Session 1 - Heath - Fairness in financial markets

Question 1

Give a definition about “Fairness”

Answer 1

it is an important ethical principle, a moral concept concerned with the “comparative treatment” of individuals. To be treated fairly is to be treated similarly to others with respect to a rule, agreement or recognised expectation

Question 2

Give a definition about Markets

Answer 2

Markets generate wealth, without any single directing or guiding hand. This implies that the foundational framework of a market must permit individuals to labor, produce, create and trade. Markets are composed of for-profit trades. Individuals need a sphere in which they can be secured in the expectation that they will get a reward from their work.

Question 3

Explain procedural fairness

Answer 3

It is fairness related to rules and this produces claims. Any claim needs to be fairly engaged. The rule however may be unfair. But fairness can be applied to the substance of rules, agreements or expectations. Procedural fairness involves proportional satisfaction of claims which can have been in force before rules were made. Claims however do not function as rights which must be enforced. Without rights, there is no enforceability

Question 4

Give an example of fairness issue regarding income and rewards

Answer 4

As individuals interact, they receive differential awards for their labor, goods and services. Inequalities of income and wealth emerge.

Question 5

Income and wealth inequalities may seem unfair. How can this be understood ?

Answer 5

Inequalities are the cumulative effect of prior distributions of natural assets, as these have been developed and their use favoured over time. An unfettered market allows the distribution of income and rewards by features that are arbitrary from a moral perspective

Question 6

Give the outcomes of markets that Hayek (1976) contends

Answer 6

Differential rewards of buying and selling are neither just nor unjust. They are only just and unjust when they are the results of intentional actions. Individuals make their decisions behind a “veil of ignorance”.

Question 7

Fairness and public finance - the unfairness rests on 2 principles :

Answer 7

1. Those who receive the benefits should pay the cost

2. Those who bear the cost should have some say in whether they are imposed

Question 8

Give an example of fairness VS administration of a currency

Answer 8

The increase of the use of public debt may be a consequence of monetary inflation, which in itself raise questions of fairness. The instability of the value of money increases the costs of doing business. But if monetary prices are to provide information, then they should signal changes in supply and demand, not increase or decrease of purchasing power

Question 9

Give 2 ways in which the control of the money supply may be used unfairly

Answer 9

1. An inflated currency devalues monetary assets and reduces purchasing power. Saving money is no longer sufficient, one need to invest
2. Inflation is hard on those who have fixed incomes, interest-bearing savings, and anyone who has lent money. Asset value drops

Question 10

There are 3 significant questions in financial disclosure - How do financial statements fairly present the financial position of a firm ? (ethics)

Answer 10

Accountants have the duty to present information fairly - code of conduct of professionals bodies require it. All elements of the company’s financial picture is in accordance with the rules or principles of accounting

Question 11

There are 3 significant questions in financial disclosure - Should companies disclose certain information to the public ?

Answer 11

Regulations provide for the disclosure of material deemed relevant for the prudent investor. There are 3 threshold for disclosure :
1. No guarantee of truthfulness
2. Disclosure without misrepresentation
3. Mandatory disclosure
Moving from 1 to 3 increases the fairness as this equalises the information available to investors. However, the abilities of the individuals may affect how well they can process those information.

Question 12

There are 3 significant questions in financial disclosure - How should financial professionals represent themselves and their products to their clients

Answer 12

In serving as a pillar of trust. A financial securities professional has the responsibility not to misrepresent a security.

Question 13

Should finance professionals offer investments suitable to the client’s profile ? Give 2 levels of suitability

Answer 13

1. A security is recommended to the client based on the information the client discloses
2. The bank (broker) must elicit and verify information from clients and use this appropriately.

Question 14

What is fairness ? Give the golden rule

Answer 14

Do unto others as you would have them do unto you

Question 15

Explain fairness in lending

Answer 15

To grant a benefit to a person and to refuse it to a similar person may appear unfair. A bank has to exercice a legitimate discrimination. The creditworthiness of a person is not only relevant but also essential

Question 16

Give the 2 major ethical arguments against inside trading

Answer 16

1. A conception of fairness : if all investors have era access to information, then insiders have access to information that is not public
2. The idea of property rights : information is scare and valuable. A company can stipulate no insider is allowed to trade but, as it is the rightful owner of the information, it can allow it

Question 17

Some argue that insider trading should be permitted. Explain

Answer 17

From the viewpoint of efficiency (EMH) it should be permitted