Ethics

Question 1

Why is there a need for ethical behaviour in the investment industry

Answer 1

Public, Investment professionals, Stakeholders, Regulators

• Building public trust in financial markets, which encourages wider participation in them.
• Promoting trust in investment professionals, encouraging the public to use professionals to manage and advise on their investments
• Instilling trust in other stakeholders, including providers of capital to the industry such as shareholders or providers of finance for transactions
• Earning the trust of regulators, allowing greater scope for self-regulation and less restrictive regulation of the participants of capital markets

Question 2

What are the two schools of thought as to why ethical behaviour exists?

Answer 2

1. Unethical behaviour = environment / situation  good people can behave unethically
2. Unethical behaviour = result of an individual’s attitude/ personality and environment is less important

Question 3

What does most academic research suggest is the more important factor as to why unethical behaviour occurs?

Answer 3

Most academic evidence says environment is more important

Question 4

Why may unethical behaviour occur? (7 points)

Answer 4

• Undue pressure or incentives to perform. If not structured carefully, bonuses and performance could increase risk-taking and reward short-term performance;
• Ability to blame others e.g. ‘following instructions’. Acting as a member of a team rather than individual’s taking responsibility
• Ability to rationalise unethical behaviour e.g. the other party being unethical too
• Conflicts of interest skewing judgement
• Lack of rigour due to laziness e.g. unwillingness to conduct proper research into a product
• Disregard for clients (more likely if distanced from clients)
• Failure to act i.e. being unethical by omission

Question 5

Why is building a global ethical code difficult?

Answer 5

Cultural issues surrounding considerations of what is ethical have made building a global ethical code difficult

Question 6

What can ethical obligations to clients/ prospective clients be summed up as?

Answer 6

Fiduciary duty

Question 7

What does fiduciary duty mean?

Answer 7

Meaning clients’ needs must be put above their own

Question 8

How must a firm and their employees act towards clients?

Answer 8

Act with loyalty to their clients and act with reasonable care and exercise prudent judgement

Question 9

How must a firm and their employees deal with clients?

Answer 9

Deal fairly and objectively with al clients when providing investment analysis making investment recommendations, takin investment action or engaging in other professional activities.

Question 10

What must a firm and their employees provide to their clients?

Answer 10

• Provide suitable recommendations when in an advisory relationship.
• Provide fair, accurate and complete information when communicating investment platform information.

Question 11

What must a firm and their employees preserve in terms of their clients?

Answer 11

• Preserve confidentiality of client information unless the information concerns illegal activities, disclosure is required by regulation or is permitted by the client.

Question 12

What is the difference between compliance and ethics?

Answer 12

Compliance = involves abiding by the law or regulations 
Ethics = morally doing what is right

Question 13

What could happen to industry as a result of unethical behaviour?

Answer 13

• New or higher taxes on the industry
• Increased regulation
• The breaking up of participants businesses
• Restrictions on activities
• Requirements for greater disclosure
• central government regulation tends to replace self-regulation, stifling future activity in the industry and creates uncertainty that slows investment and innovation.
• Loss of trust in capital markets and the investment industry can lead to a reluctance among investors to participate in the markets and to use investment professionals.

Question 14

What could happen to a firm as a result of unethical behaviour?

Answer 14

Prosecution
Reputational risk / Disapproval from clients, colleagues and the industry peer group / Negative publicity
Disciplinary action from a professional body
Excess time spent responding to regulators/ client complaints/ rewriting inadequate internal policies

Question 15

What could be the result of prosecution on a firm for unethical behaviour?

Answer 15

o Fines
o Loss of licence
o Compensation payments to clients

Question 16

What could be the result of reputational risk on a firm for unethical behaviour?

Answer 16

o Loss of value
o Loss of independence
o Organisational collapse

Question 17

Would could unethical conduct lead to for individuals?

Answer 17

Loss of job

Question 18

What are key ethical issues that could lead to financial loss/ negative outcomes?

Answer 18

• Taking on too much risk
• Purchasing inappropriate investments
• Lack of diversification
• Excessive trading that incurs unjustified transaction costs
• Purchasing products that charge fees not commensurate with performance

Question 19

What type of clients to investment advisors need to be particularly careful with?

Answer 19

Investment advisers should be particularly careful when dealing with vulnerable clients and insistent clients.

Question 20

What is the FCA Code of Ethics the underlying philosophy to?

Answer 20

The Standards of Professional Conduct.

Question 21

What do the standards of professional conduct promote?

Answer 21

promote fair and ethical behaviour

Question 22

What 7 broad categories are the Standards of Professional Conduct divided into?

Answer 22

RIDIC DP

1) Professionalism
2) Integrity of capital markets
3) Duties to clients
4) Duties to employers
5) Investment analysis, recommendations and actions
6) Conflicts of interest
7) Responsibilities as a CFA institute Member or CFA candidate