This paper aims to clarify ethical dilemmas within the financial sector according to the concept of moral discernment. To achieve the goal of this paper, 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.
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. 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.
Table of Contents
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
Research Objectives and Core Topics
This essay explores how ethical frameworks can be applied to navigate situational conflicts within the banking industry, specifically addressing the moral challenges faced by financial institutions in a volatile business environment. The central research question examines how banks can resolve dilemmas—such as mis-selling and the use of AI in credit scoring—while maintaining integrity and regulatory compliance.
- Application of Deontology to the mis-selling of financial products.
- Evaluation of AI-driven credit scoring through a Utilitarian lens.
- Role of corporate social responsibility and ethical codes in banking.
- Balancing economic incentives with moral discernment and trust.
Excerpt from the Book
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.
Chapter Summaries
1. Introduction: This chapter introduces the VUCA environment of modern business and highlights the persistent ethical failings within the banking industry that necessitate a study of moral discernment.
2. Ethical concepts: This section provides a theoretical foundation by explaining the core tenets of Deontology and Utilitarianism as frameworks for ethical evaluation.
2.1 Deontology: Discusses Kantian ethics, focusing on the categorical imperative and the moral obligation to act according to universalizable principles regardless of consequences.
2.2 Utilitarianism: Details the Benthamite approach of evaluating the "greatest happiness of the greatest number," emphasizing outcomes and overall consequences.
3. Conflicts in the Banking Industry: This chapter applies the previously defined ethical theories to specific practical challenges within the financial sector.
3.1 Mis-selling of Financial Products: Analyzes the conflict of interest between financial advisors and customers through the lens of Deontology and identifies potential mitigation measures.
3.2 Artificial Intelligence in the Credit Scoring Process: Examines the ethical implications of using AI and alternative data in credit risk assessment from a Utilitarian perspective.
4. Critical Discussion and Conclusion: Synthesizes the findings and emphasizes the necessity for banks to promote open debate and combine various ethical approaches for a sustainable business future.
Keywords
Business Ethics, Banking Industry, Deontology, Utilitarianism, Mis-selling, Artificial Intelligence, Credit Scoring, Moral Discernment, Corporate Social Responsibility, Stakeholders, Information Asymmetry, Compliance, Trust, Financial Advisor, Ethics Code.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines situational ethical conflicts within the banking sector, specifically how banks manage moral dilemmas while balancing profitability and professional integrity.
What are the core thematic fields covered?
The key themes include the application of classical ethical theories (Deontology and Utilitarianism), the impact of financial illiteracy, conflicts of interest in advisory services, and the ethics of technological integration.
What is the central research question?
The research seeks to clarify how financial institutions can apply moral discernment to navigate conflicts and maintain reputation despite strong economic pressures.
Which scientific methods are employed?
The work utilizes a conceptual and normative analysis, applying philosophical ethical frameworks (Deontology and Utilitarianism) to specific case studies and current practices in the banking industry.
What content is discussed in the main body?
The main body analyzes two specific conflicts: the mis-selling of financial products due to sales incentives, and the ethical risks associated with using AI for credit scoring, supplemented by practical recommendations for companies.
How would you characterize this work with keywords?
This work is characterized by terms like Business Ethics, Deontology, Utilitarianism, AI-based Credit Scoring, and Corporate Social Responsibility.
How does the author apply the Deontological perspective to financial mis-selling?
The author argues that using Kant’s categorical imperative, a bank employee cannot justify mis-selling products, as this would require accepting that deception should become a universal law, which is inherently contradictory.
Why does the author consider AI-based credit scoring justifiable from a Utilitarian perspective?
The author argues that AI allows for broader financial inclusion by providing loans to those without formal credit history, creating greater overall benefit to the economy despite the potential risks of algorithmic bias.
- Quote paper
- Gabriel Socha (Author), 2019, Situational Conflicts in the Banking Industry. An Analysis from a Business Ethics Perspective, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/490852
