The evolution of Ethics and its role in Financial Institutions

The evolution of Ethics and its role in Financial Institutions By Irene C. Isaka (Ph.D); Lecturer- Institute of Finance Management Presentation made during the 19th East African Banking School; Ngurdoto Mountain Lodge Arusha, Tanzania 12-16 August, 2019

Content • Introduction • Ethics in Financial Management • Code of Ethics, TIOB, TBA, TIRA • Code of Ethics in the Public Service • Ethics and Corporate reputation • Role of Regulators • Challenges • Recommendation • Conclusion

Introduction • The subject of Ethics has evolved greatly over the last decade where mostof its building blocks have come from financial crises and scandals. It alsogoes without saying that the role of industry “watchdogs” has beeninstrumental to the development and continuous updating of the Body ofKnowledge of Ethics.

Introduction • Finance is concerned broadly with the generation, allocation, and management of monetary resources for any purpose. It includes • personal finance, whereby individuals save, invest, and borrow money to conduct their lives; • corporate finance, whereby business organizations raise capital, mainly through the issue of stocks and bonds, and deploy it to engage in economic production; and • public finance, whereby governments raise revenue by means of taxation, fees, and borrowing and spend it to provide services for their citizens. • These financial activities are facilitated by financial markets, in which money and financial instruments are traded, and by financial intermediaries, such as banks, exchanges, and other financial services providers, which facilitate financial transactions.

Introduction…… Ethics in Financial Services • Trust represents an important variable with a significant impact on customers emotional responses. • Ethics in Financial services forms the basis of trust especially when there is information asymmetry. There two forms of information asymmetry • Hidden knowledge: Adverse selection e.g. a client knows that he/she is a bad risk but hides the fact from the service provider or collude with staff of the service provider. • Hidden action: Moral Hazard e.g. because of being accessible to certain information the person takes less precautions or ignore ethical standards/ codes.

Ethics in financial Management Ethical issues in financial management fall into two broad categories: • The ethical obligations or duties of a financial manager of a corporation and • the ethics of organizing a corporation with shareholder control and the objective of shareholder wealth maximization. The former category bears on decisions made by financial managers, whereas the latter is a matter largely for government in establishing the laws of corporate governance.

Code of ethics • A code of ethics is a guide of principles designed to help professionals conduct business honestly and with integrity. A code of ethics document may outline the mission and values of the business or organization, how professionals are supposed to approach problems, the ethical principles based on the organization's core values, and the standards to which the professional is held. • A code of ethics contains a set of internal guidelines that should make a commitment to operate legally and it should promote honesty, accountability and ethical conduct (Stevens et al., 2005).

Code of Ethics • Code of ethics is one of the fundamental protocols for the establishment of a valid model of organization, management and control for the purpose of ensuring the highest possible ethical standards in pursuance of the financial services. • It highlights the general ethical principles positively valued by a company to protect and further the interests of all stakeholders because of their experience and their sense of moral and legal obligations. • The specific rules of conduct are applicable to parties subject to the code, and with which such parties must comply; • it is also explicated the mechanism of communication, training and monitoring of the code, and constitutes a guide to the company policies and to the legal requirements that govern its conduct.

CODE OF ETHICS AND CONDUCT FOR THE PUBLIC SERVICE TANZANIA The Code of Ethics and Conduct was issued pursuant to the Public Service Act. A breach of the Code would be dealt with under the Public Service Act, National Security Act, Prevention of Corruption Act or any other relevant laws. Key areas covered included;- • Respect all Human Rights and be courteous; • Perform diligently and in a disciplined manner; • Promote team work; • Pursue excellence in service; • Exercise responsibility and good stewardship; • Promote transparency and accountability; • Discharge duties with integrity, and • Maintain political neutrality.

CODE OF ETHICS AND CONDUCT …….. On its part the Government has the obligations to provide; • Establish meritocratic principles and procedures to be used in appointments. promotions and in all other service delivery activities; • Establish a system, which specifies the authority. responsibilities and expected actions of each public servant which can then be assessed after a specific time; • Effect an appraisal system, which will enable a public employee to participate in assessing his/her performance; • Ensure that safe working conditions prevail which will enable the public employee to discharge his/her duties without undue risk or fear; and • Remunerate public servants on the basis of skills, responsibilities and working conditions.

Ethics for Members - TIOB Upholding the highest standards of honesty, integrity and performance in all their dealings both internally and externally. All members must therefore: • Adhere to generally accepted principles of honesty, integrity and individual attitude to uphold the mutual trust and public confidence bestowed upon them. • Be fair minded in behaviour and approach in their day to day dealings both in office and during their social interactions. • Be courteous and considerate when executing duties in their public offices. • Be obliged to acquire necessary skills and knowledge to undertake a task in a professional way. Professionalism, competence, Compliance whit the technical and professional standards . • Avoid acceptance of gifts, services or regards arising from performing their duties which would affect members’ independent judgment when accepted. Monetary gifts for rewards are thus strictly forbidden. Further to this, avoid situations which could involve and compromise one’s impartiality. • Give PROPER consideration to financial factors and the wider implications on one’s decisions when giving information or financial disclosure to customers seeking independent professional advice in appropriate circumstances.

ETHICS FOR BANKERS -TIOB The Code of Ethics sets down fundamental principles seeking to achieve the ethical conduct of banking business. The Code aspires at all times to enable the members practice the highest standards of the profession while at the same time satisfy the statutory and regulatory requirements governing the banking business in the country. • Integrity • Confidentiality • Loyalty • Legality

ETHICS FOR BANKERS TIOB….. Integrity • Conflicting businesses • Side business • Use if properties • Gifts • Personal finances (avid financial embarrassment) • Injury • Records Confidentiality • Confidential information • Insider dealing/trading • Declaration of secrecy • Access to documents • Rights of the colleagues Legal • Avoid any form of dubious business practices in contradiction to the Law and Regulations, • Illegal Business • Books of accounts • Fraud and forgeries • Submission of Returns • Free competition Loyalty • Self interest • Divulging of information • Use of official hours • Reputation of the Institute • Personal Responsibility and Perfomance

TBA Code of banking practices Major Objectives of the Code • To formulate and maintain high standards of good banking practice. • To promote integrity and confidence in the banking industry. • To ensure that banks act professionally, fairly and reasonably in their dealings with their customers. • To provide valuable safeguards for customers including secure and reliable banking and payment systems. • To assist customers understand their rights and how banks are expected to deal with them in various aspects of their banking relationship.

TBA Statement against money laundering • Tanzania Bankers' Association is committed to fighting money laundering and complying fully with the letter and spirit of money laundering laws in all parts of the world and guiding regulations as established by regulatory authorities from time to time. • All Bank employees will accept accountability and responsibility for observing these laws and policies. Any instances of suspicious transactions will be reported to the appropriate authorities.

CODE OF CONDUCT FOR INSURERS AND BROKERS - TIRA • This Code of Conduct and Ethics is drawn up in accordance with section 139 of the Act, and shall apply to all insurance registrants including members of the following professional bodies: (a) Insurance Institute of Tanzania; • (b) Association of Insurance Intermediaries i.e Insurance Agents and Insurance Brokers; • (c) Association of Tanzanian Insurers • (d) Association of Tanzanian Loss Adjusters and Surveyors • Every member of each of these bodies shall adhere to this code and shall use the best endeavours to ensure its observance and compliance with the disciplinary procedures and sections contained in PART E and PART F.

CODE OF CONDUCT FOR BROKERS - TIRA • Pursuant to Section 139 of the Act the Code of Conduct which shall guide insurance brokers in the conduct of their business is specified in Part B of the Second Schedule of the Regulations. • The code is about the general and specific conduct of the Insurance Brokers. With 40 sections the code specifically cover • Handling of confidential information • Appropriate disclosure to the client • Handling of finances, client finances should be held in a dedicated account not combined with the Brokers account

CODE OF CONDUCT FOR BROKERS An insurance intermediary shall: • ensure that the policy proposed is suitable to the needs and resources of the clients; • give advice only on those insurance matters in which he is knowledgeable • treat all information supplied by the client as completely confidential. • An intermediary shall not make inaccurate or unfair criticisms of any insurer or make comparisons with other types of policy unless he makes clear the differing characteristics of each policy. • Make an in-depth analysis of his client's insurance needs and recommend advisable methods of loss prevention. • explain all the essential provisions of the cover afforded by the policy, or policies which he is recommending, so as to ensure as far as possible, that the client understands what he is buying • draw attention to any restrictions and exclusions applying to the policy; • if necessary, obtain from the insurance company specialist advice in relating to items • refrain from offering coverage over and above that which the underwriter normally grants without the underwriter's prior consent; and • not impose any charge in addition to the premium required by the insurance company without disclosing the amount and purpose of such charge before any work involving and administrative or other charge is undertaken.

Ethical Concerns • Ethical issues could be grouped under a few categories such as • financial markets, • financial services, and • financial management. • The main ethical concern in financial markets, such as stock markets, is that they be fair, especially in cases of asymmetry, which occur when parties have unequal information or authority.

Ethics vs Conflict of Interest • Ethical issues in the financial services industry and in the financial management of corporations mainly involve • agents, who have an obligation to act in the interests of other parties, called principals, and • fiduciaries, who have a fiduciary duty to act in the interest of beneficiaries. • When agents and fiduciaries have a personal interest that interferes with their ability to serve others, they are said to have a conflict of interest.

Ethics and Corporate Reputation Ethics influence Corporate reputation due to the fact that there should be an emotional appeal in terms of trust/confidence in the following , • products and services in terms of quality, • innovation, • convenience and reliability; • Financial performance in terms of profitability, • prospects of growth, • better performance than competitors, • low investment risks;

Ethics and Corporate Reputation……. • vision and leadership in terms of excellence in leadership, • clear vision for the future, • Capability to exploiting market opportunities; • working environment in terms of quality and well-being, • staff professionalism, • Attractive remunerative policy; • social responsibility in terms of commitment towards social causes, responsibility towards the environment .

Ethics and Corporate reputation…. • Indeed reputation can be included quite legitimately among the tools of corporate governance, with reference to the mechanisms of management and coordination of interaction with stakeholders, in the context of decision-making processes and control of key resources (Cuomo et al., 2014). • In the banking services industry, as in others, having a good reputation helps to resolve the problem of lack of direct and complete knowledge, especially when a financial transaction has long-term implications • Enhancing corporate reputation is both an intangible asset and a source of strategic advantage in incrementing a corporation’s long term ability to create value.

Code of Ethics vs General performance • The sample is composed of 27 listed companies belonging to the banking services industry in Italy. • All of them adopted the code of ethics during the period examined, even though in different years, the most after the year 2006 • Analysis of effects of code of ethics and general performance of the banks 2001 -2015 • Analyzingthe variable code of ethics lagged two years emerges that the ethical practices significantly and positively affect Equity/Liabilities and Liquid Assets/Tot Dep & Bor ratios. As for code of ethics lagged one year, • Results showed that the corporate ethical practices impact positively on the corporate financial performance, (Cuomo et al., 2016)

ROLE OF REGULATORS

Role of Regulators • The subject of Ethics has evolved greatly over the last decade where mostof its building blocks have come from financial crises and scandals. It alsogoes without saying that the role of industry “watchdogs” has beeninstrumental to the development and continuous updating of the Body ofKnowledge of Ethics.

Role of Regulators….. • An attempt of management of the ethical conduct is the restriction by means of formal mechanisms. Precisely, financial services industry is one of the most heavily regulated segment with numerous instruments of control and supervising of the conduct of the players. • For instance in Tanzania financial Services are Regulated by the Bank of Tanzania, Tanzania Insurance Regulatory Authority, Social Security Regulatory Authority, Deposit Insurance Board, Capital Market and Securities Authority. • And on top of that we have control and Auditor General, Public Procurement Authority, Treasury Registrar and other bodies responsible for combating corruption and Anti Money Laundering.

Role of the Regulators One of the key responsibility of the Regulator is to ensure protection of the client/Consumers/members. The Banking Regulator has issued a number of instruments that enforce ethics and safe guard assets of the banking sector such Guidelines include: • Licencing • Capital Adequacy • Management of Risk Assets • Liquidity Management • Publication of Financial Statements • Independent Auditors • Credit Concentration • Exposure Limits • Foreign exchange exposure limit • Physical security Measures • Prompt corrective Action • Internal control & internal Audit

Role of Regulators……Ethic Vs Risk MngtBoT Risk management Regulations, 2014 • The Board of Directors of every bank or financial institution shall ensure that appropriate credit risk management policies are in place and are consistent with principles set forth in the Risk Management Guidelines for Banks and Financial Institutions issued by the Bank. Such that they • establish procedures and limits providing for adequate identification, measurement, monitoring, and control of the risks posed by its significant activities; • be consistent with complexity and size of the business, the institution's stated goals and objectives, and the overall financial strength of the institution; • clearly delineate accountability and lines of authority across the institution's activities; and • provide for the review of activities new to the bank or financial institution to ensure that the infrastructures necessary to identify, monitor, and control risks associated with an activity are in place before the activity is initiated.

Role of Regulators : ……… Guidelines vs Ethical conduct in the Social Security Sector • Totalization Of Contribution Periods Guidelines, 2014 • Security Of Electronic Information Guidelines, 2014 • Conduct Of Affairs Of Annual Members Conference, 2014 • Investment Guidelines, 2015 • Data Management Guidelines, 2016 • Risk Management Guidelines, 2016 • Administration Expenses Guidelines, 2016 • The Social Security Regulations, 2009 • Pension Benefits Harmonization Rules, 2014 • Conduct Of Affairs Of The Board Of Trustees Guidelines, 2012 • Conduct Of Actuarial Services Guidelines, 2012 • Membership Registration Guidelines, 2013 • Annual Reporting Guidelines, 2014 • Interoperability Guidelines; 2014

Challenges Ethics And Security • While consumers are happy to do more business online - that doesn’t mean they’re willing to make sacrifices around security, particularly when it comes to sensitive financial data. • Lack of ethics could lead to data breaches and attacks remain disastrous. This could affect reputation, time spent to rectify the situation etc • Essentially, any changes made to financial service offered and the way customer data are handled must maintain ethics to keep privacy and security at the front and center of the conversation.

Challenges….. Ethics vs access to Virtual Data • Before the rise of the digital age, banks were concerned with the security of their physical data and guarding their servers and tangible files filled to the brim with personal and sensitive data. • Today, this worry has shifted as data is mostly stored virtually and enterprises are more concerned about large scale attacks, as the financial implications of a cyberattack could be potentially devastating. • Automation has also altered almost every aspect of the financial services as banks now have computerised tellers, digital records, and electronic payments, all of which can be accessed and completed in a matter of seconds at the touch of a button.

Challenges……..Ethic Vs Security Threats • Traditionally banks only had to worry about the security of their server rooms, but now security has shifted to become an enterprise-wide concern. • A vast amount of the data that financial industries store is highly sensitive and can easily be shared internally and accessed by hackers, so security is absolutely imperative in every aspect of the business. • As such, the financial services sector is now concerned with both inside and outside threats. • businesses have to ensure that their security is tight enough to circumvent any such threats. • Same applies to Ethics

Recommendations • External Auditors provides assurance on the financial ethics of the organization at a particular point in time • Internal Auditors as an eye of the Board is responsible for providing assurance on effectiveness of ethics, corporate governance, internal controls and risk management • The Board is responsible for the governance of the organization toward achieving the set strategic objectives including all ethical issues • Management on the other hands is responsible for the operational roles of the organization and ensure that operations are aligned with the Code of Ethics. • Come up with innovative ethic solution, advice the Board and the board advice TIOB and other policy makers

Recommendations • Establish an overall cross-functional compliance team and a dedicated sub team managed by a director level person. The team should be supported by top executives and include executive from finance, IT, legal, marketing and affected business units. • Coordinate IT activities within the scope of an overall security and disaster recovery plan. • Have Finance or Audit take final responsibility to ensure compliance with law and the code of ethics • Marketing should take the lead on customer data usage decisions affecting privacy as well as the Do Not Call Registry. IT is one input to the whole process. • Emerging IT Requirements/Impact Definitely influence, perhaps certify… • Anti-fraud techniques – development & operations • Change management process • Data integrity • Disaster recovery practices Electronic records retention policy, “properly recorded and reported” transactions, “reasonable assurance” • test Integrity of communications Patch management Process/work flows – internal & partners Security policies and practices, compliance built into overall security architecture

Conclusion • Some schools of thoughts argue that, ethical norms of behaviour are too amorphous to be precisely defined in the context of financial Institutions. • The complexity of financial commitments and transactions such as innovative products, long chains of intermediation, additional information and so on, can make “ethical conduct” a highly ambiguous concept to apply (Oates and Dias, 2016).

Conclusion….. • A lot of work has been done by the Regulators on enforcement of ethics in the conduct of Financial Institutions the progress made has been noticed. • However, Legislations are mostly based on the prudential legal and regulatory framework. It is high time that the regulators move to the risk based Code of Ethics in order to stride with Digital Age random and rapid innovation.

Conclusion • Even though thoughts support an integration of ethical principles and law (Blodgett, 2011), however it should be considered that • firstly regulation does not cover all the extended aspects of moral behaviour in business. • Secondly, law is often developed as a reaction to amoral or unethical activities. • Thirdly, law is a relatively low standard of a minimal level of acceptable conduct (Boatright, 2013)

Resource materials • Blodgett M.S. (2011). “Substantive ethics: integrating law and ethics in corporate ethics programs”. Journal of Business Ethics, 99(1): 39-48. • BoatrightJ. R. (2011). “Trust and Integrity in Banking”. Ethical Perspectives, 18(4): 473-489. Boatright J. R. (2013). Ethics in Finance. New York: John Wiley & Sons. • Bank of Tanzania Guidelines • Code of Conduct Public Service Tanzania • Cui J., Jo H., Na H. (2016). “Does Corporate Social Responsibility Affect Information Asymmetry?”. Journal of Business Ethics, 1-24. • Cuomo M.T., Metallo G., Festa,G., Gregorio, A., Mazzucchelli,A (2016) Effects of corporate ethical practices on financial performance in the Italian banking services listed companies

Resource materials • Salvioni D. M., Astori R., Cassano R. (2014). “Corporate Sustainability and Ethical Codes Effectiveness”. Journal of Modern Accounting and Auditing, 10(9): 969-982. • Fombrun C.J., Galdberg N., Sever J. (2000). “The Reputational Quotient. A multi-stakeholder measure of corporate reputation”. Journal of Brand Management, 7(4): 241-255. • Social Security Guidelines • TBA Code of banking practices • TIOB- Code Of Ethics For Bankers • The Insurance Act 2009 and Its Regulations

Thanks for your kind attention

The evolution of Ethics and its role in Financial Institutions