Session 2

Question 1

Name the 7 core principles of financial codes of ethics (Ragatz & Duska)

Answer 1

• Integrity
• Objectivity
• Competence
• Fairness
• Confidentiality
• Professionalism
• Diligence

Question 2

Give a definition of integrity

Answer 2

Integrity demands the professional to act according to the same principles in both personal and business life. The professional possesses strong moral principles and does not deviate from them out of desire for personal gain.

Question 3

There are 2 factors when talking about threats cluster of objectivity

Answer 3

1. Perceptual bias : distortion of perception leads to faulty beliefs
2. Conflict of interest: Private or institutional gain VS official duties in a position of trust

Question 4

The principle of competence shows up in most code of ethics for 2 reasons

Answer 4

1. Clients typically lack of information

2. The client is not able to assess wether the professional is acting in the client’s best interest (adverse selection)

Question 5

Name the 3 concepts of fairness

Answer 5

1. Principle of equality
2. Golden rule
3. The obligation to give each person or constituency that which is due to them.

Question 6

Name the 4 reasons the professional should warrant a duty of confidentiality

Answer 6

1. Respect for personal autonomy : The person jurisdiction over his own personal information
2. Respect for the obligations entailed in relationships : Sharing person information builds trust and intimacy
3. Clients’ vulnerability increasing the asymmetry
4. Serving the common good : individuals can freely seek advice

Question 7

Professionalism has 3 requirements in the code of ethics

Answer 7

1. Threat all person with respect and consideration
2. Act in a way that brings dignity to the profession
3. Work toward improving the quality of services

Question 8

Diligence is interpreted in 3 different ways

Answer 8

1. Diligence requires providing services in a reasonably prompt and thorough manner
2. Professionals provide services with due care - attention to details
3. Obligation of professionals to ensure that their support staff members conduct themselves in a professional manner

Question 9

Talking about the effectiveness of codes of ethics, they have normally 3 objectives

Answer 9

1. To assure the public that its members are committed to act in accordance with the highest ethical standards
2. The fostering of group cohesion around a set of self-legislated values and norms
3. To serve a basis for adjudicating disputes that emerge among professionals or between individual professionals and the people they serve

Question 10

Name 4 reasons to believe that the marketing of financial services contributed to the financial crisis.

Answer 10

1. Mortgage companies marketed home loans to people who could not afford them
2. Credit card companies raised rates on past purchases
3. In the US : loans were issued trapping people in a cycle of debt
4. Financial advisors encouraged clients to buy/sell securities which did not contribute to clients’ better financial position

Question 11

What must ethical marketing seek to convey?

Answer 11

It must seek to convey something of value to customers in ways that accord with law and basic ethical values and norms

Question 12

Name 3 things an ethical framework would do (Brenkert - marketing of financial services)

Answer 12

1. Norms identification
2. Norms application
3. Norms promotion

Question 13

There are 3 of the major ethical issues regarding credit cards

Answer 13

1. Who should be targeted for credit card marketing?
2. What should card users know?
3. How should credit cards companies impose charges on users?

Question 14

Explain what are Payday loans (and some facts about it)

Answer 14

• Aimed at those who lack financial ressources to pay pressing bills
• Lenders do not seek to verify borrower’s ability to repay
• Very high interest rates - up to 390% annual rates
• Information is fairly clear and transparent
• People turn to payday loans because they have been hit with unexpected fees from banks and credit cards (mistrust)
• Payday lenders draw approx. 90% of their revenue from borrowers who cannot pay off their loans when due

Question 15

Name the 4 institutions to which professionals are required to submit their actions

Answer 15

1. The law of society
2. The regulatory guidelines
3. The moral norms
4. The moral principles

Question 16

Name 2 visible differences between financial services professionals and other professionals

Answer 16

1. Depth and breath of government regulation in the financial services industry
2. The number of specialised divisions within the financial services industry

Question 17

A profession emerges when a group of practitioners possesses 4 characteristics. Name them

Answer 17

1. Professions engage in vocation that is useful and noble
2. Professions require the possession of expert knowledge
3. A professional abandons the strictly selfish commercial view and keeps in mind the advantage of the client
4. A spirit of loyalty to other professionals

Question 18

Name the elements most codes of ethics have

Answer 18

1. Principles : should follow

2. Rules : promote or prohibit specific activities

Question 19

Give a precise definition of a commercial bank (Cowton - Banking)

Answer 19

It is a financial institution that is licensed as a taker of deposits and that makes loans and provides other financial services to its customers. The core of banking is financial intermediation. A bank being middleman between those with surplus of funds and those who require credit.

Question 20

What is the main issue with commercial banking

Answer 20

Commercial banking is a complex activity and like many such activities, it entails significant technical and ethical issues

Question 21

Explain the relation between a commercial bank and its savers

Answer 21

Savers make deposits at the bank. Since not all savers are expected to withdraw all their funds at the same time, the bank is able to lend on a proportion of the funds it has received. The margin is intended to cover the bank’s operating expenses and a credit risk cost. The savers have no connection with borrowers

Question 22

Explain what is “banking with integrity”

Answer 22

In entrusting their funds to a bank, depositors are relying upon both technical competences and the integrity of the bank not to abuse its position. A lack in one can harm depositors. Through codes of ethics, banks responded to the challenges of engendering trust.

Question 23

Explain what is “banking with responsibility”

Answer 23

Banks should manage the risk and return characteristics of the loan book so as not to put depositors’ savings at undue risk

Question 24

Give the 4 type of responsibility a bank should have

Answer 24

1. Banks can be said to have a responsibility not to exclude certain group
2. Having lent money, the responsibility of banks can be argued to include not being too hasty, too foreclose
3. Lending too much is potentially as serious a problem, ethically, as lending too little.
4. There are questions about the purpose for which loans are made

Question 25

Explain what is “banking with affinity”

Answer 25

Affinity banking stands for relationship by choice (like-minded parties around a values-based financial intermediation process). Some banks have a lending policy that is ethical or responsible, setting out whom the bank won’t do business with.

Question 26

Responsible investing is a product and a practice (Louche & Lydenberg - Responsible investing). Explain those 2 terms.

Answer 26

Product : investors trade shares based on financial, ethical, and on environmental, social and governance (ESG) factors.
Practice : A way to identify companies with strong sustainability records and to engage with companies to encourage improved ESG performance

Question 27

What is the goal of Responsible investing ? (4 elements)

Answer 27

• To generate both societal and financial value
• To stimulate change toward sustainability within corporations
• To steer investments towards the productive and socially beneficial use of capital
• To initiate debate on the proper role of corporations in society

Question 28

Name the 2 key characteristics of Responsible investments (RI)

Answer 28

1. It encourage a long-term perspective - it seeks to establish trust between stakeholders and corporation and it encourages corporate managers to combine corporate social responsibility with financial benefits
2. It has a broad definition of materiality

Question 29

Enumerate some pros and cons for responsible investments

Answer 29

Pro :

• Helps investors avoid risks unrecognised by traditional stock analysts
• Helps identify high-quality corporate management
• Highlight companies that are attuned to remerging issues
• Other social and environmental performance affects a company overall reputation

Con :
-A restriction on a universe of potential investments will increase undiversified risks and reduce risk-adjusted returns

Question 30

Name the 4 strategies adopted for the implementation of RI screening (see slides 67 to 70 for tools used to implement such strategies)

Answer 30

1. Avoidance : exclusion of sectors a/o activities
2. Inclusion : activities search of companies engaged in beneficial activities
3. Relative selection : select the best ESG-performing companies
4. Engagement : engaging with companies to voice shareholders concerns

Question 31

Name the 3 basic categories of the major player in RI

Answer 31

1. Asset owners (retail investors, institutional investors, …)
2. Providers of support services (money managers, financial consultants, research providers, engagement services, …)
3. Related initiatives (RI associations, national government and stock exchange, …)

Question 32

Name 5 reasons why RI cannot become mainstream

Answer 32

1. Valuation models need to be developed
2. Cross-Fertilisation between mainstream financial analysis and ESG specialists need to be encourage
3. The dominant single-dimensional assessment of companies only on financial dimensions needs to move toward ESG inclusion
4. Communication gap between companies and investors with regard to ESG issues and their relation to materiality needs to overcome
5. Today’s short-terminisme undercuts the long-term orientation of RI

Question 33

Give a definition of Microfinance (Argandona - Microfinance)

Answer 33

It is the provision of financial services to poor, low-income people, who, in normal conditions, would not have access to them. The reason for this being :

• Location - people living away from towns
• Lack of income
• Lack of financial tracks

Question 34

What is the goal of Microfinance ?

Answer 34

It is to alleviate poverty and underdevelopment, based on the assumptions :

• Lack of access to financial services is a major cause of poverty
• Access to credit is key for the development of entrepreneurial projects that will provide borrowers with a stable income, asset, knowledge and skills
• There is considerable supply of entrepreneurial ability

Question 35

What is the main ethical issue with Microfinance ?

Answer 35

1. Are high rates justified ?
2. What should be the fair interest rate for each activity ?
3. If high interest rates discourage, is there a moral duty for the MFI ?