Chapter 4 - Ethics, Integrity, Fairness

Question 1

What is an ethical culture?

Answer 1

Having a compliance culture is simply not enough. What is needed is an ethical culture in the firm which embodies the values underlying the whole regulatory
structure

Question 2

What is Ethical Finance?

Answer 2

Ethical finance is concerned with investment decisions being underpinned and with environmental, social and/or ethical factors.

An example of ethical finance is money invested with an ethical provider that will be reinvested into
institutions that benefit the environment or people overseas and in the UK, such as organic farming
enterprises and human rights issues.

Question 3

What is an example of Regulatory Standards>

Answer 3

• Integrity – a firm must conduct its business with integrity.
• Customers’ interests – a firm must pay due regard to the interests of its customers and treat them fairly;
and provide them with information which is clear, fair and not misleading; and advice which is suitable.
• Market conduct – a firm must observe proper standards of market conduct.
• Client assets – a firm must arrange adequate protection for clients’ assets when it is responsible for them.

Question 4

What are the CFA’s Code of Ethics?

Answer 4

• act with integrity, competence, diligence, respect and in an ethical manner with all stakeholders,
such as clients and others in the profession
• place the profession above their own interests
• exercise independent professional judgement
• encourage others to act in a professional and ethical manner
• uphold the rules governing capital markets
• exercise continuing professional development.

Question 5

What is CISI’s Code of Ethics?

Answer 5

• To act honestly and fairly at all times, putting first the interests of clients and customers and to be a good steward of their interests and those of counterparties,
• To act with integrity in fulfilling the responsibilities of your appointment and to seek to avoid any acts, omissions or business practices which damage the reputation of your organisation or the financial sector.
• To observe applicable law, regulations and professional conduct standards when
  carrying out financial service activities
• To observe the standards of market integrity, good practice, conduct and confidentiality required or expected of participants in markets
• To be alert to, and manage fairly and effectively and to the best of your ability, any relevant conflict of interest
• To attain and actively manage a level of professional competence appropriate to your responsibilities
• To decline to act in any matter about which you are not competent
• To strive to uphold the highest personal and professional standards at all times.

Question 6

What are Fiduciary Duties?

Answer 6

It is a legal or ethical relationship of confidence or trust
regarding the management of money or property between two or more parties, most commonly a
fiduciary and a principal.

Question 7

What are the advantages to an Ethical approach?

Answer 7

An ethical approach helps minimise the negative effects of employee behaviour while ensuring a
firm and its industry sustain healthy competition as well as socially responsible behaviour in the long
run. Put simply, ethics control costs that cannot be controlled directly or may not be known.

Question 8

What is Corporate Culture?

Answer 8

At its most basic, corporate culture expresses itself in the behaviour of individuals and in the way a
business is run.

Question 9

What is Corporate Social Responsibility?

Answer 9

Corporate social responsibility (CSR) is a form of corporate self-regulation integrated into the business
model of a company. CSR policy functions as a built-in, self-regulating mechanism whereby a business
monitors and ensures its active compliance with the spirit of the law, ethical standards, and international
norms.

Question 10

What is the goal of CSR?

Answer 10

The goal of CSR is to embrace responsibility for the company’s actions and encourage a positive impact
on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere.

Question 11

What are IOSCO’s ethical principles?

Answer 11

• integrity and truthfulness
• promise keeping
• loyalty (fully disclosing conflicts of interest)
• fairness to the customer
• doing no harm to the customer or the profession, and
• maintaining confidentiality.

Question 12

What are the benefits of Fair and Orderly Markets?

Answer 12

• Investors will have the confidence to invest in securities issued by businesses which need to raise
capital.
• They help to establish the environment to encourage economic development and wealth creation.
• They allow the transfer of capital between enterprises at fair prices for minimal cost.
• They successfully provide liquidity through the speed and ease with which capital transfers can be
affected, and buyers and sellers are able to locate counterparties willing to trade a wide range of
securities at acceptable prices quickly and efficiently.
• Investors can be reassured that settlement and delivery of stock will take place.
• Information will be readily available to ensure transparency.
• The way in which securities trades are handled and cleared will be controlled and rules adopted
aimed at limiting the volatility of security prices.
• Significant resources will be applied to the identification and prevention of market abuse.

Question 13

Who can commit Insider trading?

Answer 13

Individuls ONLY. Not companies.

Question 14

What are the common permitted isntances of Insider Trading?

Answer 14

• Market Makers
• Market Information
• Price Stabilisation

Question 15

What is a Chinese Wall?

Answer 15

A Chinese wall is the term given to arrangements made by a firm to manage conflicts of interest where
information held by an employee in one part of the business must be withheld from (or, if this is not
possible, at least not used by) the people working in another part of the business.

Question 16

What two templates did the MAD establish for Insider Registers?

Answer 16

One template to record permanent insiders, the other to record those who are insiders only in respect of a particular event or period of time

Question 17

What measures should a company take during the sensitive peiod beofre an M&A deal is made public?

Answer 17

During the sensitive period, participants in an offering should implement trade review and surveillance
procedures usually known as watch lists (sometimes referred to as grey lists), which permit trading
in the securities on the list, subject under close scrutiny by the firm’s compliance department, and
restricted lists, which restrict or prohibit trading in the securities on the list.

Question 18

Who can see a Bank’s Restricted List?

Answer 18

As inclusion on a restricted list will often mean
that the firm and the issuer are engaged in some business/transaction, it is important that the restricted
list (or details of the securities included) should not be communicated to anyone outside the trading
areas of the firm or to anyone external to the firm.

Question 19

What role does Compliance play in Trading Restrictions?

Answer 19

When an employee becomes aware of material information regarding a security, they should immediately inform the compliance officer. The compliance officer must then decide on the trading restrictions, if any, that are appropriate in the circumstances. In particular, the compliance officer must decide whether to place the security on the firm’s watch list or restricted list.

Question 20

What is a Relevant Person under MIFID?

Answer 20

In simple terms, a ‘relevant person’ means anyone working for the firm (from directors of the firm or any of its appointed representatives, to any natural person involved in providing services to the firm – such as an outsourced services provider).

Question 21

What would a PAD policy typically restrict?

Answer 21

1. entering into a personal transaction that is contrary to the MAD; involves misuse or improper
   disclosure of confidential information, or conflicts with the firm’s duties to a customer
2. improperly advising or procuring that anyone else enters into a transaction that (if it had been done
   by the employee themselves) would have fallen foul of the above or of a ‘relevant provision’, or
3. improperly disclosing information or opinion, if they know or should know that the person to whom
   they have disclosed it is likely to enter into a transaction that (if it had been done by the employee
   themselves) would have fallen foul of the above or of a relevant provision or encouraging someone
   else to do so.

Question 22

What would a PAD policy not apply to?

Answer 22

• deals under a discretionary management service, if there is no prior communication between the
portfolio manager and the relevant person (or any other person for whose account the transaction
is being executed) about the deal
• deals in units/shares in certain classes of a fund, if the relevant person (and any other person for
whom the deals are affected) is not involved in the management of the fund.

Question 23

What is the typical threshold for disclosure of significant shareholder relations for Research?

Answer 23

Disclosure of any significant shareholder relationship between the firm (or any affiliated
company) and the relevant issuer (the company which is the subject of the investment research
recommendations), including at least:
• shareholdings exceeding 5% of the total issued share capital held by the firm or affiliated
company
• shareholdings exceeding 5% of the total issued share capital of the firm or any affiliated
company held by the relevant issuer.

Question 24

What must a Whistlebloower policy address?

Answer 24

Firms need to put in place appropriate arrangements that allow staff to raise concerns about any
malpractice with their manager, a senior executive or an independent function like compliance. If they
feel uncomfortable raising the matter internally, the firm should also provide details of an external body
such as private or charitable services. In some cases, regulators themselves provide a telephone hotline
or an email address for staff to contact.

Question 25

What re the 6 expected outcomes laid out by the FCA for fair treatment of retail customers?

Answer 25

• Outcome 1 – Consumers can be confident that they are dealing with firms where the fair treatment of
customers is central to the corporate culture.
• Outcome 2 – Products and services marketed and sold in the retail market are designed to meet the
needs of identified consumer groups and are targeted accordingly.
• Outcome 3 – Consumers are provided with clear information and are kept appropriately informed
before, during and after the point of sale.
• Outcome 4 – Where consumers receive advice, the advice is suitable and takes account of their
circumstances.
• Outcome 5 – Consumers are provided with products that perform as firms have led them to expect,
and the associated service is of an acceptable standard and as they have been led to expect.
• Outcome 6 – Consumers do not face unreasonable post-sale barriers imposed by firms to change
product, switch provider, submit a claim or make a complaint.

Question 26

Where a conflict of interest arises, how must a firm act?

Answer 26

In the best interest of their clients

Question 27

What is the normal first step for a client who has a complaint?

Answer 27

The normal process when a client has a complaint is for them to first approach the firm to seek
resolution. Regulators will normally encourage the client to contact the firm directly as soon as possible.
Typically, regulated firms are required to investigate complaints promptly and reply to them within an
appropriate period, eg, eight weeks.

Question 28

In the UK, where can a client escalate complaints?

Answer 28

If an investor is not satisfied with the firm’s response, an ombudsman service may be able to help. The
Financial Ombudsman Service (FOS) offers a usually a free independent service for settling disputes
between financial services firms and their customers.

In the UK, the Ombudsman can now make awards of up to £150,000.

Question 29

What steps must a firm take when holding client money?

Answer 29

Firms must take the necessary steps to ensure that client money is held in an account or accounts identified separately from any accounts used to hold money belonging to the firm.

Question 30

Where might a Bank hold client money to achieve segregation?

Answer 30

• a central bank
• a Banking Consolidation Directive (BCD) credit institution (a credit institution that has its registered
office in a European Economic Area (EEA) state)
• a bank authorised in a third country
• a qualifying money market fund.

Question 31

What could be classed as a lavish gift?

Answer 31

Holidays, Ipad etc

Question 32

What is covered under the Unfair Contract Terms Act 1977?

Answer 32

The Act renders terms excluding or limiting liability ineffective or subject to reasonableness, depending
on the nature of the obligation purported to be excluded and whether the party purporting to exclude
or limit business liability is acting against a consumer.