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Investment in Knowledge

Investment in Knowledge

Financial Ethics and Regulation

1.0 Introduction

The financial sector plays a significant role in an economy by transferring funds from less useable source to where it is needed. Banks get financed by people’s deposits (liabilities) then convert them into assets to make a return. The current account is the link between the bank and the general public who access the depository services (Gondat-Larralde and Nier, 2004).

Recently banks have been transitioning from traditional to modern banking by diversifying in sales activities to grow the liabilities book. Therefore, retail banking has been on a rampage to promote sales of the product to householders (Erturk and Solari, 2007). Morden Banks have developed a technique called incentive sales selling, where Sales personnel are promised a bonus for achieving sales targets.

The approach is a delinquent for some employees’ work culture values, how they sell the current account to people, a study on Wells Fargo Bank commission-based sales approach.

The bank has a moral culture obligation to treat its customers reasonably as not tools to make a profit but partners in business. The government does not shy away to regulate the financial institution but also giving them room to operate.

 2.0 A Current Account

A current account is essential in providing transactional services such as depository, payments, and an overdraft. The past ten years have seen a rush in the growth of people acquiring a current personal account (Ashton and Hudson, 2013a). The world has transformed into the ‘Information Revolution,’ retail banking has gone through a great deal of reformation.

Using the account, people quickly transfer money from one point to the other both locally and internationally. The technological transitioning from the use of cash to electronic use such as the point of sale (POS), Electronic cash register (ECR), and many more to ease the trade. Many people are opening current accounts so that they can access advanced technological services, as having cash limits them these services.

 2.1 Characteristics of a Current Account

The three main features of the current account include the flexibility for people to make deposits, make payments, and further acquire an overdraft facility or any other credit facility. The product provides convenience to the customer whenever they want to transact. Thus, the personal account opens opportunities for personal savings, which becomes the main driver to investment and economic growth (Kandil, 2012).

The customers get admitted to electronic banking such as Automated Teller Machine (ATM), automatic bill payment (ABP), and electronic transfer of funds (EFT) services (Kolodinsky et al., 2004).

The additional services that characterize the current account are the services of an overdraft, where the customer overdraws or spends more than what is in the bank (Liu et al., 2018). Almost all account holders have this facility, although it’s at the bank’s discretion. Debit cards are issued on the account to access the money directly, which is also a risk to the customer as they may lose cash via scams, fraud, and theft.

3.0 Current Account suppliers

In most of the countries around the world, the money supply is heavy dominated by banks that offer a deposit account, which acts as a point of entry to the banking services. The institution offering this product includes all small, big, and international banks, building societies, including those providing financial services to a wealthy clientele. The leading big banks in the United Kingdom supply about 77% of current accounts to the general public (Ashton and Hudson, 2013b). See the Pie chart below.

(Ashton & Hudson, 2013c).

4.0 Current Account Market

Any accountable adults have a right to access financial products. The World Bank determines financial inclusion as someone having a banking account or products such as credit, insurance, pensions, and savings. According to (Demirguc-Kunt et al., 2017b), “Globally, about 1.7 billion adults remain unbanked without an account at a financial institution or through a mobile money provider.” In the United Kingdom, according to research by (McKay and Rowlingson, 2018), 1.23 million people are unbanked.

The market is substantial in developing countries, while in countries like the United Kingdom, the competition is stiff for banks to salvage a sale. The (financial inclusion report 2018) indicated 7.5 million people have current accounts in financial institutions across the UK.

There is a correspondingly growing market for money-launders and terrorists wanting to open bank accounts for transactions. Illegal drug cartels are looking for opportunities to transfer illegally acquired funds in their factures, and a bank account is ideal. This market for illicit practitioners is growing every day, and many banks worldwide have in-boarded them. A lot of money laundering across countries. For example, investigation of the Bank of New York in America for laundering in 1999 (Buchanan, 2004).

5.0 Current Account Sales

The banking sector has become so competitive worldwide; consequently, banks are investing in customer relationship building to survive in the market (Boot and Thakor, 2000). In retail banking, new models of marketing are in continuous development. Banks usually run models on its customer data bank to transform the data into sales. This approach is made by practically matching the current holder customers to other products such as insurance, personal loan, car loan, or mortgage. Besides, new customers may be sold additional products as well in pursuit of high sales volume and save time for the customer.

In separate instances, the bank may be tempted to sell inappropriate bank products to prime customers at the point of admission. Moreover, take advantage of its existing ones by cross-selling the wrong products, which would not benefit them at all. Sometimes opening accounts that may be used by money laundering and terrorist financiers. According to a research paper, (Puria and Rocholl, 2008), banks should inform and explain well to its retail customers of the product and services its offering to maintain a good relationship.

A lot of banks, especially in developing countries, do set targets for the sales consultant to be attained in a month. The set sales targets become the base for performance review and a baseline to receive a bonus. Explicitly sales targets are ideal for employees to build energy and passion without which low sales may result. In Nigeria, commission-based sales are fundamental for the growth and existence of the bank (Akenbor, 2011).

The bank does lay down rules and procedures towards the opening of an account to the employees. However, in some cases, the moral obligation may be overlooked in the name of meeting targets; as a result, employees may act unfairly to the customer. Recently, there have been quite a number disgraceful happening in the banking sector distorting the goodwill to the general public. Some of the employees of large banks have been expressing no sense of responsibility and fairness in executing their duties, which results in undermining the core values of the bank. The practice results in deteriorated trust because of these portions of dishonest exhibited in the eyes of the general public (Cohn et al., 2014).

Employees sometimes overlook culture values, which they should practice to fulfil their everyday work by applying the cultural norms. A study by (Graham et al., 2016) indicated that a culture that is impacted and influenced by the institutional practices of financial incentives, the motivation can oppose ethical responsibility and accountability. The study derived that employees will focus more on the money incentive given and slowly start to side-line their day-to-day cultural norms.

5.1 Wells Fargo Bank Sales Scandal

In the scandal of the Wells Fargo Bank cross-selling of the personal accounts. The employees of the bank were opening bank accounts, even issuing debit and credit cards in the absence of the customer. The sad thing was the audacity of forging signatures to meet sales targets (Reckard, 2013). According to the Los Angeles newspaper, the bank management gave sales goals which each employee should attain, and it was accumulative to the next day.

Furthermore, the branches needed to cross-sell to existing customers for a performance bonus. The performance targets and incentives flued excessive pressure on the employee; as a result, unethical practices of selling what customers did need. They processed cheque accounts to farm employees who did not qualify for them. They were afraid of being disciplined for not meeting their targets and losing out on the sales practice’s bonuses (Sales Practices Investigation Report, 2017). The cross-selling in this scandal wasn’t the main problem, but the unbearable pressure that resulted in the employees act irresponsibly to the extent of forging signatures.

With all honesty, it was still in the hands of the employees to report to senior management of the impracticable targets. Arguably senior management could have been aware of the trendy but wanted to please their shareholders of the bogus growth of the bank.

The customers were at the receiving end, suffering detrimental charges on the accounts they did not open. In as much as firms want to be competitive, the government has to set regulations to protect consumers.

6.0 Regulation of Cross-selling of Current Account

The financial management is a behavioral control where the government instructs the regulators to regulate the firms on behalf of the consumers (Hendry, 2013, p. 265). It is likewise essential to note that unbearable regulation may cause firms to fail to operate appropriately. Too much control may cause the firms to relocate to other countries where there is fair treatment.

According to (FSA Feedback, 2008), regulation six and seven, “A firm must pay due regard to the interests of its customers and treat them fairly. A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair, and not misleading”. The UK has a well-organized interventionist approach to regulation of financial firms, which may not be the case with many countries. The retail banking needs to be well regulated, especially when opening the person accounts for individuals and companies. The bank compliance department should monitor and control employee’s practices strictly to foster integrity fair practices and retention of customers in the long run. Financial companies should take into consideration that remunerations incentives may attract illegal practices (Fleming and Fielding, 2016). Some workers are unable to act in a probity manner when they face a strenuous goal; they full-on wrong behaviours.

The commission-based sales, which are still being proficient in many countries, were a cause of the Wells Fargo Bank scandal, but countries like the UK have abolished the practice.  The regulation of the commission-based sales approach side-effect is the drop-in sales of retail firms (Ring, 2016). It is, therefore, a contest for firms to take responsibility for regulatory and be accountable. For instance, when opening an account, a customer should provide an identity card for KYC (know Your Customer), source of income, and due diligence conduct by a sales consultant. The bank similarly regulates its service by employing the mystery shoppers to maintain standards.

The regulation and ethical behaviours are inculcated in bank employee’s everyday work by conducting several pieces of training (EBA, 2014). The exercises create ownership of the cultural practice, i.e., delivering duties as if they own the bank. The culture values help employees act in an ethical, accountable, and responsible manner and exhibit high levels of integrity.

7.0 Conclusion

The growth of banks corresponds to growing the liability book through an increased number of depositors. The recent years have seen the aggressiveness by the retail baking in the onboarding of the new customers. Many banks around the world are using the commission-based incentive to drive sales. The approach may be working, but it’s downsize, maybe causing a behaviour change among the employees who may be conducting corrupt practices. The fraudulent practice is in the case of Wells Fargo Bank in the USA, where employees were opening accounts without people’s concert. The consequence was a negative impact on consumers and the image of the bank distorted. The UK government abolished the sales commission approach to regulate retail banking in avoiding such scandals. Banks are also encouraged to control themselves by developing a work culture so that they can work without being heavily regulated.