Ethical review of financial services: Misusing authority and misleading clients

 Cherry Anne B. Salvatera

Master’s in Business Administration

Divine Word College of Laoag, Laoag City, Ilocos Norte 

Abstract

This article examines ethical issues in the Philippine financial services sector, with a focus on financial advisors abusing their authority and engaging in the mis-selling of financial products. In a world where financial literacy is often inadequate and trust in institutions is critical, the power differential between advisors and clients can lead to potential exploitation. We've seen several ethical quandaries arise as a result of agents who misrepresent insurance, promote investment-linked policies, or push unnecessary banking products to earn a commission. Despite the presence of regulatory bodies such as the Securities and Exchange Commission (SEC Philippines), the Bangko Sentral ng Pilipinas (BSP), and the Insurance Commission, enforcement challenges and cultural attitudes occasionally allow these problems to persist.

Using both global and local examples, this paper illustrates the structural problems that enable unethical behaviour and proposes better regulation, improved ethical training, and adjustments to the compensation structure. Ultimately, restoring public trust in Philippine financial services necessitates not only legal regulation but also a values-based approach to professional behaviour.

Keywords: financial sector, misused authority, advisor, misled clients, abuse, commission, trust, fiduciary, ethics, savings, conflicts of interest

Introduction

The financial services sector relies on trust. Clients choose a financial advisor who provides practical guidance while prioritising their needs. Financial advisors can significantly impact their customers' futures, whether through retirement planning or managing life savings. This fiduciary responsibility goes beyond professional duty and is an ethical commitment. However, when authority is abused and clients are purposefully misled, the foundation of trust is weakened.

In recent years, we have seen a worrying trend in which financial advisors and institutions put personal or corporate interests over their ethical obligations. The misuse of authority in financial services is more than just poor decision-making; it is a systemic ethical failing with far-reaching implications. This paper aims to investigate the causes of these violations, the reasons they persist, and the necessary steps to maintain ethical standards in a sector that has a direct impact on people's financial well-being. Mis-selling unsuitable financial products, hiding critical information, or using their position to influence vulnerable clients are all serious violations of professional integrity.

Fiduciary Duty

            Trustworthy financial advisors are fiduciaries, which means they are legally bound to operate in their clients' best interests, not their own. As one might expect, commission-based enterprises often fail to meet this fiduciary requirement. Instead, they concentrate on earning potential and rewarding opportunities under a less stringent appropriateness criteria, which requires that the proposed financial product be acceptable for the client's financial circumstances, but not necessarily in the client's best interests. Conflicts of interest, on the other hand, are more likely to disrupt relationships when there is no fiduciary standard in place.

Authority Bias

            We are more likely to trust persons with titles, credentials, or institutional backing. This psychological tendency, known as authority bias, causes clients to immediately trust financial consultants, allowing them to avoid rigorous assessment. According to Dr. Turner, a highly respected geneticist and CEO of a major biotech company, authority bias occurs when individuals tend to follow and believe the opinions or suggestions of those in positions of authority or power, such as teachers, doctors, police officers, managers, or experts in the field. This bias can have a substantial impact on how we obtain, comprehend, and respond to information in all aspects of our lives.

How Authority is Misused in Client Relationships

Advisors may abuse their position in various ways:

·         High-pressure sales tactics: A growing body of research demonstrates how sales methods can promote unethical behaviour. One study found that advisors paid on sales commissions were significantly more likely to engage in misconduct, resulting in client losses exceeding $25,000 (Patel, 2019). Team-based incentives may reduce the quality of suggestions, as advisors may encourage customers to purchase high-commission products to meet their internal goals. This conflicts with their fiduciary duties, as they prioritise personal profit over the best interests of the client.

·         Complex jargon: Accounting, like many other professions, has its distinct manner of communication. Jargon has a bad reputation, yet there is a time and place for everything, including specialised lingo. Using complex vocabulary to attract clients could be considered adviser abuse. While this jargon can be helpful as a shorthand for those who understand it, it can also be used to confuse and manipulate clients who are unfamiliar with the terms and conditions. This creates a power imbalance, in which the advisor appears competent while the customer feels bewildered or compelled to comply without fully understanding.

These strategies leverage the trust inherent in the financial advisor-client relationship and often lead clients toward decisions that prioritise the advisor's interests.

The Mechanics of Misleading Clients

Misleading clients often involves:

·         Risk misrepresentation. A misrepresentation is a misleading statement of fact made during contract talks to persuade one party to agree. In this case, a financial advisor presents an investment in a financial product as low-risk, even if it carries significant volatility.

·         Unsuitable products. This case involves pressuring a client to purchase a product that is not aligned with their financial goals. For example, a woman who is about to retire wants to invest her money in a short-term investment, yet an advisor pushes this older woman to opt for a long-term investment to achieve a high return or income.

These practices transform professional guidance into manipulative sales pitches, violating ethical obligations.

The Need for a Culture of Ethics and Accountability

Building a truly ethical financial industry requires:

·         Transparent compensation models. This includes explicitly exposing how and why employees are compensated, promoting fairness, trust, and engagement. This strategy could involve publicising wage ranges for roles, detailing the factors that influence pay, and communicating the company's overall compensation policy.

·         Ethics Training and Leadership. This involves an institutional focus on integrity over sales targets.

·         Whistleblower protection. We aim to create an environment where employees feel comfortable reporting any misconduct without fear of retaliation. It's vital to remember that when writing responses, we should always keep to the prescribed language and avoid using anything other.

Conclusion

The backbone of financial services is trust, but when that trust is broken—due to the abuse of power and the mis-selling of financial products—the consequences can be severe. Clients may not only lose their money, but they also lose their faith. These unethical behaviours are some of the frequent consequences of broader structural issues, such as skewed incentives, lax oversight, and a sales-driven culture that prioritises profit over people. There are regulatory authorities, such as the BSP, SEC, and IC, that are effective at identifying and disciplining misconduct; however, meaningful change requires more than just following the rules. It advocates for a cultural shift in financial institutions that fosters openness, prioritises long-term customer relationships, and empowers both advisors and clients to act ethically.

Restoring ethics in financial services is more than simply meeting regulatory obligations; it is a moral duty. Only through accountability, increased education, and structural changes will the industry reclaim the public trust it so desperately needs. And only when ethical behaviour is at the forefront of every financial concept will the sector be able to fulfil its mission of supporting individuals in reaching their financial goals with honesty and integrity.

References

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Motion Tactic. (2022, March 23). Jargon: A Double-Edged Sword - Allinial Global. Allinial Global. https://allinialglobal.com/blog/jargon-a-double-edged-sword

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Snigdha Parghan. (2024, June 13). Understanding Compensation Models: Your Complete Guide. Kennect.io; Kennect. https://www.kennect.io/post/compensation-model

 

 

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