Abstract
Walking the first mile is mandatory, doing what is required, fulfilling what the law and regulation demand from corporate governance. The second mile is optional and voluntary. The laws of physics dictate that the first mile has to be walked before a second one can be attempted. However, corporate social responsibility (CSR) approaches and strategies appear not only to allow but also to extol the virtues of walking the second mile before completing the first, the assumption being that a second mile can help lift the corporate image even where the first mile of good corporate governance has not been walked.
Banks and financial institutions spend millions of pounds promoting financial literacy education as part of CSR in order to address perceived low standards of financial education among the public. The expectation seems to be to generate a consumer-friendly banking image that helps to shift the public focus from irresponsible bankers to irresponsible consumers. However, as the second mile of CSR has often not been preceded by the first mile of good corporate governance, the image of banking has persisted as one of irresponsibility, fraud and malfeasance.
How should banking companies go about developing corporate plans for CSR? If good CSR is to truly become the extra second mile walked by companies to promote social welfare, the mile of good corporate governance has to be walked first. Two simple suggestions are proposed. It is submitted that these proposals, if implemented, would be effective in promoting the corporate image of financial institutions as well the financial literacy levels of the general public, thereby achieving the aims of both good corporate governance and good corporate responsibility.
And whosoever shall compel thee to go a mile, go with him twain
Matthew 5:41 in the Bible, King James Version
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Notes
- 1.
With effect from April 2010, the Consumer Financial Education Body (CFEB) , established under the Financial Services Act 2010, continued the work of the FSA's Financial Capability Division independently of the FSA, and with effect from April 2011, the CFEB has been relaunched as The Money Advice Service (MAS). With effect from April 2012 the FSA has become a subsidiary of the Bank of England , and split into the Prudential Regulation Authority (PRA) for maintaining financial stability, and the Financial Conduct Authority (FCA ) for supervising the conduct of banks.
- 2.
Known as unit trusts in the UK.
- 3.
See for example Appendix for a worked example of how an advertised interest rate of 8 % actually works out to an effective interest rate of 14 % due to the method of interest application.
- 4.
The guide did not record the year of its publication.
- 5.
A common trick used by financial institutions is to omit the per annum (p.a.) after an interest rate, thereby reducing the apparent cost of a loan or increasing the apparent return from an investment. For example, a loan misleadingly advertised as having an interest rate of ‘only 1 %’ could actually mean 1 % per day which is 365 % per annum; if this is compounded every day the AER will work out to a phenomenal 3678 % p.a. The formula for calculating AER is [1 × (1 + r)n]–1, where r = rate of interest, and n = number of compounding periods. Thus [1 × (1 + .01)365] − 1 would work out to an AER of 3678 % where the quoted interest rate was “just 1 %” compounded daily over 365 days.
- 6.
- 7.
Note that the term ‘APR’ carries different meanings in different countries.
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Appendices
Appendix 1: Calculation of Annual Equivalent Rate (AER )
How an advertised interest rate of 8 % actually works out to an AER of 14 % due to the method of interest application
Loan amount: £1200
Interest @8 % per annum for 1200 for one year: £96
Interest application method: Added on to the principal at the outset (not calculated on reducing balance of loan)
Average loan balance during the year: £686 (not £1200)
Therefore the effective rate of interest works out to: 14 % per annum (not 8 %)
Date | Particulars | Debit | Credit | Bank balance | Actual loan balance |
---|---|---|---|---|---|
1 January | To loan | 1200 | −1200 | ||
1 January | To interest | 96 | −1296 | −1200 | |
31 January | By installment | 108 | −1188 | −1092 | |
28 February | By installment | 108 | −1080 | −1080 | |
31 March | By installment | 108 | −972 | −972 | |
30 April | By installment | 108 | −864 | −864 | |
31 May | By installment | 108 | −756 | −756 | |
30 June | By installment | 108 | −648 | −648 | |
31 July | By installment | 108 | −540 | −540 | |
31 August | By installment | 108 | −432 | −432 | |
30 September | By installment | 108 | −324 | −324 | |
31 October | By installment | 108 | −216 | −216 | |
30 November | By installment | 108 | −108 | −108 | |
31 December | By installment | 108 | 0 | 0 | |
1296 | 1296 | ||||
Average balance | −686 | ||||
Stated rate of interest | 8 % pa | ||||
Interest (i) = | Principal (P) × period (n) × rate of interest (r)/100 | 1200 × 1 × 8/100 | 96.00 | ||
Annual Equivalent Rate (AER) | |||||
r = | i/P/n × 100 | 96/686/1 × 100 | 14 % pa |
A more accurate calculation can be made using the Excel spreadsheet function for the internal rate of return (IRR) and arrive at the figure of 14.4521 % pa as the actual cost to the borrower.
[This was the method of interest calculation adopted by Leeds and Holbeck Building Society for its fixed rate mortgage.]
Appendix 2: Interactive Voting Proposals to ‘Westminster Briefing’ for Being Put Forward for Parliamentary Debate
I propose a measure that could go a long way toward furthering public understanding of interest rates, which currently assume more shapes and sizes and guises than those encountered in more regulated economies.
At present it is virtually impossible to find the annual equivalent rate (AER ) published for loans or the simple interest rate published for deposits. Currently, financial institutions provide AERs for deposits but not for loans because the compounded rates are higher (and more attractive as deposit rates, but less attractive as loan rates), and they provide the simple interest rates for loans but not for deposits as that is more attractive as loan rates, but less attractive as deposit rates. Further, interest rates are frequently published in a misleading manner as they are not expressed as a percentage per annum.
I propose that the publication of the simple rate of interest as a percentage per annum, the frequency of compounding, and AER be made mandatory for loans in addition to the APR , which is not well understood by both consumers and many financial literacy practitioners; conversely, for savings deposits, the publication of the simple interest rate as a percentage per annum and the frequency of compounding should be made mandatory in addition to the AER .
Do you believe that this proposal will improve public understanding of interest rates?
I propose that all material produced with a view to promoting financial capability be compelled to show the date of production/publication.
This will facilitate the identification of poorly produced material that is inaccurate or out of date on date of publication.
Do you believe that this proposal will lead to the production of more up-to-date material?
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Lee, N. (2017). Walking the Second Mile before the First: A Corporate Social Responsibility Conundrum?. In: Idowu, S., Vertigans, S. (eds) Stages of Corporate Social Responsibility. CSR, Sustainability, Ethics & Governance. Springer, Cham. https://doi.org/10.1007/978-3-319-43536-7_7
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