Case 2: Ethics and Responsibility in Finance

DEPARTMENT OF BUSINESS ADMINISTRATION

STUDENT TRAINING PROGRAM

Name: ____Bryan C. Petallana_____ Date: ____May 13, 2022___

Case Study 2: Ethics and Responsibility in Finance

Chapter 3 - The fund holder’s ethical dilemmas: savers and rentiers

Topic 3.4: Forced savings: life insurance and pension funds

As stated in the book, the spread of financial technology began in the second half of the twentieth century that allowed people to set aside money for specific circumstances like death, disability, or retirement. Although compulsory contributions limit access to one's earnings, they also prevent 'free-riding' in social policy by requiring everyone to save, especially those who are most prone to waste their earnings. There is nothing wrong with getting prepared for the future. Savings and life insurance plans assist you in achieving these objectives by allowing you to create a financial portfolio while being protected by a life insurance policy. Life insurance policies encourage disciplined saving. Paying a small monthly insurance premium will help you build up your savings. Financial innovation has existed since the dawn of humanity; nevertheless, it accelerated in the first half of the 17th century and then again in the twentieth century. Although some financial innovations have transformed the way the industry works (for example, technology advances such as the ATM), most innovations, particularly in the twentieth and

twenty-first centuries, have been further improvements of already existing products and services. As a result, the process of developing new and/or enhanced products and services appears to have been mostly incremental as industry competition has intensified, and these innovations have been fueled by both internal and external influences to the innovating company (Arthur, 2017). The financial innovation process appears to be characterized by complexity, which arises from reconfiguration in a globalized, socio-technical setting, resulting in high risks and unpredictability. In Philippine context, the BSP (Bangko Sentral ng Pilipinas) has been increasing the banking system's ability to respond to the difficulties provided by globalization and the shocks created by the global economic crises over the years, particularly in the aftermath of the 1997 Asian financial crisis. The BSP's prudential regulatory criteria are being strengthened and aligned with international norms in order to improve risk management, promote good corporate governance and transparency, and eliminate moral hazard. The expansion and deepening of the domestic capital market is another significant BSP priority. A developed capital market also provides the availability of a broader range of financial instruments, which helps to stimulate higher levels of savings, which in turn leads to higher levels of investments, allowing for quicker economic expansion (Guiguinto, 2008). In line with the forced savings, recently in the Philippines, former House Speaker Alan Peter Cayetano spearheaded the introduction of a bill on Thursday, March 31, 2022, that would formalize his earlier proposal to require different government departments to set aside 5% in budgetary savings for "rainy days." House Bill (HB) No.10832, also known as the "Mandatory Savings Act of 2022," was introduced in the House of Representatives. It requires all government departments, bureaus, offices, agencies, financial institutions (GFIs), instrumentalities, and governmentowned or controlled businesses (GOCCs) to save 5% of their budget by simplifying non-essential activities and projects. The law proposes a 5% required savings rate to raise P250 billion "to give aid to our countrymen who are in desperate need of recovery from the current pandemic's detrimental impacts." Aside from mandatory contributions, regular savers can sign long-term savings contracts. Contracts for savings or insurance, such as life insurance or pension arrangements. The premise

behind such institutions is to guarantee the payment of a lump sum or a lifetime annuity over a long period of time. Life insurance also protects against the possibility of premature death by assuring that a predetermined sum is paid to a survivor. At the end of the day, having life insurance is vital whether you're married with children, have a partner, or have other relatives that rely on you financially. After you die, life insurance pays out money to your selected beneficiary, known as a death benefit. It might assist in providing money to your loved ones when they require it. Understanding life insurance can assist you in making long-term financial plans for your family.

Topic 3.7: Asset and risk management institutions

Risk is a significant factor in how we manage our economy, organizations, and families. When it comes to household money, risk can be rather complex, especially for people or families — for example, mothers and fathers may stand to make or lose huge sums of money. The sorts of risks involved have an impact on how money is managed or invested in stocks, bonds, and real estate. When confronted with dangers, the question is how well equipped we are to deal with them. If risk awareness is low, there's a good chance that risk may convert into hazard, resulting in severe consequences. Handful savers manage their financial assets without professional assistance. Some people resort to retail banks, which offer a variety of savings and deposit accounts, as well as life insurance (as previously mentioned) and pension funds. Asset managers are specialized agents who work with the wealthy. Other institutions, with the exception of the latter, make guarantees to savers in exchange for their cash.

In the Philippines, by establishing a regular stream of laws controlling sustainable finance, the central bank is aiming to guarantee that adherence to green banking principles becomes the rule rather than the exception in the local financial system. Governor Benjamin Diokno of the Bangko Sentral ng Pilipinas (BSP) emphasized regulators' commitment to helping protect the environment through regulations that

make finance for climate-friendly projects cheaper and more prohibitive for climate-damaging projects. The second step is to mainstream sustainable financing by issuing enabling regulations. The first two regulations on sustainable finance and environmental and social risk management frameworks have already been issued by the BSP. "Future regulations will target prospective areas of bank investment activity, climate stress testing, prudential reporting, and potential regulatory incentives," stated the BSP chief. In April 2020, the BSP released its Sustainable Finance Framework, which outlined high-level supervisory expectations for the incorporation of sustainable principles, such as environmental, social, and governance considerations, into corporate and risk governance frameworks, business strategies, and bank operations.

There would be no need for financial institutions if savers and investors, buyers and sellers could find each other easily, purchase any and all assets at no cost, and make decisions based on freely available, flawless information. Financial institutions, on the other hand, are sought by market participants in real economies because they can supply market information, transaction efficiency, and contract enforcement. The operation of competitive financial institutions has little effect on the structure of systematic risk in the financial market. Risk can be traded or hedged, but it never goes away in the aggregate. The value added of the financial industry is that it makes the capital formation process more efficient and hence more appealing by offering services to investors, creditors, and shareholders. Furthermore, the businesses diminish nonmarket wealth transfers in financial contracts between

traders with varying levels of wealth, competence, or avarice. Financial institutions facilitate the discovery, appraisal, and transmission of information about lawful investment opportunities, reducing monopolistic positions and inefficient risktaking.

Chapter 4: The ethical dilemmas facing fund users

Topic 4.2: Risk and business financing

It was stated in the book that the entrepreneur's financial risk is limited to the amount of money invested in the business, which corresponds to shares. There are two types of shareholders: entrepreneurs who own shares in their companies and outside investors who simply contribute financing without any understanding or expertise in the company's field of operation. Knowing which sources of money he can legitimately seek without exposing them to excessive danger is the ethical issue for the entrepreneur. The emergence of new sources of entrepreneurial finance may make it easier for businesses to raise funds and expand. To date, the literature on venture capital and angel financing has built a rich legacy of research. The rise of "new" forms of finance, such as crowd funding, and the limited attention paid to "conventional" debt financing and financial bootstrapping, however, provides possibilities to study the issues that ventures encounter from various points of view and theoretical perspectives.

In fact, jus at week ago, Reuters reported that wall Street sees greater risk of default by major banks. Credit risks have risen since the Ukraine crisis, as some major US banks have seen their staple operations suffer setbacks, with capital market activity halting and lending projected to remain weak. As a result, bondholders are considering hedging techniques to protect themselves from probable defaults. This turned of events has greatly impact the entrepreneurial businesses in some parts of the world. Entrepreneurial businesses are the lifeblood of economies, driving both economic growth and employment. Young and inventive entrepreneurial enterprises are critical to the development, expansion, and creation of new technologies, sectors, and markets, as well as the production of the most jobs (Megginson 2004). However, these businesses frequently require significant sums of financial resources to continue to grow. The role of venture capital investors and business angels has been underlined in entrepreneurial finance literature for decades. Because internal resources are scarce, it is commonly considered that entrepreneurial enterprises require external finance to establish and then grow. However, it is widely considered that adverse selection and moral hazard issues,

along with a lack of steady cash flows and high-quality collateral, make attracting external loans, particularly "conventional" bank debt, extremely difficult, if not impossible, for early entrepreneurial enterprises. Furthermore, even when bank financing is accessible, it is sometimes regarded as undesirable for small businesses. Indeed, the aforementioned issues, combined with the higher risk of financial trouble associated with leveraged businesses, deter fund raising. Remember that entrepreneurial ventures are critical "engines" of future economic

progress.

Topic 4.5: Public fund users

Simply put, public funding is money that comes from the government's coffers. It is the money of the taxpayers, and funding health, human services, environmental, community development, and other public service initiatives is one way it's spent for the greater good. Public services are under increasing pressure to innovate, but there is no agreement on how to do so. Social innovation is specifically about meeting human needs, and it has a well-established place in public policy (Marques et al., 2017). Public organizations, like individuals and businesses, may have strong reasons to borrow money from others, whether through bank loans or the bond market. These causes are strikingly comparable to those that confront households: calamities (wars, disasters, diseases, etc.) or loans that raise people's living standards while allowing politicians to demonstrate the visible impact of their policies to voters. Finally, loans may be required to support investments that are expected to have a long-term influence on growth and hence raise future tax collections. Internal revenue allotment, the Philippines' major transfer tool from the central government to local government units (LGUs), has been criticized for its inability to equalize properly, particularly in impoverished municipalities and provinces, and for monies not being spent efficiently.

As the Philippines getting transitions to the next administration, according to Cielo D. Magno, a professor at the University of the Philippines’ School of Economics,

the next Philippine president must restore public trust in the government, strengthen democratic governance, and pursue big economic and political reforms as soon as possible. The future president of the Philippines should execute public financial management changes that will improve not only revenue collection but also public expenditures and government spending performance. To keep the debt from spiraling out of control, the next president should eliminate unnecessary spending, plug budget leaks, and invest on the most pressing requirements, she said, adding that a culture of good governance and institutionalized transparency would enhance business confidence. The next president should create a national budget that is "people-centered" and "inclusive" in order to spur recovery. The new administration will have a number of fiscal issues, including securing funding for health, education, and social safety programs. As stated in the book, decision makers must learn to strike a suitable balance between their own egos and the benefit of the community they are responsible for, avoiding being captured by a technical framework that the corporations directly involved may seek to lock them into.

Chapter 5: Ethical dilemmas in financial intermediation

Topic 5.2: Advise, prescribe or sell?

The financial professional serves as a service provider or a financial product salesperson. According to the book, the 'advisor' has increasingly supplanted the vendor in European bank locations. This change in language indicates ambiguity and an ethical challenge that must be investigated. Clients who seek the advice of professionals — whether bankers, lawyers, garage mechanics, accountants, or doctors – are searching for guidance on how to proceed. Nonetheless, advisors frequently assume the role of prescribers, particularly of their own services. They serve as advisors, prescribers, and, eventually, sellers, putting them in a position of 'conflicting interests.' When it comes to doing the right thing for their clients, honest

financial planners sometimes face some difficult decisions. There are some frequent problems that investing experts face, as well as suggestions for how to solve them. Financial advisors look after assets and money for people who don't have a lot of experience with markets and finance in general.

In an interview Alex Narciso, President of Sun Life of Canada (Philippines), Inc., explains why Filipinos can rely on the insurance company's 20,000-strong advisory group to help them with their financial needs. Filipinos are more cognizant of the importance of money not just for life's joys but also for its many hardships. Filipinos seeking financial advice at any point of their lives might find a financial advisor who will become a lifelong partner. Their financial advisors, he claims, are a crucial component in helping them keep their obligations. Financial advisors at Sun Life are "frontliners" who are constantly there for their clients, no matter what. They provide excellent financial advise to our clients on a frequent basis as their financial demands change. Apart from that, they go above and above to ensure that their clients get the most out of their plans. Their most recent campaign underscores this by telling the tales of three clients who have discovered a life partner in their advisors.

Today, planners must consider if the old technique is preferable or whether the client would be better served by purchasing any of the many alternative solutions offered. Similarly, a client who is placed in a universal variable life policy may be better off in the long run. The financial sector's complexity has offered individuals more possibilities to make smarter decisions. It has also significantly raised the chance of being misled.

Topic 5.3: Financial innovation: cui bono?

The capitalistic system's basic idea is that innovation is valuable. Innovation creates greater value, and the capitalistic system stimulates innovation since it permits the

innovator to enjoy the greatest rewards. When the term financial is placed in front of innovation, though, people's perceptions tend to shift quickly. This is because the general people does not believe financial innovation benefits them. Perhaps it will assist a few investment bankers in receiving larger bonuses. However, financial innovation does not necessarily improve the lives of ordinary people. Financial innovation is when excessive risk-taking is not supported by excellent financial innovation. Financial innovation is only beneficial if it allows for risk dispersal. It is critical that the technology being developed not be utilized for any kind of risktaking. Take the situation of credit default swaps, for example. If you already have a bond, these products serve as insurance. As a result, if you own firm A bonds and purchase credit default swaps, you are purchasing insurance. Credit default swaps, on the other hand, can be purchased without any interest in the underlying. In such instances, if firm A defaults on its loan, the investor will benefit. This is where insurance becomes a game of chance. As a result, credit default swaps would be a useful financial innovation if the risk of them being misused was greatly decreased. Recently, Digital Pilipinas has partnered with Global Impact Fintech (GIFT) and the Department of Trade and Industry through the Philippine Trade and Training Center (DTI-PTTC) to host a one-of-a-kind discussion on the state and trends of the Philippine Halal Economy along the local ASEAN highways titled "Islamic Fintech and Philippine Halal Economy." With the global Islamic Finance market expected to grow to $3.8 trillion by 2022, the ASEAN corridor is developing as a fertile ground for innovation in the halal or Sharia-compliant financial business. The Philippines is positioned itself to become a regional and global powerhouse for Islamic fintech.

It is crucial to understand the distinction between financial and general innovation. Credit default swaps were not invented at the same time as the internet. This is because credit default swaps have the potential to be abused. As a result, financial authorities must maintain their integrity. It is sometimes claimed that these regulators suffocate financial innovation.

References:

Arthur, K. (2017). The Emergence of Financial Innovation and its Governance - A Historical Literature Review. Journal of Innovation Management. University of Cape Coast. Retrieved from: https://journalsojs3.fe.up.pt/index.php/jim/article/download/21830606_005.004_0005/296/1922

Guiguinto, D. (2008). The Philippine Financial System: Issues And Challenges. Retrieved from: https://www.bis.org/publ/bppdf/bispap28t.pdf

Quismorio, E. (2022, April 1). Proposed Mandatory Savings Act filed in House; here's what it does. Manila Bulletin. Retrieved from: https://mb.com.ph/2022/04/01/proposedmandatory-savings-act-filed-in-house-heres-what-it-does/

Lucas, D. (2021, November 24). BSP sets policies to make ‘green banking’ the norm. Inquirer.Net. Retrieved from: https://business.inquirer.net/334960/bsp-sets-policies-tomake-green-banking-the-norm

Yasmin, M. (2022). Wall Street sees greater risk of default by major banks. Reuters. Retrieved from: https://www.reuters.com/business/finance/wall-street-sees-greater-riskdefault-by-major-banks-2022-05-03/

Megginson, W. L. (2004). “Towards a Global Model of Venture Capital.” Journal of Applied Corporate Finance 16: 89–107.10.1111/jacf.2004.16.issue-1 Retrieved from: · https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.194.2893&rep=rep1&type=pd f

Atienza, K. (2022, May 9). As PHL votes, experts say good governance is crucial for recovery. Business World. Retrieved from: https://www.bworldonline.com/topstories/2022/05/09/447125/as-phl-votes-experts-say-good-governance-is-crucial-forrecovery/

Marques, P., Morgan, K., & Richardson, R. (2017). Social innovation in question: The theoretical and practical implications of a contested concept. Environment and Planning C, 36(3), 496–512. Retrieved from: https://journals.sagepub.com/doi/abs/10.1177/2399654417717986

(2021). More than financial advisors. Business World. Retrieved from: https://www.bworldonline.com/spotlight/2021/10/02/397836/more-than-financialadvisors/

Hilario, E. (2022, May 2). PH poised as innovation hub for Islamic Fintech. Manila Bulletin. Retrieved from: https://mb.com.ph/2022/05/02/ph-poised-as-innovation-hub-forislamic-fintech/