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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1

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

2

Corporate or Personal unethical behaviour

1. Environment

2. Personality

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

3

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

4

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

5

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)

6

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

7

Ethics vs Compliance

Ethics - doing whats right regardless of regulation

Compliance - complying with regulations

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

8

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

9

Outcomes of Firm’s behaving unethically for the Firm itself

1. Prosecution - fines, loss of licence

2. Reputational - negative publicity, difficulty attracting new clients

10

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)

11

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