Ethical and Compliance Driven Behaviour

Question 1

Need for Ethics

Answer 1

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

Question 2

Corporate or Personal unethical behaviour

Answer 2

1. Environment
2. Personality

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

Question 3

Motivations for unethical behaviour

Answer 3

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

Question 4

Cultural issues of Ethics

Answer 4

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

Question 5

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

Answer 5

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

Keep confidentially or client (unless illegal activities)

Question 6

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

Answer 6

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

Question 7

Ethics vs Compliance

Answer 7

Ethics - doing whats right regardless of regulation

Compliance - complying with regulations

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

Question 8

Outcomes of Firms behaving unethically on Industry

Answer 8

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

Question 9

Outcomes of Firm’s behaving unethically for the Firm itself

Answer 9

1. Prosecution - fines, loss of licence

2. Reputational - negative publicity, difficulty attracting new clients

Question 10

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

Answer 10

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)

Question 11

Vulnerable and Insistent Clients

Answer 11

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