Ethical and Compliance Driven Behaviour Flashcards
(11 cards)
Need for Ethics
- Public Trust - for participation in financial markets and use of investment professionals
- Trust of Capital Providers
- Trust of Regulators - allows less restrictive regulation
Corporate or Personal unethical behaviour
- Environment
- Personality
Most evidence suggest environment, therefore corporate ethics and example of senior employees have big effect
Motivations for unethical behaviour
- Incentives to perform - can increase risk taking
- Ability to blame others - acting as a team member
- Conflicts of Interest
- Lack of rigour - due to laziness
- Disregard for clients - often distance from them
- 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
- 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:
- Too much risk / inappropriate investments
- Lack of diversification
- Trading for transaction costs (excessively)
- 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