Implications Of Unethical Behaviour

Question 1

What is the difference between ethics and compliance?

Answer 1

1. Ethic involves doing what’s right regardless of what the law or regulation states.
2. Compliance involves abiding by the law or regulations.

Note: there are examples where employees comply with the law but still behave unethically

Question 2

When practitioners in the industry behave unethically and put their own interests ahead of the clients, the industry becomes vulnerable and results in:

Answer 2

1. New/ higher taxes on the industry
2. Increased regulation.
3. Breaking up of participants’ businesses.
4. Restrictions and activities.
5. Requirements for greater disclosure.

Question 3

What are some of the implications of unethical behaviour for firms?

Answer 3

1. Possibility of prosecution.
2. Loss of license or compensation payments to clients.
3. Reputational risk.

Question 4

Why is reputation an asset for a firm? What are some of the consequences of bad reputation?

Answer 4

1. Good reputation enhances future cash flows.
2. Bad reputation:

A. means loss of value, loss of independence or even leads to the collapse of the organisation

B. Bad reputation also means loss of clients.

C. Bad reputation also means lots of time spent responding to complaints, regulators and inadequate internal procedures

D. Downgraded ESG rating - impacts investibility of firms for investors

Question 5

What is the importance of having strong internal procedures and ethical standards?

Answer 5

1. Prevents employees from breaking regulations
2. Addresses areas where there might be conflict of interest.
3. Statements on ethical standards SHOULD be written clearly and should stand out from detailed instructions on compliance procedures
4. Ethical standard should be communicated clearly to all employees.

Question 6

What are some of the potential penalties of unethical conduct?

Answer 6

1. Disciplinary action from a professional body.
2. Disapproval from clients, colleagues and the industry peer group
3. Negative publicity.
4. Loss of an individual’s job.

Question 7

What are some of the negative and unethical behaviours investment advisors or consumers could take that cause negative outcomes for the client?

Answer 7

1. Taking on too much risk.
2. Purchasing inappropriate investments.
3. Lack of investment diversification.
4. Excessive trading the incur on justified transaction costs.
5. Purchasing products that charge fees but are not justified by their performance or value.

Question 8

What are some of the things that investment advisors should be particularly careful with when dealing with vulnerable clients and insistent clients?

Answer 8

1. Advisers need to have procedures in place to determine whether a client is vulnerable before offering advice.
2. Vulnerable clients are less likely to be able to represent their own interests and more likely to suffer harm
3. Insistent clients that don’t follow the advisors’ recommendations and want to take a risky transaction - the advisor should follow the FCA (financial conduct authority)

All the above needs to be done by advisors to avoid acting unethically