of the investment of the bank’s shareholders. This is the most useful concept when it comes to assessing ethical behavior in the financial sector.
B) Ethics as corporate social responsibility
The company’s response to society, which abides by a series of voluntarily pre-established commitments by virtue of a moral judgment.
The approach of financial institutions is quite similar to the one that other industries follow, with social, environmental, cultural and sponsorship programs. There are, however, sector-specific initiatives, one of the most notable being the “Principles of Ecuador”, adopted in 2003, when 10 banks pledged to apply the social and environmental policies and follow a project funding analysis procedure and their review by independent experts. BBVA was the first Spanish bank to join this initiative in 2004.
C) "Ethical banking"
Ethical banks are those that lend or invest money seeking an ethical purpose, choosing investments based not only on profit-related criteria, but also on the social concerns of its account holders.
These initiatives, due to their purpose and dimension, leave out the vast majority of the financial activity, which has to be covered by professionals that both are required to behave ethically and recognized for said ethical behavior.
The option of the so-called “ethical banking” is, considering the purposes it seeks to achieve, undoubtedly praiseworthy. Nonetheless, it is not the only ethical conduct that takes place within the financial activity, nor is it justified to claim exclusive ownership over the epithet.
D) The ethical dimension of the microfinance activity:
Development of the financial activity as a transformation element of society. Aimed especially at people with less resources and limited access to the traditional financial activity, providing them with a social integration tool through credit.
The progressive adoption of a commercial approach to microfinance, together with the disproportionate growth of some of them, have raised questions regarding the ethical dimension of these institutions.
The debate strengthens the idea that ethical behavior cannot be determined based on the goals pursued, but on the effective culture and conduct that govern the activities carried out to pursue them.
Financial ethics as a culture of compliance
Among all the possible meanings of financial ethics, the one that has a broader practical application is the one that understands it as a responsible professional behavior. In this senses, an ethical financial institution will be an institution that has managed to ensure that its leaders and employees perform their duties in accordance with a corporate culture with pre-determined moral values.
Is there room for ethics in financial regulations?
As discussed above, recent scandals have evidenced the distance between the values stated in the codes of conduct and the ones that employees actually implement and live by.
Based on these failures, some authors have questioned the effectiveness of the ethical principles when it comes to regulating conducts in the financial sector, defending regulations as the only solution to guarantee the correct running order of the system.
Other authors, however, consider that it would be extraordinarily hard to articulate legal rules capable of cover the whole universe of potential future situations in the sector. Legal regulations are rigid and inflexible. On many occasions, their content is excessively detailed, but insufficiently on many other.
Notwithstanding the obvious need for regulations to establish the minimum requirements, it is inevitable to share the skepticism regarding the practical effectiveness of these measures and the negative consequences that an excessively thorough or strict regulation can bring in connection with the future access of customers to products and services.
An effective corporate culture
If we accept that the mere statement of values is not enough, we will need to deepen into the factors that determine the success of some organizational cultures compared to other.
The statement of ethical values in the codes of conduct will be of very little value a company’s symbols do not convey them. The practice that is really learnt is the one that leads to recognition, remuneration and progress in the scale of merit of the organization.
Therefore, an effective implementation of the values requires rolling out an internal regulation aimed at the design of processes that generate and maintain behavioral habits, in a way such that they are integrated into the institution’s behaviors as some kind of metaregulation.
This process-oriented regulation needs to be: (I) easily perceptible (II) sufficiently disseminated and (III) effectively applied through remuneration, recognition and sanctioning mechanisms.
The corporate culture is critical to ensure honesty and integrity in employee behavior. Its effectiveness depends on a series of factors:
- The top management’s commitment and example. If those who bear the highest responsibility behave inadequately, they can neither expect nor require their collaborators to apply different integrity standards.
- Integral involvement of the company: Commitment with the integrity values has to affect all the people that integrate company, and all the activities that the company develops.
- The rollout of a compliance program, through the approval of policies and procedures aimed specifically at the effective application of the values.
