Ethics Scenarios Flashcards
A financial services firm promotes its new investment product as having “guaranteed high returns with no risk”, even though the product is exposed to market volatility.
Which regulatory standard has likely been breached?
A. Market Conduct
B. Client Asset Protection
C. Customers’ Interests
D. Personal Accountability
Answer: C
The claim is misleading and fails to provide clear and fair information, breaching the FCA’s customer interest standard.
1.2 Regulatory Standards
1.4 Internal Codes of Conduct (ethical marketing)
A junior investment analyst discovers that their team leader has deliberately delayed the release of a negative analyst report to avoid affecting a pending corporate deal.
**Which principle of the CISI Code of Conduct is most clearly being violated?
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A. Speak Up & Listen Up
B. Client Focus
C. Respect for Market Participants
D. Conflict of Interest
Answer: D
Withholding material information to protect deal interests breaches transparency and conflict management expectations.
1.3.1 CISI Code of Conduct
A wealth manager, aware of a pending merger that will significantly impact the share price, discloses the information to a friend who then trades on it.
What offence has likely been committed?
A. Market Manipulation
B. Insider Dealing
C. Professional Misconduct
D. Failure of CPD
Answer: B
Disclosing and trading on material non-public information constitutes insider dealing under market integrity rules.
Chapter 4, Section 2.2 (Price-Sensitive Information)
A large bank mandates ethics training for all staff, but mid-level managers openly mock the sessions, creating a dismissive environment.
What key success factor for ethical training is missing here?
A. Detailed case studies
B. External trainers
C. Senior leadership support
D. Global coverage
Answer: C
Ethical culture is driven by visible leadership. A lack of senior buy-in undermines training effectiveness.
1.5.6 Senior Management and Ethical Standards
1.5.7 Ethical Decision-Making and Training
A large investment firm’s CEO publicly promotes their ethics programme. However, employees report unethical conduct being ignored and whistleblowers sidelined.
Which key element is most clearly missing from the firm’s ethical culture?
A. Clearly worded Code of Ethics
B. Senior leadership modelling ethical standards
C. Regular ethics training
D. Diverse and inclusive hiring policy
Answer: B
Ethical culture must be modelled from the top; a disconnect between statements and behaviour undermines credibility.
1.5.6 Senior Management and Ethical Standards
An employee at a retail bank is unsure whether a colleague’s actions breach the code of ethics. They consider raising concerns but fear retaliation.
What is the best initial step according to CISI’s guidance?
A. Report directly to the FCA
B. Leave the issue alone if uncertain
C. Approach the colleague first
D. Raise concerns internally, e.g., with a line manager or compliance
Answer: D
1.3.1 CISI Code of Conduct
CISI encourages members to raise concerns internally first through appropriate channels like line managers or compliance.
A financial adviser is offered a generous incentive trip by a fund provider to promote its new investment product. The adviser genuinely believes the fund is suitable for some clients but has not yet conducted a full suitability assessment for their client base. They are considering recommending the fund in upcoming meetings.
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Which of the following best describes the ethical issue at stake?**
A. The adviser may be breaching their fiduciary duty by failing to prioritise clients’ best interests over personal gain.
B. The adviser has already breached regulatory standards by accepting an inducement, regardless of intent.
C. There is no issue provided the adviser discloses the incentive to clients and regulators.
D. The adviser is prioritising professional development and should continue as long as they ensure suitability later.
Correct Answer: A.
The adviser is at risk of breaching fiduciary responsibilities (Section 1.5.2), as the personal incentive may unduly influence recommendation behaviour before proper suitability checks are performed.
Why not B?
Option B is close, but intent and context matter: accepting an incentive is not an automatic breach unless it unduly influences advice or contravenes local inducement rules.
C and D both fail to capture the underlying conflict of interest and necessary proactive safeguards.
A wealth manager receives a confidential tip from a client about an upcoming corporate acquisition. The manager does not trade but mentions the rumour to a colleague in a private conversation.
Which best reflects the ethical risk?
A. The manager has breached confidentiality by disclosing client information.
B. The manager has committed insider dealing, even though no trade occurred.
C. The manager failed to escalate potential market abuse appropriately.
D. There is no ethical breach, as no transaction was executed.
Correct Answer: C.
Even without trading, failing to report material non-public information raises ethical concerns around market integrity and proper conduct (Section 2.2).
Why not A? While confidentiality is relevant, the issue is broader — potential market abuse.
Why not B? No trade occurred, so insider dealing is not complete under legal definitions.
Why not D? Doing nothing when in possession of sensitive information may breach internal codes and regulatory expectations.
A junior employee questions a pricing strategy that seems to disadvantage long-term clients but is told by their manager, “It’s technically compliant.” They feel uncomfortable but say nothing.
What is the most appropriate ethical course of action?
A. Accept the explanation as it complies with regulation.
B. Escalate the concern internally through compliance or whistleblowing channels.
C. Wait for further evidence of wrongdoing before acting.
D. Consult the client directly to raise concerns over fairness.
Correct Answer: B.
Ethical standards (Section 1.5.6 and 1.3.1 – Speak Up & Listen Up) require concerns to be escalated internally, even if technically compliant.
Why not A? Ethics go beyond mere compliance.
Why not C? Delay may allow unethical practices to persist.
Why not D? Involving the client prematurely may breach internal confidentiality protocols.
An investment manager declines to manage a complex derivative product for a client, stating they do not feel confident advising on the structure. The client insists and offers a higher fee.
What is the most appropriate response under the ethical principles?
A. Proceed only if the client accepts full risk and signs a waiver.
B. Accept the mandate but disclose personal limitations.
C. Decline the mandate or seek expert support before accepting.
D. Accept the mandate due to client demand and high fees.
Correct Answer: C.
Ethical obligations under the CISI Principle of “Aware of Capabilities” (Section 1.3.1) require professionals to avoid acting beyond competence unless expert assistance is obtained.
Why not A or B? Disclosure does not resolve the duty of competence.
Why not D? High fees do not justify acting beyond capacity.
A firm’s annual ethics training is delivered via a mandatory online module with no assessments. Staff often click through quickly without engagement.
What best characterises the firm’s ethical training approach?
A. It meets baseline requirements for ethical training.
B. It fails to embed an ethical culture due to lack of engagement or reinforcement.
C. It is sufficient if ethics breaches are low.
D. It should be supplemented with legal compliance training only.
Correct Answer: B.
According to Section 1.5.7, ethical training must promote engaged, values-based decision-making, not just tick-the-box compliance.
Why not A? It may meet form, but not substance.
Why not C? Low breach rates don’t prove ethical awareness.
Why not D? Legal training alone is not sufficient for building ethical judgement.
Amira, a fixed income analyst, learns in an internal meeting that her firm will reduce holdings in a corporate bond due to credit concerns. Before this is public, she sells her own bond holdings without Compliance approval. The firm’s PA dealing policy prohibits trading on confidential information and requires pre-approval for personal trades.
Which best describes Amira’s conduct?
A. Compliant, as she acted before the firm’s trade to avoid conflict.
B. Non-compliant, as she used confidential information and failed to seek pre-approval.
C. Permissible under exemptions for securities not managed by her team.
D. Acceptable if reported to Compliance after execution.
Correct Answer: B
Amira is in breach because:
She acted on confidential, non-public information acquired through her role.
She failed to seek pre-approval, a requirement under MiFID-aligned PA dealing policies.
The intent to avoid a conflict by pre-empting the firm’s transaction is irrelevant — the risk lies in the misuse of privileged information.
Why not A or D?
Timing alone doesn’t remove the ethical breach. PA dealing policies focus on information access, not just trade timing.
Why not C?
There’s no indication the exemption applies, and exemptions typically relate to discretionary management arrangements or specific fund structures — not analyst positions.
Liam is a research analyst at a UK investment firm. He is preparing a report recommending a “Buy” on the shares of Avanta plc. Unknown to most readers, the firm’s parent company holds a 6% stake in Avanta, and Avanta also holds 8% of the parent company’s shares. Liam’s team includes a short reference to these links in the report footnotes but makes no prominent disclosure. The firm’s website contains a lengthy policy document listing all such holdings.
Which of the following best describes the firm’s regulatory and ethical position?
A. The firm has met its disclosure obligations by including the shareholding links, regardless of where or how they are presented.
B. The firm has not complied because the disclosures were not made clearly and prominently in the report or linked accessibly.
C. Disclosure is unnecessary since Avanta and the parent company are separately managed and no direct inducement was involved.
D. The firm can rely on group-level disclosures unless a conflict has already materialised in the recommendation.
Correct Answer: B
Rationale:
FCA and MiFID-aligned guidance requires clear, prominent disclosures of any ≥5% shareholding between the firm (or its affiliates) and the issuer (Avanta). Listing these facts in a generic policy document without making a clear, accessible reference in the report fails to meet the standard (see Section 2.4.5).
Why not A? – Disclosures must be accessible and obvious, not hidden in generic footnotes or policy documents.
Why not C? – Ownership thresholds trigger disclosure, regardless of control or inducement.
Why not D? – Group-level ownership is precisely why disclosure is required — it’s about potential, not realised, conflicts.
Farah, a regulated adviser, is discussing investment options with a high-net-worth client who insists on placing a large proportion of their portfolio in speculative crypto-assets. Farah explains the risks and documents the discussion but still proceeds with the recommendation without a formal suitability assessment, trusting the client’s judgement.
Which statement best reflects Farah’s regulatory position?
A. Farah acted appropriately by respecting the client’s autonomy and documenting risk disclosures.
B. Farah failed to meet fair conduct standards by not ensuring product suitability regardless of client wealth.
C. Suitability rules are waived for high-net-worth clients who provide explicit instructions.
D. Suitability only applies to regulated products, so crypto-assets are excluded.
Correct Answer: B
Rationale:
Fair conduct standards (Section 3) require product suitability to be assessed for all clients, including high-net-worth individuals. Documentation alone is insufficient if the adviser has not ensured that the product matches the client’s needs and risk profile.
Why not A? – Disclosures help but do not replace suitability assessments.
Why not C? – There is no general waiver for high-net-worth clients unless specific regulatory exemptions apply.
Why not D? – Crypto-assets may not be regulated, but advice on them may still engage ethical duties and fall under firm policy.
Daniel is a retail banking adviser assisting a recently bereaved elderly client. The client appears confused and struggles to recall recent financial decisions but insists they want to withdraw and reinvest a large sum into a high-yield fixed-term product. Daniel is pressed for time and proceeds with the transaction after briefly mentioning the cooling-off period.
Which statement best reflects Daniel’s conduct under fair treatment standards?
A. Daniel acted correctly by completing the transaction as instructed and providing the required cooling-off information.
B. Daniel should have refused the transaction outright due to signs of cognitive vulnerability.
C. Daniel should have paused the transaction and followed internal procedures for supporting vulnerable customers.
D. Fair treatment only applies to product design, not to frontline interactions.
Correct Answer: C
Rationale:
Fair conduct (Section 3) requires firms and advisers to take extra care when dealing with vulnerable clients. Proceeding with the transaction without adapting communication, pausing the process, or engaging support structures (e.g. additional verification or family involvement) can result in unfair outcomes.
Why not A? – Simply stating cooling-off rights is not enough when signs of vulnerability are present.
Why not B? – Immediate refusal may be disproportionate and lack client dignity.
Why not D? – Fair treatment obligations apply to all client interactions, not just product governance.
Clara manages client portfolios for a discretionary wealth management firm. One of her clients expresses strong interest in environmentally responsible investments, requesting that their portfolio avoids fossil fuel exposure. Clara rebalances the portfolio to include ESG-labelled funds but does not independently verify the ESG credentials or underlying holdings. One of the new funds is later found to have significant holdings in oil and gas firms.
Which of the following best reflects Clara’s responsibility under ESG and fair conduct principles?
A. Clara met her duty by following the client’s ESG preference and using industry-labelled funds.
B. Clara may have breached ESG and conduct obligations by failing to ensure alignment between the fund’s label and its actual holdings.
C. The responsibility lies with the fund provider to ensure ESG accuracy, not with Clara as the intermediary.
D. ESG preferences are non-binding, so portfolio deviations are acceptable unless the client suffers financial loss.
Correct Answer: B
Rationale:
Under Section 5 (ESG) and fair conduct principles, advisers must ensure that ESG products reflect the client’s expressed values. Relying on fund labels alone is not sufficient — reasonable due diligence is required, particularly where ESG factors drive the investment decision.
Why not A? – Labels are not a substitute for proper product scrutiny.
Why not C? – Intermediaries have a responsibility to vet ESG claims, especially when acting on client instructions.
Why not D? – ESG preferences form part of the suitability assessment, and ignoring them risks both ethical and regulatory breaches, regardless of financial impact.
