Lessons in Clarity: Ethics and Regulation

The global financial services industry has been rocked by a number of scandals that have eroded public and investor trust. Trust is essential to the functioning of the investment industry as well as the broader financial services industries; without it, individuals are unlikely to lend or invest their funds or financial capital, leading to reduced economic growth around the globe.

In this article, we take a closer look at a couple of key topics in the Investment Foundations course of study — ethics and regulation (Module 2) — to learn more about the role they play in establishing trust in financial markets and the investment industry.

Why Regulate?

Financial markets are built on a structure of laws and regulations that are designed to ensure that firms doing business and people working in the investment industry fulfill their obligations. However, laws and regulations alone are not always sufficient to protect customers and the financial system because they may not cover all financial activity and are sometimes vague or ambiguous. Laws and regulations are also often slow to catch up with market innovations.

Therefore, financial markets need codes of ethics and professional standards. These are established by organizations, such as CFA Institute, to guide the behavior of those working in the industry and help them adapt to a continuously evolving financial services industry.

Key Principles for Professionals

Fundamental ethical and professional principles for the investment industry include:

  • Place client interests first: Those working in the investment industry generally have an obligation to place client interests ahead of their own or those of their employers. In some circumstances, however, the duty to maintain the integrity of capital markets will take precedence. For example, trading on insider information on behalf of clients would benefit clients financially, but would ultimately harm all investors by eroding investor confidence in financial markets.
  • Exercise diligence, reasonable care, and prudent judgment: Those working in the investment industry should strive to work to the best of their ability, using the knowledge, skill, judgment, discretion, and experience that they would apply to their own investments.
  • Act with independence and objectivity: Investment industry professionals should carry out their responsibilities in a thoughtful and objective manner, free from any encumbrances or biases, such as accepting gifts or entering into relationships that may influence their judgment.
  • Avoid or disclose conflicts of interest: Conflicts between client interests and the personal interests of the employee or employer should be avoided or managed through disclosure so that all relevant stakeholders are aware of any conflicts and their potential effects on the client’s interests.
  • Make full and fair disclosure: Transparency and good communication are key elements in building trust with investors and helping them to make intelligent and informed decisions. Those in the investment industry who make false or misleading statements not only harm investors but also undermine investor confidence and threaten the integrity of capital markets.
  • Engage in fair dealing: All clients should be treated fairly regardless of whether one client has more assets, pays higher fees, or has a closer relationship with the financial adviser. It is only through the fair treatment of all stakeholders that those in the investment industry can maintain the confidence of the investing public.
  • Protect confidential information: Investors expect privacy, discretion, and confidentiality from the investment industry. The confidential information of clients, employers, counterparties, and other stakeholders must be diligently protected.

This list may seem daunting to bear in mind as you go about your daily work. But the essence of it can be captured by two simple questions:

  1. Would you want to be on the receiving end of your behavior? If not, don’t do it!
  2. Would your reputation be tarnished if your actions were reported in the press? If yes, don’t do it!

Bottom Line

By acting in an ethical manner and with high professional standards, you can play a part in helping the financial services industry to regain the trust of investors. Rebuilding trust will help create a long-term savings culture with the wider benefits for the economy that this type of culture brings.