Chapter 4: Integrity and Ethics in Professional Practice Flashcards
When considering the ‘ethics vs compliance’ approach to regulation, the ethical issue of ‘prevention’ is paired with the compliance requirement of:
A. Mandatory
B. Fear-driven
C. Detection
D. Letter of the law
C. Detection.
Ethics is what you OUGHT to do, whereas compliance is what you HAVE to do.
The ethical principle, to ensure that the outcome of a transaction is fully equitable to all parties to that transaction, is known as:
A. Honesty
B. Openness
C. Fairness
D. Transparency
C. Fairness requires that a transaction or decision is fair to all involved or affected by it.
Richard Nixon is a senior private wealth manager with Tricky plc, a leading fund management firm based in London with many professional and retail clients.
Upon returning from a business development trip to Tokyo, Nixon has published an internal memorandum to all his subordinates recommending that all clients of ‘growth’ portfolios within Tricky’s client base ought to be advised to contain a minimum 10% investment into Trofu Fund, a soon to be launched third-party Japanese hedge fund investing in Asian equities. Given Tricky’s reputation for spotting exclusive and lucrative products for their clients, the pre-order book quickly fills up.
Disappointingly for Nixon, Tricky is informed that, due to excess demand, only part of Tricky’s subscription to Trofu Fund will be allocated to them. The dealing desk asks Nixon for a ‘steer’ as to how the allocation should be split between clients. Not unnaturally, Nixon propose that long-standing and profitable clients should be looked after here.
Which of the following issues pose ethical problems for Tricky plc?
I The level of fees to be paid to Trofu, given the disappointing part-allocation
II Nixon’s conduct relating to his internal memorandum
III The proposal of Nixon regarding the allocation of units in Trofu to clients
IV The fact that Trofu is not an FCA-registered collective investment scheme
A. All four issues
B. Issues I, II and III only
C. Issues I, III and IV only
D. Issues II, III and IV only
D. Issues II, III and IV only.
The level of fees to be paid to Trofu is a business issue for Tricky to consider, not an ethical issues. However, the other three issues pose ethical questions for Tricky to consider.
Nixon’s memo suggests that all clients of ‘growth’ portfolios ought to contain at least 10% Trofu Fund units. Such as instruction risks falling foul of COBS Suitability rules - and to issue an instruction to all subordinates implying that suitability rules can be ignored is certainly unethical.
The allocation of the units should be decided in a fair, open and ethical manner - it is obviously unfair to prioritise older or more profitable clients in this way.
Finally, there are regulatory and ethical issues relating to the promotion of hedge funds to retail clients, which means that the regulatory status of Trofu is something that Tricky should consider.
Raymond, an unauthorised person, left his employment with IEW IFA Ltd to set up his own IFA practice around two weeks ago. Using Internet search engines and the phone book to find telephone numbers to use, Raymond contacted several of his previous clients to tell them of his new practice and the advisory services he is now offering and offers them discounts for transferring their business to him.
According to the CISI Professional Code of Conduct, which of the principles might Raymond have broken?
A. Principle 1, the principle relating to personal accountability, in speaking to his old clients
B. Principle 2, the principle on client focus, in speaking to his old clients
C. Principle 3, the principle on conflicts of interest, in speaking to his old clients
D. Principle 4, the principle on respect for market partners, in speaking to his old clients
A. Principle 1, the principle relating to personal accountability, in speaking to his old clients.
It is clear from the question that Raymond is not authorised by the FCA to offer IFA services, and as such has broken Principle 1, the personal accountability principle, in respect to conduct of business financial promotions rules and the general prohibition.
However, if Raymond had been authorised, he would NOT have broken any of the other Principles since he has used publicly-accessible information sources to find contact details for his previous clients. Contacting the clients is fine, so long as Raymond does not use any confidential IEW Ltd information in order to do so.
Which of the following is the motto of CISI and its members?
A. Dictum meum pactum
B. Quocumque perrexeris, ibi estis
C. Nil status nisi optimum
D. Veni vidi Vinci
A. Dictum meum pactum meaning ‘my word is my bond’.
The FCA initially established a Handbook of detailed and prescriptive regulation that does not impose any standards of ethical behaviour except for:
A. Principles for Businesses only
B. Principles for Businesses and Conduct Rules
C. Conduct Rules only
D. Conduct Rules for Approved Businesses
B. The Principles for Businesses and Conduct Rules are high-level and do not go into detailed rulings but instead provide an ethical framework for firms and individuals respectively.
How many Principles are contained within the CISI Code of Conduct?
A. Seven
B. Eight
C. Nine
D. Ten
B. There are eight principles.
The Principles are a way in which the CISI attempt to ensure its members ‘act in a way beyond compliance’.
Members of the Chartered Institute for Securities and Investment are required to follow the professional code of conduct. Who is one of the stakeholders in Principle 8 ‘Speak Up and Listen Up’?
A. Client
B. Society
C. Firm
D. Industry
B. ‘Society’ is one of the stakeholders for Principle 8. The other stakeholder is ‘colleagues’.
You are the new office manager of Boycott Investments Ltd, responsible for all day-to-day affairs within the office, taking over from Monty, now sadly deceased. Under pressure from the directors of the firm to save money, you have been looking for savings in the travel costs of staff. Air miles for flights have been accruing to the firm, but no attempt seems to have been made in the past to use these air miles to reduce the travel costs of employees on firm business.
Further investigation reveals that Janet, the travel administrator, has used Boycott, air miles to book herself flights with her husband to holiday destinations over the past two years. Under questioning, Janet claims that Monty has said she could use the air miles as a perk of her job. You express surprise that Boycott would pay for her holiday flights in this way, to which Janet angrily replies, ‘Boycott did not pay for anything - I paid for the airport taxes and booking fees out of my own pocket’.
You search for the office policy on the use of air miles only to find out that there is no such policy - an omission you decide to correct. Under the circumstances what is the most appropriate additional action for you to take?
A. Introduce the policy but say no more to Janet, or anybody else, about the matter - after all, airlines are not real money
B. Summarily dismiss Janet, ensuring that her final salary payment has the full market value of the flights deducted from it
C. Immediately instruct Janet that all future bookings of flights must be signed off by you, and that no further bookings of flights for personal travel should be made
D. Calculate the number of air miles remaining in Boycott’s corporate account, and divide this between all staff (except Janet), ensuring everybody has the chance to benefit from personal travel as Janet has had
C. Immediately instruct Janet that all future bookings of flights must be signed off by you, and that no further bookings of flights for personal travel should be made.
There is no existing policy relating to the use of corporate air miles, and your predecessor is deceased, therefore there is no way of proving one way or the other that Janet’s actions were not authorised by Boycott. It would be unethical, and possibly illegal in view of employment law, to summarily dismiss Janet in this situation. You would be justified, however, in telling Janet there will be a late income tax submission to HMRC for the value of the flights, which were a benefit in kind.
Having said this, you should not feel constrained by your predecessor’s instructions to Janet (whether or not she is telling the truth). It would be perfectly acceptable to introduce a ‘business use only’ policy for the remaining air miles going forward.
Janet’s assertion that the air miles do not represent money raises an important point for you to consider. You should think carefully whether or not this is symptomatic of a wider culture of disregard to office costs within Boycott - perhaps addressing this cultural issues may have a positive effect on cost efficiency in the future.
In the eyes of the CISI, an ethical salesperson should always be clear, impartial, straightforward and:
A. Informed
B. Organised
C. Approachable
D. Confident
A. Informed.
Clear, Impartial, Straightforward and Informed are the four fundamentals of an ethical salesperson the eyes of the CISI.
John Bowman has been trading using a practice account for five years. He has recently won a competition in which he invested a theoretical $1,000,000 and made great profits. He is in the initial stages of setting up an actual fund and is in the process of marketing it to potential clients. In John’s marketing literature he provides diagrams showing his previous success on the practice account and in the competition. He explains that these trades and profits were on a theoretical basis and that this will be his first real fund.
From an ethical viewpoint, and considering the point of view of the CISI Professional Code of Conduct, which of the following statements is correct?
A. John has provided a clear explanation of the basis of his fund and his previous experience
B. John’s lack of experience means he should not be marketing this fund to others
C. John should not provide theoretical performance figures as they may be different to actual figures
D. John’s involvement with the investment decisions of fund means he is too close to be objective about its performance
A. John has provided a clear explanation of the basis of his fund and his previous experience.
CISI’s Professional Code of Conduct Principle 5 states that members must ‘attain and actively maintain a level of professional competence appropriate to your responsibilities and promote the development of others’. The practice account seems a good way to develop such competence.
Given that John has explained that these trades and profits were on a theoretical basis and that this will be his first real fund, there is no ethical problem with John’s actions.
