Financial Services: Ethical Pitfalls and the Role of Ethical Practices

Ethical Pitfalls and the Role of Ethical Practices
Student’s Name
Institutional Affiliation
Course Title
Instructors Name
Due Date
Ethical Pitfalls and the Role of Ethical Practices
Introduction and Background
The financial sector is a complex mammoth system permeating local and global socioeconomic functions. In principle, the sector promotes and improves social and economic welfare by mobilising savings and distributing capital to worthy investments. Banks (commercial and investment) and insurance firms constitute financial intermediaries, providing the conduit through which capital flows between savers and borrowers (Hanley & Hoberg, 2019). According to Yu et al. (2021), these activities facilitate economic growth, create employment, and reduce societal poverty (p. 4). In addition, the financial sector provides the bedrock for the growth of healthy markets and resilient economies. For instance, it provides liquidity, allows the development of risk management strategies, and reduces inefficiencies and costs of doing business.
In practice, the financial sector taps into businesses, households, and other institutions (including governments and local authorities) to mobilise savings that it then avails to borrowers through loans and investments. As a result, it supports innovation, entrepreneurship, and sustainable development by financing projects that generate social and environmental benefits alongside financial returns (Bayar et al., 2018). It also provides a collection of efficient and reliable instruments (financial services) to individuals, businesses, and governments to aid their socioeconomic empowerment. Further, the sector creates various assets like currencies, derivatives, and stocks, which economic agents can trade (Hanley & Hoberg, 2019). Finally, the financial sector maintains the stability of local and global economies and guarantees consumer protection by ensuring compliance with regulations, conducting due diligence, and providing transparency and disclosure of information.
The debate over the specific factors behind the financial crisis of 2007-2008 rages on even today. Experts agree that the increasing complexity of financial products was among the fundamental causes of the crisis. Financial institutions created and marketed increasingly complex financial products such as mortgage-backed securities, collateralised debt obligations, and credit default swaps (Ogg, 2022). According to Ogg (2022), these products comprised multiple layers of risk and lacked transparency, making it difficult for investors to fully understand the risks involved. In addition, regulators did not adequately understand the complexity of these products and their potential impact on the financial system. This lack of understanding and transparency led to a mispricing of risk, with investors taking on more risk than they realised, ultimately leading to the collapse of the housing market and the subsequent financial crisis.
The increased complexity of financial products also contributed to the financial crisis of 2007-2008 due to the interconnectedness of financial institutions and their exposure to these products. Financial institutions held large amounts of these complex financial products on their b...