What are the social responsibilities of financial institutions?

A lot has been said and written recently regarding the irresponsible behavior of financial institutions, which many claim was the cause of problems economy has been facing. Unbridled greed when time comes to exploit their privileged situation, wages and profits of their executives perceived as excessive, their reluctance to lend and invest, have become a subject of debate. And although in Latin America the crisis has not struck as hard, we cannot exempt the region’s institutions from responsibilities.

It is a lot easier to talk about irresponsibilities, which have visible negative consequences, but it is harder to talk about what the responsibilities are, apart from not committing irresponsible acts. The responsibilities of these institutions before society are way beyond not doing evil, and even on this, they have plenty of capacity to do so without it being very visible. It is not the same as when a company pollutes air or sells a product that is harmful to health. In financial institutions damages can be more serious, but more subtle. Let us analyze what their responsibilities are.

Responsibilities of financial institutions before society

Let us begin by remembering that all the resources a financial institution manages, both their own and those of others, come from the public in general, for the service of this same public and its organizations and companies. In this role of intermediary, the public becomes one of the key stakeholders, which have to be the focus of their responsibility.

Being financial intermediation an activity of large impact, it is highly regulated, both nationally and internationally. In this sense, main responsibilities covered by laws and regulation in several countries involve issues directly related to clients and suppliers of financial resources such as: money laundering, corruption, speculation, transparence in their operations and good corporate governance principles (including excessive compensation, conflict of interests, independent directors, related party transactions, internal and external audits, risk control, etc.). This is the law in the vast majority of countries.

But the current crisis has shown, even in developed countries, that this supervision and control leaves much to be desired. It has exposed the almost impossible task of controlling them. They call the shots. ‘If you pressure me, I will not lend to people or companies’. ‘It is more comfortable for me to take deposits from the public and then lend them to governments, there are no risks’. (And here governments are partly to blame because of insatiably demanding resources which crowds out the private sector). In addition, with the amount of resources they handle they can develop managerial processes and hire personnel quite more capable than those of supervisors and regulators. They will always be many years ahead.

And not to mention the case of developing countries where these responsibilities may not even be legislated, regulated or yet well defined, and –if they are- it is very likely they will not be well monitored, controlled and punished ( How much we miss in Spanish the three words that hit the spot in supporting responsibility: ‘accountability’, ‘monitoring’ and ‘enforcement’ !).
But it is not enough with merely complying with the applicable laws and regulations in their operations, although it would be a significant progress if they did, not only in practical terms but also in spirit. Financial institutions have been given a license to operate, and I do not mean the one society gives, but the one governments do. They have been given the right to take deposits, sell financial instruments, arrange insurance policies with the public in return for services to be provided (i.e. ‘lending those resources’), responsibly investing their money, covering their risks. They have been given a privilege.

Their responsibility is to intermediate the public’s money responsibly. What does this mean?

• Complying with applicable laws and regulations. Investing more money in obeying than in evading them.

• Capturing resources and putting them into effective use, with the lowest possible intermediation margins. Lending, lending. Cutting back on their operation costs if possible. This is of the utmost importance, for instance, in the case of microfinance institutions that often constitute a quasi-monopoly.

• Allocating their resources responsibly. Lending and investing in activities that are socially responsible, making the appropriate due diligence and according to international best practice [[In Latin America there are only 7 out of a total of 70 signatory banks of the Equator Principles which include guidelines on environmental impact and affected communities, use of hazardous substances, consulting with the communities, monitoring and reporting mitigating negative impact. There are only 42, all of them in Brazil, of over 800 signatory investors and fund managers of the Principles for Responsible Investment requiring consideration of social and environmental impact in their investments.]].

• Expanding service coverage to underserved populations, with products that fit their needs (microcredits, microleasing, mobile banking, among others).

• Promoting financial education to clients. Finance and insurance instruments are usually complex, and if they are not, they will make them so. This requires customer’s education, especially when they expand to lower income populations.

• Promoting products ethically. Pressure to obtain profits makes financial institutions tend to promote complex products without considering clients’ capacity or needs or addressing markets that do not need them and neglecting those who do, but that provide for greater risks for the institution.

• Investing liquidity in responsible activities, not just investing clients’ funds responsibly.

• …And of course, carrying out their operations with social and environmental responsibility. As with any company.

The responsibilities of financial institutions are far simpler than many products they try to offer. It is about fulfilling the task for which they were created, which is not lining their own pockets or their executives’, but improving society’s saving and investment capacity.

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