Ethics in the time of COVID-19

By Professor Paul Kofman and Clare Payne

In the wake of last year's banking royal commission, this situation is a chance for banks to redeem their reputations and rebuild trust.

With sharemarkets crashing and unemployment expected to surge, one thing stands out amid the carnage of COVID-19.

Many small firms, family firms and retailers had to close their businesses overnight as they saw cash flow evaporate.

Their exposure to instant financial distress has been unprecedented. The terrifying speed at which the backbone of our economy was impacted has taken many economists and policymakers by surprise.

As a consequence, governments, regulators and banks have had to work together to ensure stability and maintain societal trust.

Prof Paul Kofman and Clare Payne.

While wage subsidies and interest deferrals have created a temporary reprieve, the question is, what happens next?

In our opinion, the banks have a major role to play — now and post-COVID — in ensuring the ethical fabric of society is strengthened by the measures that are being put in place.

Last year’s banking royal commission identified small businesses as particularly vulnerable to unethical treatment by their banks. COVID-19 therefore provides an opportunity for Australia’s banks to rebuild trust by providing extra support to small business.

It’s clear that small businesses are crucial to both the economy and bank performance. The banks have stepped up to provide temporary relief from unserviceable loans, whether by moral obligation or self-interest. The government has termed this “building a financial bridge” to economic recovery.

But, we must ask, will the bridge support all those that need to cross? And what will they find on the other side?

We illustrate with three examples:

First, despite a precipitous fall in their share prices, many large corporations have so far proven resilient and are using other mechanisms to avoid financial distress.

In contrast, many small businesses appear to have been operating on thin margins, with little to no cash on the accounts. Sadly, at the tail-end of three decades of economic growth, many small businesses hold substantial debt on their books.

To us, there seems to be a clear case for banks supporting and ensuring small business operates on sustainable financial footing. While that would not have prevented the dire consequences of COVID-19, some resilience would have bought valuable time for government and regulators to intervene.

Banks know the finances of small business more intimately than government and regulators. They, along with financial advisers and accountants, should be on the front line, reading and responding to early warning signs of complacency, and generally supporting small businesses’ financial wellbeing.

Second, the wholesale adoption of digital banking will likely last beyond the crisis.

Banks will benefit from related efficiency gains and cost savings. But more than that, this is a vote of confidence in our banks — restoring a level of trust that would have been inconceivable just a year ago.

It will be a test of ethics for the banks to show and deliver the benefits of digital finance to their employees and customers.

Digital finance presents new risks to both banks and customers. While much effort will be made to ensure regulatory compliance, banks should also ensure the other impacts on society are understood and benefits shared.

And third, what are the ethical implications of the government allowing early access to superannuation savings? How much can be withdrawn without substantially jeopardising minimum retirement living standards?

Conflicts of interest, unethical practices and untenable business models have seen banks progressively move away from providing financial advice.

However, the moral obligation to look after their customers remains, therefore efforts should be made to internally resolve conflicts and develop models that allow their customers to benefit from banking and financial experts who can guide the public in making informed decisions.

Most, if not all, financial interventions have repercussions. Bank loans have to be repaid. A reduction in the super savings will mean a smaller benefit on retirement.

Now we must ask, who will take responsibility for managing the risks and ethical implications when crossing “the bridge”?

If ever there was an opportunity for the banks to show their customers that they care, this would be it.

In the words of one of our banking pillars: “(We provide) financial support ... so that we can get back to normal ...”

This is an opportunity for a new normal with ethics at its core.

This article originally appeared in The Australian.

Paul Kofman is the Sidney Myer Chair of Commerce and Dean of the Faculty of Business and Economics at the University of Melbourne, and Clare Payne is the EY fellow for trust and ethics and Honorary Fellow at the University of Melbourne. Paul and Clare are the authors of A Matter of Trust — The Practice of Ethics in Finance (Melbourne University Publishing).