Chapter 10: Ethics and professional standards Flashcards
10.1: Ethical behaviours in financial services
NUMBER OF QUESTIONS 5/100
10.1.1: Ethics in principle
Ethics relate to standards of behaviour and are woven into the regulation of our industry. To be ethical means more than just complying with the rules, and it would be a mistake to think otherwise.
So, ethics lie at the heart of financial service legislation and can be labelled alongside integrity, honesty and trust. Ethical behaviour ↓ Honesty and integrity ↓ Trust ↓ Fair, more efficient markets ↓ Better outcomes for all
Ethics apply across all 11 Principles for Business that we discussed in the last chapter but are most prominent in Principle 1 (Integrity) and 5 (Market Conduct).
New rules were introduced regarding individual responsibilities in 2016 though the Senior Managers and
Certification Regime and the Senior Insurance Managers Regime
KEYFACT
Both of these initiatives have a key aim:
To ensure that those in senior positions behave with integrity, honesty and skill.
These rules should influence ethical behaviours by:
• A greater emphasis on the responsibilities of senior managers including developing and embedding culture and standards
• New conduct standards for senior managers with regular assessment of competence to deliver on such standards
• Greater rules on delegating responsibilities only to an appropriate person who is sufficiently overseen
• Introduction of whistleblowing procedures and protection of staff that use them
Ethics also plays a part in the Principles for Approved Persons. Firms and individuals alike should show positive ethical behaviours if they are to remain ‘fit and proper’ in the eyes of the regulator.
The APER principles and the code of ethics were ‘beefed up’ recently. To become accredited by the regulator, a professional body’s own code of ethics must demonstrate compliance with APER.
The Retail Distribution Review (RDR) aimed to improve standards within the regulated investment market.
Advisers now need a Statement of Professional Standing (SPS) confirming that they:
• Adhere to the Code of Ethics
• Hold the necessary qualifications to fulfil the role
• Have completed sufficient Continuous Professional Development (CPD)
• Comply with APER
Good business ethics makes good business sense.
They also help in building trust and confidence amongst customers and raise the reputation of the industry as a whole.
Many of the difficulties the financial sector has faced have centred on ethics, both in retail and wholesale
markets.
The FCA is at pains to stress that the current focus is on improving the culture and values of firms.
This supports the concept of Principles-Based Regulation.
The FCA encourages firms to:
• Look at their management structure and composition, to promote ethics
• Ensure work incentives are linked to good ethical behaviours
• Employ high standards of effective risk-management
• Consider the training needs of their employees through an ethical T & C scheme
• Deter poor behaviours.
10.1.2: The Bribery Act 2010
There are different levels of ethics. One area that has wider implications is the introduction of the Bribery Act 2010, which came into force on 15 July 2011 and specified 3 new offences:
• Offering, promising or giving a financial or other advantage, intending to bring about improper performance (‘Giving a bung’ basically)
• Bribery of a foreign public official
• Failure of a firm to prevent bribery
The act is aimed at enhancing free and fair competition, and reducing bribery in all companies, not just financial services.
Adequate resources must be employed by firms, and the message communicated from the top down, starting from senior management level and filtering down through all layers of the firm.
The company should set out its:
• no-tolerance approach and commitment to the prevention of bribery
• approach to the specific and general risks associated with bribery prevention
• strategy for mitigating and preventing the risk of bribery occurring
10.1.3: Practices on whistleblowing
Staff can become concerned at what they see going on at their place of work, but be too afraid of any consequences to report this further.
What is the definition of whistleblowing?
One definition is: ‘a person who raises a concern about a wrongdoing in their workplace’.
Many financial services organisations must now provide the following regarding whistleblowing:
• Written and published company policies
• Reporting rules
• Oversight rules
Remember, the FCA itself, as part of trying to ‘make forward looking judgements’, has a whistleblowing line
for anyone with concerns to use. This can be done anonymously if required.
Ethical behaviours in financial services SUMMARY
• Ethics relate to standards of behaviour
• They are woven into the FCA Principles for Business and Approved Person Principles
• New rules came into force from 2016, relating to behaviours and responsibilities within both the banking and insurance sectors
• Both TFC and RDR moved the financial services industry along a more ethical path
• The Bribery Act introduced new rules, aimed at encouraging free and fair competition
• Whistleblowing is where a member of staff is concerned at something they see within an organisation
• There must be adequate protection for the whistle-blower
• Whistleblowing is actively encouraged by the regulator
10.2: Putting ethics into practice
To stand a chance of embedding ethical principles into a firm, there must be a clear, complete and visible framework.
“Tone at the top” sets the tone of organisation at all levels
Board and Senior Management behaviour: “Walk the talk”
Strategy: controls include management information (MI)
Use of MI promptly to effect change
Firms must include the following elements in their frameworks:
• Ethics code or values statement
• Firm processes and structures to ensure ethics are embedded
• Evaluation methods to check progress and behaviours
Many professional bodies have their own ethics codes, adherence to which is part of being a continued member of such institutions.
Many firms have mission statements and values that reflect their corporate culture.
10.2.1: Ethics codes and value statements
Ethics codes are a high-level statement of a firm’s commitment to ethical conduct.
It’s a statement of “This is how we do things here”.
They should set out realistic and practical standards for how business should be conducted and have clear links to corporate values.
Values statements generally sit above the code as a small number of key attributes that the firm looks to its people to uphold e.g. teamwork, integrity and customer focus.
The Walker Review, conducted in 2009, stated that, during the financial crisis, principle deficiencies in banks related more to behaviour than process.
The Aldermanbury Declaration was the general insurance sector signing up to a common set of professional standards in relation to knowledge and conduct.
‘Embedding’ means that ethics are practised at all levels of a business and are ‘business as usual’. They shouldn’t be contrived and laboured.
The need for continuous Professional Development (CPD) creates a learning pathway and commitment to
maintain standards.
10.2.2: Governance
Governance is another key component and should work alongside risk-management and compliance within a business.
You will often see Governance, Risk and Compliance as a defined ‘GRC’ group.
Individuals should take personal responsibility for living the ethical values of the firm.
Any ethics code should highlight the following to individuals throughout a firm:
- Acting in an honest and fair way in the best interests of the client
- In such a way as to protect the reputation of the financial services industry
- Observing the most challenging professional standards
- Managing ethically any conflicts of interest
- Keeping knowledge levels updated
- And not exceeding own competence thresholds when dealing with colleagues or clients
The question that is often raised is ‘do we do what we say we will do’ and at every stage in a firm’s procedures it is valuable to build in time to allow ethical concerns to be raised.
The FCA paper, An Ethical Framework for Financial Services (2002) identified some core values:
• Be open, honest, responsive and accountable
• Be committed to acting competently, responsibly and reliably
• Relating to colleagues and customers fairly and with respect
Ethics will only be adopted by staff if they ‘buy in’ to the values and principles. They cannot be imposed on people. If they are, they will come across as contrived and customers will notice it. As you would expect, firms have different levels of commitment to ethics.
Look below to see some different (and in some case unacceptable) characteristics:
Minimum standard approach
• Hope never to be caught
• Do the minimum they can
• Budgets overrule ethics
Compliance culture exists • Mechanical approach to compliance • Do everything by the book • See ethics and compliance as 'business prevention' • Promote a culture of dependency
Business improvement focused
• See ethics as good for business
• Have a marketing edge’
• Clear commitment at senior level
Live the values, values-led
• Want to be ethical because it is ‘the right thing to do’
• Have principles based on its core values
• Engender the spirit of ethical values not just the ‘letter
• Promote individual responsibility
Once an ethical issue has been identified that is providing difficult to get to grips with and resolve, ‘dilemma resolution’ can be a useful process to use.
It’s basically a series of questions that can help focus on solving the ethical dilemma. The questions follow the format:
- Is the process being considered essentially ‘good’ or ‘acceptable”?
- Are the outcomes ‘good’ or ‘enduring’?
- Would the decision stand up to public scrutiny in the light of day?
- Would you be proud / happy to be associated with the decision?
Putting ethics into practice SUMMARY
- To embed ethics in a firm there needs to be a clear, visible framework
- These can include ethics codes and methods of evaluating outcomes
- ‘Tone at the top’ and walking the talk’ are examples of senior management leading by example and individuals, firms, and markets practising what they preach in terms of ethical behaviours
- Governance, risk, and compliance should work together to achieve ethical outcomes
- Dilemma resolution is a key process to help staff work through ethical dilemmas
- The Dilemma Resolution Model can help resolve ethical issues
- Even though it may feel like a ‘loop the loop’ experience
10.3: Ensuring ethical outcomes
Evaluating ethics is difficult, and often other factors need to be considered such as complaints or persistency issues.
Collecting management information (MI) can help:
• Type of MI + How it can be used
Lapses / cancellations
• Examine the frequency of policy lapses
• Early cancellations may be a negative indicator
Complaint volumes
• Need to consider the number of complaints
• And more importantly the cause
• This can identify ‘problem products or services’
Client file reviews
• Assess the quality of paperwork before, during and after advice has been provided
• This can help identify trends
• Allows firms to take the necessary steps to eradicate the problem
Business spread
• Is there a good spread of products sold?
• Or is there an imbalance to one product in particular?
• Does this flag a training and development need?
10.3.1: Ethics and TCF
The FSA issued a Guide to Management Information for Treating Customers Fairly in 2007 stating that, in order for TCF MI to be beneficial, it must be:
Seen
•MI must be reported to the level of management for whom it is relevant i.e. whoever it is most relevant for. So MI with regard to compliance monitoring should ultimately go to the Head of Compliance
Challenged
•Where the results differ greatly from the expected results, the regulator will expect the results to be challenged
Analysed and monitored
•The right messages should be drawn from the data obtained. Firms should not take the absence of poor results as a sign that customer outcomes have been achieved
Acted on
•Where appropriate, actions should be taken to remedy the situation, investigate further and follow up on actions
Recorded
• Records must be made of the Mi itself, what has been done to mitigate any issues arising, and to demonstrate the success that those actions have brought about
10.3.2: Consumer Outcomes
Individuals, firms, and markets must be clear about desired, ethical outcomes.
To help, the FSA, and now the FCA, set out six high level consumer outcomes which are:
• Consumers can be confident… fair treatment of customers is central to the corporate culture
• Products and services… meet needs of identified consumer groups
• Clear information provided before, during and after sale
• Advice is suitable and takes account of the consumer’s circumstances
• Product performance and the service provided are as expected
• Consumers do not face un-reasonable post sale barriers…claims, switches and complaints.
Did you recognise these as the TCF principles?
Positive and negative indicator examples were provided when these were published, including:
Informed
Positive behaviours
- Customer feedback is included in decisions made that affect the customer
Negative behaviours
- Feedback is not considered. Insufficient information is sought from the customer
Competent
Positive behaviours
- Individuals have the skill and expertise to fulfil their role and make decisions in the interests of customers
Negative behaviours
- Decision-makers lack expertise and make decisions favouring shareholders, not customers
Empowered
Positive behaviours
- Individuals are given appropriate levels of power to take decisions
Negative behaviours
- Individuals misunderstand their authority or lack confidence
Open to challenge
Positive behaviours
- A culture exists where individuals and customers can challenge management decisions
Negative behaviours
- No mechanisms exist that allows customers or employees to challenge management decisions
Recorded
Positive behaviours
Accurate records are kept for an appropriate length of time
Negative behaviours
Poor or incomplete records are kept about customer issues
Firms often use maturity matrices, also known as competency frameworks, to provide clarity of the
expectations of their staff at different levels. For example, within a bank, a cashier may need level 1
communication skills, but a head of customer service may need level 4.
An example is shown below:
Level 1: Early stage commitment
•Ongoing commitment to develop values
•Trusted and Honest
Level 2: Maturing
•You ‘walk the talk’
•Deliver on outcomes
Level 3: Leader
• Seen as a genuine and ethical leader
• Unbiased with a transparent ethical policy
Level 4: Innovative
• Engender ethical change
• Sponsor ethical practices
• Encourage greater awareness
Ensuring ethical outcomes SUMMARY
• Management information (MI) helps monitor ethical behaviour by providing information on areas such as complaints, cancellations, and business mix in a firm
- File reviews should be undertaken to show any unethical trends and enable these to be addressed
- Ethics and TCF are intertwined
- MI must be seen, challenged, analysed and monitored, acted on and always recorded
- Ethical behaviours should lead to desired customer outcomes
- There are six high level consumer outcomes laid down by the FCA
- These include examples of positive and negative indicator examples
- Maturity matrices, also known as competency frameworks, provide clarity of the expectations of staff at different levels
- Compliant is not the same as ethical
10.4: Ongoing engagement with stakeholders
The final areas we need to consider are around engagement.
Ethics should be constantly evolving, with continual feedback being shared amongst:
Customers, Regulators, Employees and advisers, Partners and networks
Engagement ensures that the outcomes remain valid.
Firms should also review their own values from time to time to satisfy themselves that these remain valid.
10.4.1: Evidencing ethical behaviours
Providing evidence that you are acting ethically is still evolving, with different bodies handling the subject in
different ways, such as:
• Gaining higher level qualifications such as Chartered Financial Planner Status
• ISO2222 - Defining the advice process into a five-stage process with an ethical take
• Investing in integrity - A ‘Charter Mark’ designed to show a commitment to ethical practices
• AA1000 Series - A set of principles-based standards produced by Accountability
• Global reporting initiative - A comprehensive sustainability reporting framework
To keep pace with increased customer scepticism in our industry, there have been calls for a move from ‘Tell me’ to ‘Show me’ to ‘Prove to me’ initiatives.
Tell me → Show me → Prove to me
•The company tells you they are
ethical↓
•The company can back up its claims with some MI ↓
• It is clear the firm is ethical through the actions it takes.
The role of compliance will also need to change, with different ethical cultures evolving.
Bellow shows the different levels of commitment to ethics within a compliance environment.
Minimum standard approach
• Reactive to queries and firefights
• Compliance and Business relationship is distant
• Use enforcement fear
Compliance culture exists
• Box-ticking
• Short-term fixes for breaches
• Ethics seen as irrelevant
Business improvement focused
• Consults and educates on ethics
• Proactive: spotting issues before they develop
• Asking for and analysing feedback from clients and staff alike
• Sees the link between compliance and the business needs
Live the values, values-led
• Partnership relationship
• Open to good external practice
• Reinforce good practice through reward structure
We now have some more examples of behaviours for you to practice and embed your knowledge.
10.4.2: Corporate social responsibility (CSR)
Engaging with stakeholders within a company to ensure ethical standards are at the heart of a business is known as corporate social responsibility.
12 steps have been identified in designing and implementing a CSR programme:
1 • Identifying all the stakeholders within a firm, or market
2 • Prioritising the stakeholders identified
3 • Ascertaining the issues of importance to identified stakeholders
4 • Understanding how identified issues can impact on the business
5 • Understanding stakeholder and company current stance on these issues
6 • Understanding where stakeholders need the business to be, on key issues
• Comparing this with where the business is, to see the scale of change/improvement required
7 • Understanding the time, money, experience, and authority you have available (resources)
8 • Questioning how the resources available can be used most effectively
9 • Implementing identified improvements and evaluating progress
10 • Communicating progress with key stakeholders
11 • Having an external firm check the effectiveness of the CSR programme
12 • Communicating improvements as a result of the CSR programme
Working within a regulated industry means we must work with set rules and regulations and in an ethical way. Regulators such as the FCA do not use the word ‘ethics’. They prefer to use words such as honesty and integrity.
As previously mentioned, ethics are embedded across all 11 Principles for Business. They are also supported in this aim by the APER Principles and the Fit and Proper requirements.
Ethical behaviours in financial services SUMMARY
In this chapter, we have looked at the following areas:
Ethics in financial services
• Ethics are widely defined as those values we commonly hold to be ‘good’ and ‘right’
• A strong ethical culture builds customer trust and increases engagement with the financial services industry
• Many of the recent ‘scandals’ in our industry can be viewed as ethical issues.
Ethics in practice
• Embedding ethics in a firm requires:
- An ethics code or values statement
- Processes and structures to embed ethics
- Methods of measuring and evaluating ethics
• The ‘tone at the top’ is crucial with senior managers needing to ‘walk the talk’
Evaluation and outcomes
• Evaluating ethics can be difficult and often other measures, e.g. complaints data, is required
• Reviewing feedback from customers, staff and other key stakeholders can help
• A review of certain Ml measures can also help e.g. lapses, audits etc.
Ongoing engagement with stakeholders
• Ethical standards are constantly evolving
• Feedback between customers, regulators, employees and networks is vital
