Ethical and Compliance Driven Behaviour Flashcards Preview

2. Ethics and Investment Professionalism > Ethical and Compliance Driven Behaviour > Flashcards

Flashcards in Ethical and Compliance Driven Behaviour Deck (11)
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Need for Ethics

1. Public Trust - for participation in financial markets and use of investment professionals

2. Trust of Capital Providers

3. Trust of Regulators - allows less restrictive regulation


Corporate or Personal unethical behaviour

1. Environment

2. Personality

Most evidence suggest environment, therefore corporate ethics and example of senior employees have big effect


Motivations for unethical behaviour

1. Incentives to perform - can increase risk taking
2. Ability to blame others - acting as a team member
3. Conflicts of Interest
4. Lack of rigour - due to laziness
5. Disregard for clients - often distance from them
6. Failure to act


Cultural issues of Ethics

Interpretation varies between countries (e.g. present or a bribe)

There is a relationship between perception of fairness/trust and willingness of public to participate in that countries stock market


CFA Code of Ethics - Firm’s Fiduciary Duty to Clients

Act in client best interest, taking reasonable care and judgement and acting fairly

Keep confidentially or client (unless illegal activities)


CFA Code of Ethics - Employee Duty to Employer and Co-Workers

Act for benefit of employer (use full skills and not disclose confidential information)

Not accept gifts or compensation to cause CoI

Co-workers - Promote ethical behaviour to colleagues, especially in supervisory role


Ethics vs Compliance

Ethics - doing whats right regardless of regulation

Compliance - complying with regulations

Can be compliant without being ethical (e.g. selling PPI)


Outcomes of Firms behaving unethically on Industry

Industry becomes vulnerable to gov intervention

- higher taxes
- increased regulation
- greater disclosure etc

This creates loss of trust in capital markets and investment and reduced participation in industry


Outcomes of Firm’s behaving unethically for the Firm itself

1. Prosecution - fines, loss of licence

2. Reputational - negative publicity, difficulty attracting new clients


Causes of unethical behaviour between Investment Advisers and Clients (breaking fiduciary duty)

Have a fiduciary duty to benefit clients. This can be affected by:

1. Too much risk / inappropriate investments
2. Lack of diversification
3. Trading for transaction costs (excessively)
4. Trading for fees (products based on fees, not performance)


Vulnerable and Insistent Clients

Vulnerable - less able to represent own interests and more likely to suffer harm. Advisers must determine before giving advice if client is vulnerable

Insistent - do not want to follow adviser's recommendation. Adviser should follow FCA guidance