Chapter 1: Ethics and Integrity in Financial Services Flashcards
What are the four key principles to consider when making an ethical decision?
Is the decision…?
1) Clear and Honest
2) impartial and Open
3) Straight Forward and Transparent
4) Informed and Fair
Give an example of an event in recent history which undermined the integrity and ethics of the financial services industry.
Rigging of the LIBOR (London Interbank Offered Rate) and other interest rate setting mechanisms around the world.
Banks are supposed to submit the actual interest rates they are paying, or would expect to pay for borrowing from other banks do that benchmark interest rates (such as the LIBOR) can be set.
Having a set interest rate is important as it serves as a benchmark for setting the price of government and corporate bonds, mortgages, student loans, credit cards and other financial products.
It was discovered that traders at some of the big banks had been falsely inflating or deflating interest rates in order to profit from trades, or to give the impression they were more creditworthy than they were.
This had a negative effect on consumers and financial markets and resulted in fines for the banks and jail sentences for the individuals involved.
Give two reasons why sales is particularly open to the risk of unethical behaviour.
1) Commission structure incentives
2) Asymmetric Information in financial services - customers may not know what they are buying
What is ESG?
ESG stands for environmental, social and governance and it has become increasingly important over the recent years. ESG is linked
to ethics in that it assesses whether a company is ‘doing the right thing’ in terms of the impact it has on the environment, the community in which it operates and the way it is governed.
When it relates to companies, because companies are
corporate bodies, governance is often referred
to as corporate governance.
Give three examples of what may be assessed as Environmental criteria for ESG.
1) How much energy the company uses and how responsible it is in conserving energy.
2) Whether the company minimises waste and pollution.
3) The conservation efforts of the company and the impact it has on the natural world.
Give four examples of what may be assessed as Social criteria for ESG.
1) The extent to which the company supports its local community.
2) Charitable contributions made by the company.
3) Whether the health and safety of the workforce is held in high regard.
4) The values encouraged and required of the company’s suppliers, such as their working conditions and the way their employees are treated.
Give three examples of what may be assessed as (Corporate) Governance criteria for ESG.
1) The diversity of the company’s management and board of directors, in terms of age, experience, ethnicity, and gender.
2) The balance between executive directors (making day-to-day decisions) and non-executive directors (acting in a more consultative capacity).
3) The values and ethical expectations placed on the staff, particularly the senior management.
What is responsible investment?
Why might doing the right thing morally and ethically be good for companies?
Investment where the primary aim might still be to grow the money invested over time, but this is combined with the consideration of ESG factors and other ethical criteria that will distinguish which investments are acceptable or unacceptable.
Finally and critically, it is possible that, as doing the ‘right’ thing morally and ethically becomes increasingly important, those companies that do so become more successful and valuable. So, investing responsibly might be helpful in generating better investment returns than might otherwise be the case.
What is impact investing?
Give two examples of impact investing.
Impact investing involves investing money that, in addition to generating a financial return, is also targeted at having a positive impact on society or the environment. It enables investors to invest with a conscience in the knowledge that the investment will make a favourable difference.
1) Gender lens investing
2) Microfinance
What is Gender Lens Investing?
Give four examples of Gender Lens investing.
Gender lens investing is about focusing on investments that will promote gender equality, providing opportunities to women.
1) Providing capital to enable women to launch or expand their businesses.
2) Helping fund products and services that will benefit women and girls.
3) Pushing for an appropriate balance of male and female membership of the board of directors and the broader workforce.
4) Putting pressure on the company towards equality of working conditions, including levels of pay between male and female employees
What is Microfinance?
Microfinance tries to make an impact on low income or unemployed individuals, who not normally have access to conventional financials services.
Often targeting under-developed or developing countries, microfinance typically takes the form of low value loans (microloans) that are often combined with some financial or business education.
1) It usually helps sole traders, family businesses and small cooperatives become more organised in order to buy the equipment they need, becoming more stable and resilient as a result.
2) Crucially, it can also remove the need for the impoverished to utilise what are often unprincipled and expensive moneylenders
