Ethics in Finance: Modules 1-6 Summary PDF

Module 1: Reputation, trust, ethics ​ Audio ​ KP Chapter 1 ​ Film dilemma ​ Cases Section A: Personal Ethics Key Themes ​ Understanding Ethics in Finance ○​ Ethics: Moral principles governing behaviour or activities. ○​ Key concepts: Trust, i...

Module 1: Reputation, trust, ethics ​ Audio ​ KP Chapter 1 ​ Film dilemma ​ Cases Section A: Personal Ethics Key Themes ​ Understanding Ethics in Finance ○​ Ethics: Moral principles governing behaviour or activities. ○​ Key concepts: Trust, integrity, honesty, and social responsibility. ○​ Finance impacts daily life (deposits, loans, credit cards) and relies on trust in practitioners. ​ Challenges in Financial Inclusion ○​ Millions remain unbanked or financially excluded, perpetuating poverty. ○​ Barriers to access persist despite advancements like digital finance. ​ Uncertainty and Ethical Challenges ○​ Financial decisions often involve uncertainty (e.g., future market changes). ○​ Advisors must maintain competence and honour promises to uphold trust. ​ Trust and Reputation ○​ Trust is forward-looking, built on reputation and past behaviour. ○​ Mistakes erode trust but maintaining ethical standards restores confidence. ​ Influences on Ethical Decision-Making ○​ Peer pressure, time constraints, financial stress, and lack of support shape decisions. ○​ Education and corporate culture influence the moral compass of finance practitioners. Key Takeaways ​ Personal ethics hinge on trust, competence, and commitment to client well-being. ​ Practitioners face ethical dilemmas influenced by external and internal pressures. ​ Upholding fiduciary duties, confidentiality, and regulatory compliance is crucial. ​ Ethical lapses can lead to loss of trust and professional credibility. Section B: Institutional Ethics Key Themes ​ Historical Shifts in Financial Ethics  ○​ The transition from individual morality (guild system) to institutional codes of conduct. ○​ Separation of ownership and management in modern banks created new ethical dynamics. ​ Cultural and Regulatory Changes ○​ Deregulation and competition led to aggressive sales cultures and diluted ethics. ○​ 2008 financial crisis highlighted institutional failures and prompted reforms. ​ Current Ethical Challenges ○​ Recurring issues include: ​ Cybersecurity breaches. ​ Insider trading and money laundering. ​ Exploitation of client information. ​ Workplace inequities and bullying. ○​ Calls for ethical leadership and corporate accountability. ​ The Business Case for Ethics ○​ Improves trust and reduces transaction costs. ○​ Avoids legal penalties and enhances reputation. ○​ Attracts and retains ethical employees, ensuring sustainability. Key Takeaways ​ Institutional ethics require balancing profit motives with social responsibility. ​ Ethical leadership and a supportive corporate culture are essential for change. ​ Compliance with ethical standards benefits both organisations and stakeholders. Section C Ethics and the Economy Key Themes 1.​ Market Crashes and Financial Crises ○​ Market crashes often follow revelations of material information that reveal the true value of assets to be lower than their market value (e.g., Lehman Brothers, Enron, Global Financial Crisis 2008). ○​ Historical examples include Tulip Mania and the South Sea Bubble. 2.​ Unethical Behavior and Financial Systems ○​ The global financial system is vulnerable to unethical behaviour such as incompetence, deception, and greed, leading to systemic failures. ○​ Trust between the public and the financial system is essential for stability. 3.​ The Role of Regulation and Trust ○​ Financial deregulation in Australia (1980s) led to a significant drop in public trust in the financial sector. ○​ The 2017 Banking Royal Commission exposed systemic misconduct, such as fees for no service, falsified loan applications, and conflicts of interest. 4.​ Public Perception of Finance Professions  ○​ Finance professions are ranked low in public trust and integrity compared to health, education, and police sectors. ○​ Poor governance and a lack of accountability have exacerbated distrust. 5.​ The Challenge of Restoring Trust ○​ Governments’ regulatory interventions have limited impact due to costs and the ever-evolving financial landscape. ○​ Trust must be rebuilt through self-regulation and ethical behavior by finance practitioners and institutions. Key Takeaways ​ Trust is foundational for the financial system to function and deliver economic growth. ​ Financial misconduct damages the economy, institutions, and individual well-being. ​ Public trust in finance professions has been eroded significantly over time, partly due to deregulation and systemic unethical practices. ​ Regulation alone is insufficient; ethical conduct and institutional reforms are necessary to rebuild trust. Section D: Ethics Theories Key Themes 1.​ Information Asymmetry and Erosion of Trust ○​ Increasing complexity in finance has widened the knowledge gap between clients and finance practitioners. ○​ Public trust has eroded due to financial volatility, unethical behaviour, and wealth inequality. 2.​ Four Ethical Theories ○​ Utilitarian Ethics (Process-Based): ​ Focuses on outcomes and consequences; actions are morally right if they produce the greatest good for the greatest number. ​ Criticisms: Lack of ethical constraints on means, difficulty measuring utility, and potential neglect of rights and fairness. ○​ Deontological Ethics (Principles-Based): ​ Emphasises duties and moral rules regardless of outcomes; actions should align with universal moral principles. ​ Criticisms: Lack of flexibility, traditional focus, and challenges in resolving complex transactions. ○​ Virtue Ethics (Personal Ethics): ​ Focuses on character traits like courage, honesty, and empathy; emphasizes alignment between personal and institutional ethics. ​ Criticisms: Contradictions between virtues and incompleteness in addressing institutional behaviours.  ○​ Ethical Relativism (Context-Based): ​ Ethical behaviour is informed by community norms and values, adapting to different contexts. ​ Criticisms: Inconsistencies in behaviour, moral ambiguity, and challenges for international financial operations. 3.​ Ethical Decision-Making Framework ○​ Combines principles- and process-based approaches to navigate ethical challenges. ○​ Aims to balance competing priorities like fairness, utility, and moral rules. Key Takeaways ​ Ethical frameworks provide guidance for decision-making but are not perfect solutions. ​ Trust can be rebuilt by fostering ethical behaviour at personal, institutional, and systemic levels. ​ Ethical decision-making requires balancing moral principles, outcomes, and contextual considerations. ​ Ethical failures (e.g., lack of accountability, and whistleblower punishment) highlight the importance of improving culture and governance in finance. Ethical Dilemma 1 film Notes ​ Initial Enjoyment of Work: Barbara initially enjoyed her profession but is now struggling due to external pressures. ​ Market Challenges: The profession is facing a downturn, adding stress to her role. ​ Missed Responsibilities: ○​ James raises concerns about documents not being signed and due process not being followed. ○​ Barbara, feeling rushed, does not fully acknowledge or act on these concerns ​ Ethical Obligation: ○​ Barbara has a responsibility to address issues raised but appears distracted by other pressures. ​ Conflicting Pressures: ○​ She is balancing managing her team, external perceptions, and accolades from her boss. ○​ There’s a mix of professional and personal life challenges contributing to her unease. ​ Impact on Professionalism: ○​ The situation highlights real-world issues of balancing obligations, external pressures, and personal life in maintaining professional integrity. Module 2: Duty to employer ​ Audio ​ KP Chapter 2 ​ Cases ​ Film dilema Module 2 Section A: Professionalism​ 1. Professionalism ​ Business ethics stem from the professional obligations of individuals and organisations. ​ Core Idea: Ethics are central to maintaining trust and credibility in professional practices. ​ Professionals are expected to uphold standards that benefit the broader community, not just individual or corporate interests. 2. Expectations of Business ​ Society expects businesses to operate ethically and responsibly. ​ Key Expectations: ○​ Act in the public interest and beyond profit motives. ○​ Address pressing social issues like climate change, inequality, and community welfare. ​ Companies are held accountable for the broader impact of their operations on stakeholders. 3. Finance and Responsibility ​ Finance has a critical role in enabling responsible business practices. ​ Ethical finance involves: ○​ Avoiding harmful investments (e.g., tobacco, gambling). ○​ Supporting sustainability and social progress through thematic investing. ○​ Adopting ESG principles to guide decisions. ​ Swiss Cheese Model: A layered approach to ensuring financial responsibility across regulations, investments, and governance. 4. Measurement and Reporting ​ Ethical business practices require transparency and accountability. ​ Measurement Tools: ○​ ESG metrics to evaluate environmental, social, and governance performance. ○​ Sustainability reports to communicate impact and progress to stakeholders. ​ Companies are increasingly expected to disclose their contributions to societal goals, like the UN Sustainable Development Goals (SDGs). Module 2 Section B: Expectations of Business 1. What Are Expectations of Business and How They Have Evolved ​ Traditional Expectations: ○​ Profit maximization for shareholders. ○​ Providing quality products and services. ​ Modern Shift: ○​ Focus on Corporate Social Responsibility (CSR). ○​ Addressing environmental sustainability and societal issues. 2. Dominant Theories That Have Shaped Expectations and How They Are Changing ​ Shareholder Theory: ○​ Advocates profit as the primary goal. ○​ Evolving to consider broader responsibilities. ​ Stakeholder Theory: ○​ Emphasizes the importance of all stakeholders (e.g., employees, communities). ○​ Driving modern business strategies. 3. How Ethics Is Playing a Part in Expectations ​ Integration of Ethics: ○​ Ethical decision-making in corporate strategies. ○​ Balancing profit with moral obligations. ​ Examples: ○​ Implementation of fair labor practices. ○​ Avoidance of environmental harm. Section C: Finance and Responsibility 1. Finance and Societal Expectations ​ Finance is a cornerstone of economic stability and growth, with societal expectations emphasizing trust, accountability, and equitable development. ​ Transparency and layered responsibility (Swiss Cheese Model) are essential to prevent unethical practices, incorporating regulation, investment strategies, and corporate responsibility. ​ Key Approaches: ○​ Thematic Investing: Investments focused on achieving positive outcomes, such as tackling climate change or supporting healthcare. ○​ Screening & Divestment: Excludes industries like gambling or tobacco from investment portfolios. ○​ ESG Principles: Prioritizing Environmental, Social, and Governance considerations in financial decisions. 2. Global Influences on Financial Responsibility ​ Globalization and interconnectedness are reshaping financial norms, while financial crises have prompted stricter oversight and reforms. ​ Technological advancements enhance access and innovation but also demand robust frameworks across regions to ensure accountability. ​ UN-Led Initiatives: ○​ Principles for Responsible Investment (PRI): Framework for responsible investing with thousands of institutional signatories. ○​ UNEP Finance Initiative: Integrates environmental considerations into financial practices. ○​ Human Rights Initiatives: Standards addressing ethical conduct in industries. ○​ Sector-Specific Guidelines: Customized guidance for banking, insurance, and more. ​ Broad Frameworks: ○​ Sustainable Development Goals (SDGs): Aligning finance with global goals like poverty alleviation and climate action. ○​ UN Global Compact: Encouraging corporate sustainability across industries. 3. Sustainability, ESG, and Responsible Investment ​ ESG factors and sustainability are driving a shift from short-term gains to long-term value creation. ​ Thematic investing, ESG integration, and sector-specific guidelines like the UN PRI and SDGs are shaping financial practices toward responsible and ethical outcomes. 4. Challenges and Opportunities ​ Balancing profitability with sustainability and addressing global disparities in adopting responsible finance practices remain critical challenges. ​ Opportunities lie in combating greenwashing and capitalizing on demand for sustainable financial products, emphasizing finance as a force for good. Key Takeaways: ​ Finance is increasingly aligning with societal and environmental goals. ​ ESG considerations and thematic investing are redefining financial strategies. ​ UN frameworks provide essential guidance for ethical financial practices. ​ Progress continues, but there are still gaps to address. Section D: Social Context of Business Accountability 1. Understanding Current Expectations and Whether They Are Changing ​ Businesses are under increased scrutiny to demonstrate accountability beyond profit-making.  ​ Public and stakeholder expectations are evolving, with more emphasis on transparency and ethical behavior. ​ Businesses must adapt to societal values and norms that prioritize sustainability, inclusivity, and fairness. ​ Examples of changing expectations: ○​ Greater demand for environmental stewardship. ○​ Enhanced focus on social equity and justice. ○​ Accountability for actions across supply chains. 2. Social Licence as a Part of Business Performance ​ "Social licence to operate" refers to the ongoing approval and acceptance by stakeholders and the public. ​ Businesses need to build trust and legitimacy to maintain their social licence. ​ Key components: ○​ Ethical practices that align with societal values. ○​ Transparent communication and engagement with stakeholders. ○​ Long-term commitment to social and environmental issues. ​ Social licence influences a company's reputation, investor confidence, and market success. 3. Frameworks That Are Guiding How People Are Reporting ​ Numerous frameworks have emerged to standardize and guide reporting on accountability and responsibility: ○​ Global Reporting Initiative (GRI): Focuses on sustainability reporting. ○​ Task Force on Climate-related Financial Disclosures (TCFD): Addresses climate-related risks and opportunities. ○​ Sustainability Accounting Standards Board (SASB): Provides industry-specific sustainability standards. ○​ Integrated Reporting Framework: Combines financial and non-financial information. ​ These frameworks enable comparability, transparency, and accountability in reporting. ​ Companies are increasingly adopting these frameworks to meet stakeholder expectations and regulatory requirements. Key Takeaways: ​ Governance is essential for ethical and transparent business operations. ​ ESG considerations should be embedded in governance frameworks. ​ Global standards (e.g., OECD Principles) help guide businesses toward responsible governance. ​ Learning from governance failures underscores the importance of accountability. Ethical Dilemma 2 film Notes Regulation & Business Practices vs. Investment Banks ​ Perception vs. Reality: Discussion on whether regulatory oversight differences between city investment banks and regional firms are real or just perceived. ​ Andy’s Dilemma: Uncertainty about whether practices in his firm are ethical or just the norm; attempts to raise concerns were dismissed. ​ Legal vs. Ethical Boundaries: Law as a minimum standard, but ethical and moral responsibilities extend beyond legal requirements. ​ Whistleblowing Risks: Andy faces a tough choice—speaking out could cost his job, but staying silent risks long-term reputation damage. Cultural & Professional Fit ​ Cultural Misalignment: Andy struggles with workplace norms (e.g., business practices, after-work drinks). ​ Professional Boundaries: Attempting to fit in could compromise his professional integrity. ​ Career Considerations: He must decide if adapting to the culture is worth potential ethical risks or if he should leave. Module 3: Duties, Legislation, Regulation and Governance ​ Audio ​ KP Chapter 3,4 ​ Cases ​ Film dilemma Section A: Duties and Obligations 1. Legal and Ethical Responsibilities ​ Finance professionals have duties to clients, employers, and stakeholders. ​ Ethics involves principles like trust, integrity, honesty, and social responsibility. ​ Legal duties and ethical duties overlap but are not identical. 2. Key Duties to Clients (CFA Institute’s Five Core Duties) ​ Loyalty, Prudence, and Care – Avoid conflicts of interest, maintain confidentiality, and balance risk vs. return. ​ Fair & Objective Dealings – Provide unbiased investment analysis and recommendations. ​ Suitability – Ensure financial advice aligns with the client’s financial situation and risk appetite. ​ Performance Presentation – Communicate accurately, fairly, and completely. ​ Preservation of Confidentiality – Except in cases of illegal activity (e.g., money laundering). 3. Legal Framework & Fiduciary Duties ​ Australia’s Corporations Act requires financial professionals to act with care, diligence, and in the best interest of institutions. ​ Fiduciary duty goes beyond general legal obligations, requiring financial advisors to prioritise the client’s best interests. ​ The definition of "best interest" is evolving to include ESG (Environmental, Social, and Governance) factors, beyond just financial returns. 4. Challenges in Ethics & Regulation ​ Greenwashing (misrepresenting ESG responsibility) is an emerging issue. ​ Regulatory enforcement is difficult, and legal action against financial misconduct is rare. ​ Self-regulation and good governance are critical for promoting ethical financial decision-making. Section B: Duties to Stakeholders 1. Employee Duties to Employers ​ Employees owe loyalty, must avoid conflicts of interest, and protect intellectual property. ​ Ethical workplaces should encourage whistleblowing to expose wrongdoing. 2. Employer Duties to Employees ​ Financial institutions should provide a safe, healthy work environment that promotes well-being. ​ The finance sector struggles with issues like toxic culture, lack of diversity, discrimination, and sexual harassment. ​ Legal action against toxic workplaces is increasing, but cultural change is slow. ​ Diversity policies exist but lack meaningful implementation. 3. Ethical Issues in Employment Practices ​ Unethical terminations – Employees being publicly escorted out damages the finance sector’s ethical reputation. ​ High turnover and restructuring lead to loss of loyalty, knowledge, and expertise. ​ Public perception of layoffs is negative, reducing trust in financial institutions. 4. Stakeholder Engagement & Transparency ​ Institutions must communicate openly with regulators, governments, and the public to maintain trust. ​ Post-financial crisis, stakeholders demand more involvement in governance to prevent unethical practices. ​ Ethical transparency is key to restoring and maintaining public confidence in financial institutions. Section C: Limits to the Law ​ Legal enforcement in finance is slow, costly, and sometimes ineffective, especially in the fast-evolving fintech sector where regulations struggle to keep up. ​ Regulatory intervention is necessary when markets fail to ensure fair outcomes (e.g., banning payday loans or unqualified financial advisors). ​ Digital technology complicates enforcement, as perpetrators often operate from overseas legal safe havens. ​ Financial regulation aims to protect system integrity, ensuring safe financial practices through licensing and monitoring of professionals. ​ Challenges to regulation include: ○​ Regulatory capture – when regulators prioritize industry interests over public interest. ○​ Moral hazard – banks take excessive risks, knowing they will be bailed out.  ​ Retail clients remain vulnerable, as regulatory focus is on systemic risks rather than individual protection. ​ Ombudsman services like AFCA (Australian Financial Complaints Authority) provide alternative dispute resolution for clients. ​ Regulation is only as effective as its implementation, and excessive reliance on laws can create a false sense of ethical security. ​ Financial misconduct remains persistent, with many unethical advisors simply moving to new firms. Section D: Governance and Accountability ​ Investment advice is self-regulated by FINRA (Financial Industry Regulatory Authority), with oversight from the SEC in the U.S. ​ Self-regulation in financial markets can work if there is: ○​ A large number of actors to prevent market manipulation. ○​ Enforcement mechanisms to stop unethical behavior. ​ Example: A failed oil derivatives exchange in the Netherlands collapsed due to price manipulation, proving the need for trust and integrity. ​ Industry bodies (e.g., Australian Banking Association) promote ethical codes but lack enforcement power. ​ Corporate governance is key in financial services due to its economic importance and responsibility to safeguard depositor funds. ​ Boards of directors play a critical role in governance, requiring expertise in: ○​ Sustainability ○​ Cybersecurity ○​ AI & data analytics ​ Good governance relies on diversity, accountability, and engagement with management, regulators, and the public. ​ Ethics should be integrated into governance, reducing risks of groupthink and poor decision-making. ​ Self-regulation and good governance are often more effective than strict regulatory intervention, fostering long-term trust in financial markets. Ethical Dilemma 3 film Notes ​ Working in an alien environment - a culture different to home culture - impacts how business operates ​ Global business - stints overseas - navigating through business practices and cultural backgrounds - structure, hierarchy - raise dilemmas in fitting in ​ Cross-cultural issues arises - put expats into tough situations Module 4: Conflicts of interest ​ Audio ​ KP Chapter 5 ​ Cases ​ Film dilemma Section A: Knowing ​ Conflict of Interest Case Study ○​ June, an executive independent director at Bermuda Holdings, failed to disclose that her father-in-law manages private equity valuations. ○​ Her father-in-law’s company received unusually high advisory engagements (12 times since 2020) despite strict procurement rules. ○​ June claims she didn’t disclose the relationship as she deemed it irrelevant. ​ Governance Structure & Ethics ○​ Independent directors of Bermuda Bank were given control over private equity investments at Bermuda Holdings. ○​ These independent directors were assigned based on their lack of financial benefit from the investments. ○​ June was appointed chair of the investment management committee, relying on valuations from advisory consultants (including her father-in-law’s firm). ​ Ethical Concerns & Reputation ○​ June insists that her father-in-law’s payments do not impact her independence. ○​ The issue isn’t just the process but the perception—non-disclosure damages trust. ○​ Raises the question: Is June acting in Bermuda Holdings’ best interests, or does she favour family? ○​ Would it be different if the advisor were a friend rather than a relative? ​ Understanding Conflicts of Interest ○​ Conflicts of interest occur when personal/institutional interests clash with duty to another party. ○​ Common in various professions, including finance, politics, dentistry, and academia. ○​ More transparency exists today than in the past, yet conflicts continue. ​ Declining Trust in Finance ○​ In Module 1, bank managers were discussed as once-trusted figures in society. ○​ Trust eroded as banks prioritised shareholder interests over client interests. Section B: Doing ​ Recognising Conflicts of Interest in Finance ○​ The CFA Institute defines conflicts of interest as personal/interpersonal relationships that interfere with professional duties.  ○​ Not all conflicts are inherently unethical—transparency and disclosure are key. ​ Disclosure vs. Elimination ○​ Some conflicts can be managed through disclosure, while others must be eliminated. ○​ Example: Auditors cannot own stock in a company they audit (conflict must be eliminated). ○​ Example: A fund manager investing in a client’s company can be managed via disclosure. ​ June’s Case: Breach of Trust ○​ June’s failure to disclose her father-in-law’s involvement raises governance concerns. ○​ Even if there was no intentional bias, the perception of favoritism can damage trust. ○​ The risk extends beyond compliance—clients and investors may lose confidence in Bermuda Holdings. ​ Regulatory & Ethical Considerations ○​ Laws require disclosure of conflicts in financial and corporate settings. ○​ Ethics go beyond legal requirements—organizations should foster a culture of integrity. ​ Best Practices for Managing Conflicts of Interest ○​ Establish clear policies on disclosure and recusal. ○​ Regularly review governance structures to prevent oversight failures. ○​ Encourage a culture of transparency where employees feel accountable. Section C: Classic Conflicts for Markets 1. Market Structure & Competition ​ Market Power vs. Competition: Firms may dominate markets, reducing competition and harming consumers. Regulations and antitrust laws promote fair competition. 2. Economic Efficiency vs. Social Equity ​ Efficiency vs. Equity: Markets focus on maximizing efficiency, but this can lead to wealth inequality. Governments intervene through taxation and subsidies to ensure fairness. ​ Short-Term vs. Long-Term Goals: Companies often prioritize short-term profits over sustainability and long-term societal benefits. Regulations and investor activism push for long-term strategies. 3. Market Failures & Government Intervention ​ Public Goods and Free Riders: Markets struggle to provide non-excludable goods (e.g., clean air, national defense) due to free-rider issues, requiring government funding. ​ Externalities: Unregulated markets may cause negative (pollution) or positive (education) externalities. Governments correct these through policies like taxes, subsidies, and regulations.  Section D: Managing and Acting 1. Government’s Role in Market Regulation ​ Policy & Regulation: Governments regulate industries to promote competition, correct externalities, and provide public goods through taxation and incentives. ​ Innovation vs. Regulation: Striking a balance between encouraging innovation and enforcing necessary regulations to prevent market failures. 2. Business Responsibilities & Ethics ​ Corporate Social Responsibility (CSR): Companies integrate ethical practices, sustainability, and social impact into their operations. ​ Consumer Influence: Changing consumer preferences for ethical and sustainable products influence corporate strategies. 3. Global Market Considerations ​ International Cooperation: Markets are interconnected, requiring global efforts in trade policies, environmental standards, and financial stability. Ethical Dilemma 4 film: ​ Gray Area of Insider Trading: The film explores a situation where insider trading may have occurred, but there was no clear intent from Martin to engage in it. ​ Ethical Dilemma: While Martin did not profit directly, his friend Craig did, putting others in the market at a disadvantage. ​ Martin’s Responsibility: Once Martin realizes what has happened, he likely has an ethical obligation to act, but he does not take responsibility. ​ Missed Opportunities: Martin had several chances to inform his boss or colleagues about the situation but failed to act. ​ External Pressures: His decisions were influenced by pressures from friends, his boss, and SolarNext (the company in question). ​ SolarNext’s Role: The company may not have properly disclosed critical information, adding to the ethical and legal concerns. ​ Unclear Outcome: While something unethical may have happened, the film portrays it as a complex and ambiguous situation rather than a straightforward case of insider trading. Module 5: A future for ethical finance ​ Audio ​ KP Chapter 5 ​ Cases ​ Film dilemma Section A: Globalization Roadblock ​ Ethical Concerns in Global Finance ○​ Finance has improved lives but has ethical mishaps. ○​ Global finance is often unaccountable and can lead to systemic economic consequences. ○​ Political responses to anti-globalization may undermine trust in banking rather than address ethical concerns. ​ Historical Context of Globalization ○​ Post-WWII and post-1989 (collapse of communism) saw increasing global economic integration. ○​ Free trade agreements facilitated capital, goods, services, and labor movement. ○​ European Union countries sacrificed some autonomy for economic growth (e.g., UK lost coal mining but gained financial prominence). ○​ Redistribution of growth aimed to reduce inequality and unemployment impacts. ​ Public Backlash and Resentment ○​ Growing discontent over globalized decision-making lacking accountability. ○​ Protests targeted institutions like the EU Parliament, G20, and major corporations. Section B: Financial Crisis & Anti-Globalization Sentiment ​ 2008 Financial Crisis as a Trigger ○​ Near-collapse of global finance fueled resentment. ○​ Sparked movements like Occupy and "99%" protests in 2011. ○​ Seen as a moral failure of capitalism—financial elites accumulating wealth while national governments struggled to regulate them. ​ Public Response and Actions ○​ Protesters marched on Wall Street, advocating for change. ○​ Encouraged people to shift from multinational banks to local credit unions. Section C: Innovation in a Sandbox 1. Defining Innovation ​ Innovation refers to the development of new products, services, or processes that improve efficiency and reduce resource consumption.  ​ It is a crucial driver of economic growth, competitiveness, and sustainability. 2. Economic Growth and Innovation ​ Countries investing in research, technology, and innovation tend to outperform others in economic rankings. ​ Innovative economies create new industries, enhance productivity, and generate employment opportunities. 3. Barriers to Innovation in the Private Sector ​ High Development Costs: Innovating requires significant investment in research, testing, and regulatory approvals. ​ Risk of Competitor Free-Riding: ○​ When a firm introduces a new product, competitors can copy or modify it without incurring the initial research costs. ○​ This discourages businesses from investing in innovation, as they may not reap the full benefits. ​ Intellectual Property (IP) Challenges: ○​ Patents and copyrights protect innovation, but enforcement can be weak, allowing competitors to exploit ideas without proper compensation. ○​ In industries with limited patent protection, firms struggle to maintain a competitive edge. 4. Case Study – Novo Bank’s Mortgage Innovation ​ The Idea: ○​ Novo Bank developed a specialized mortgage product for customers in flood-prone areas. ○​ This aimed to address a market gap by providing financial solutions for high-risk properties. ​ Challenges Faced by Novo Bank: ○​ Regulatory Hurdles: Required extensive approvals before launching the product. ○​ Market Awareness Costs: As a new product, significant marketing investment was needed to educate potential customers. ○​ Risk of Copycats: Competitors could replicate the product without incurring the same development costs. ​ Competitor Response – Seagate Bank: ○​ Seagate Bank observed Novo Bank’s product and quickly introduced a similar mortgage option. ○​ Since Novo had already conducted market research and addressed regulatory concerns, Seagate saved on initial costs.  ○​ Seagate further undercut Novo by offering lower interest rates, attracting more customers. ​ Outcome: ○​ Novo Bank suffered losses despite pioneering the innovation. ○​ Seagate Bank benefited from the groundwork laid by Novo without incurring the upfront costs. Section D: Regulatory Sandboxes 1. What is a Regulatory Sandbox? ​ A regulatory sandbox is a framework that allows companies to test new products, services, or business models in a controlled environment under regulatory supervision. ​ It provides temporary exemptions from certain regulations to foster innovation while maintaining oversight. 2. Benefits of Regulatory Sandboxes ​ Encourages Financial Innovation: ○​ Reduces compliance costs and regulatory burdens for startups and financial firms. ○​ Allows firms to experiment with new products without facing immediate full-scale regulations. ​ Supports Consumer Protection: ○​ Regulators can assess potential risks before a product enters the broader market. ○​ Companies receive guidance to ensure compliance with legal and ethical standards. ​ Enhances Regulatory Learning: ○​ Provides insights into emerging trends and technologies, allowing regulators to adapt policies accordingly. ○​ Helps balance innovation with financial stability and consumer safety. 3. Application to Novo Bank’s Case ​ How a Regulatory Sandbox Could Have Helped Novo Bank: ○​ If Novo Bank had access to a sandbox, it could have tested its mortgage product under relaxed regulations. ○​ This would have allowed them to refine their offering, gauge customer response, and assess risks without full compliance costs. ○​ The controlled environment would have given them a first-mover advantage before competitors entered the space. 4. Challenges and Limitations of Sandboxes ​ Bias Toward Large Firms:  ○​ Large firms with more resources may dominate sandboxes, leaving smaller startups at a disadvantage. ​ Consumer Protection Concerns: ○​ While sandboxes reduce regulatory burdens, they must ensure that consumers are not exposed to untested financial risks. ​ Short-Term vs. Long-Term Effectiveness: ○​ While sandboxes provide temporary regulatory relief, companies must eventually comply with full regulations. ○​ There is a risk that some firms may struggle to transition from the sandbox to the broader market. Section E: Climate Finance and Impact Investing 1. The Growing Impact of Climate Change ​ Extreme weather events, wildfires, food insecurity, and biodiversity loss are intensifying. ​ Despite numerous international agreements, progress in addressing climate change has been slow. 2. Role of Finance in Climate Change ​ Finance has contributed to climate issues but is also a key part of the solution. ​ The Paris Agreement (2015) emphasizes aligning financial flows with low-carbon and climate-resilient pathways. 3. Climate Finance Defined ​ Encompasses local, national, and transnational financing from public and private sources. ​ Supports both mitigation (prevention) and adaptation (treatment) efforts. ​ Large-scale investment is necessary to reduce emissions and prepare for climate impacts. 4. Financial Responsibility and Ethical Investing ​ Wealthier nations are expected to financially support vulnerable countries. ​ The finance sector plays a role in divesting from major polluters and supporting sustainable industries. ​ Ethical investment portfolios and ESG (Environmental, Social, Governance) reporting help measure financial institutions' commitment. 5. Challenges in Climate Finance and ESG Reporting ​ ESG reporting lacks consistency across financial institutions, impacting transparency. ​ The Paris Agreement calls for standardized climate finance reporting to ensure predictability. ​ Independent climate finance audits could improve accountability. 6. Impact Investing vs. ESG Investing ​ Impact investing focuses on generating both financial returns and positive environmental/social outcomes. ​ Originated in the private sector, while ESG aims at public transparency regarding sustainable practices. ​ Increasing demand for sustainable investments has led funds and superannuation providers to offer ESG-focused financial products. 7. Greenwashing and Ethical Concerns ​ Greenwashing: Financial institutions may misrepresent the sustainability of their investment products. ​ Regulators recognize this issue, as misleading claims distort investor decisions and damage trust. ​ Overly positive ESG reporting can create complacency, slowing real climate action. Section F: Blended Ethics in Finance 1. Ethical Awareness in Finance ​ Ethical awareness in finance is increasing, but the future remains uncertain. ​ Ethical decision-making is complex, blending multiple ethical perspectives. 2. Four Ethical Positions in Financial Decision-Making (from Module 1) ​ Outcome-based ethics: Prioritizes results over the means used. ​ Principles-based ethics: Decisions are guided by intent rather than outcomes. ​ Virtue ethics: Personal values influence financial choices. ​ Relativist ethics: Decisions are based on context and situational factors. 3. The Complexity of Ethics in Financial Institutions ​ Financial ethics often blur personal and professional values. ​ Example: Virtue ethics could conflict with fiduciary duties (e.g., fund managers selecting assets based on personal beliefs rather than client interests). 4. The Shifting Nature of Ethical Positions ​ Ethical frameworks have evolved over time and continue to shift. ​ Key questions remain: ○​ Are we moving toward relativist ethics in a polarized world?  ○​ Are ethical shifts cyclical or driven by geopolitical forces? ○​ Are we making real ethical progress, or are we stuck in limbo? 5. Ethical Challenges in Modern Finance ​ FinTech, robo-advisors, and climate finance are reshaping the financial landscape. ​ These innovations push traditional financial institutions to adapt or risk obsolescence. ​ However, new ethical risks emerge, including: ○​ Privacy concerns in digital finance. ○​ Technology literacy gaps impacting financial decision-making. 6. The Future of Ethical Finance ​ Alternative finance models promote inclusive and sustainable financial services. ​ Financial institutions must balance profitability, ethical responsibility, and innovation. ​ Trust in financial systems depends on their ability to integrate ethical considerations effectively. Ethical Dilemma 5: ​ Emerging Financial Intermediation: The film explores student entrepreneurs in peer-to-peer lending, operating in a regulatory grey area. ​ Lack of Risk Management: The business gains unexpected momentum but lacks the risk management frameworks seen in established financial institutions. ​ Stakeholder Responsibilities: There are multiple stakeholders—parents, investors, borrowers, staff—and conflicts arise as priorities shift between them. ​ Balancing Growth and Risk: The entrepreneurs face a dilemma between allowing organic business growth and implementing necessary risk management, with potential media scrutiny looming. ​ Incentives and Ethical Risks: Sales staff are given incentives (movie tickets, mobile credit), which may drive unethical behavior, prioritizing quantity over quality. ​ Long-Term Viability Concerns: Poor incentive structures could harm both borrowers (over-indebtedness) and investors (loss of funds), risking the business’s sustainability. Module 6: A future for ethical finance ​ Audio ​ KP Chapter 5 ​ Cases ​ Film dilemma Section A: 1. Ethical Awareness and Influences on Decision-Making ​ Ethics in practice involves understanding factors that influence decision-making. ​ Ethical awareness helps recognize biases that may impair judgment. ​ The moral compass is an internal guide to distinguishing right from wrong but can be subject to bias. 2. Moral Injury and Ethical Dilemmas ​ Acting against personal values or witnessing unethical behavior can cause psychological harm (moral injury). ​ Self-interest can override professional responsibilities, leading to unethical decisions (e.g., insider trading cases). ​ Self-deception occurs when individuals justify actions that contradict their ethical values. 3. Common Ethical Pitfalls ​ Moral fading: Ethics can gradually diminish in decision-making. ​ Tribalism: Believing the company is always right without questioning its direction. ​ Legalism: Relying solely on the law without considering ethical implications. ​ Moral relativism: Viewing work as a "game" and setting aside personal ethics. ​ Scientism: Over-reliance on data without questioning broader ethical concerns. 4. Biases in Ethical Decision-Making ​ Over 181 biases influence human thinking, both individually and organizationally. ​ Leaders are susceptible to biases such as: ○​ Zero-risk bias: Avoiding risk at the cost of innovation. ○​ Status quo bias: Sticking with existing practices without questioning improvement. ○​ Authority bias: Assuming senior leaders are always correct. 5. Stereotyping and Perception Biases ​ Stereotyping is a natural cognitive process but can lead to unfair outcomes. ​ Blind hiring practices and anonymous grading help reduce bias. ​ Halo and Horns effect: First impressions can unfairly shape future judgments. 6. Ethical Leadership and Psychological Safety ​ Ethical leadership requires self-awareness and encouraging open discussions on ethics. ​ Psychological safety in the workplace fosters transparency, allowing mistakes to be addressed early. ​ Ethical practitioners should reflect on biases, unintended consequences, and strive for continuous improvement. Section B: Influencers ​ Workplace Environment as a Cue ○​ Office layout, desk arrangements, and privileges signal hierarchy and workplace values. ○​ These cues influence behavior and decision-making. ​ External Influences on Decision-Making ○​ Weather and external events can shape attitudes and ambitions. ○​ Major events may push individuals to make bolder decisions. ​ Ethical Culture vs. Individual Blame ○​ Past focus on "bad apples" has shifted to examining toxic workplace cultures. ○​ Cases like Jerome Kerviel’s highlight systemic failures over individual misconduct. ​ Normalization of Unethical Practices ○​ Workplace socialization can make unethical behavior seem normal. ○​ Certain industries may influence and erode personal values over time. ​ Social Influence & Group Dynamics ○​ Bystander Effect: More people around = less likelihood of individual action. ○​ Groupthink: Dominant voices can lead to poorer decision-making. ​ Behavioral Economics & Nudge Theory ○​ Decision-making is affected by psychological, emotional, and social factors. ○​ Small interventions (nudges) can encourage ethical behavior and better choices. ​ Duty of Care & Accountability ○​ Employees have ethical responsibilities toward clients, colleagues, and society. ○​ Decisions leave an electronic trail, reinforcing the need for accountability. ​ Awareness & Ethical Decision-Making  ○​ Recognizing external influences helps individuals make conscious, ethical choices. Section C: Good practices Trolley Dilemma: ​ Involves a decision to divert a trolley to save five people or let it hit one. ​ Challenges thinking about agency, responsibility, and moral justification. ​ Used to teach ethics by encouraging reflection on decisions and justifications. Complexity in Decision Making: ​ Life often presents complex situations, where decisions aren't clear-cut. ​ Personal connections (e.g., family) may change decision outcomes. ​ Discussion of complexities and differing perspectives is important. Testing Decisions: ​ Use models like the "sunlight test" to assess how decisions would hold up in public scrutiny. ​ Align decisions with integrity to ensure they’re ethically sound. Decision-Making Model: 1.​ Gather Information: Understand the facts before making a decision. 2.​ Context: Consider the larger context (e.g., regulations, competitors). 3.​ Stakeholders: Evaluate how decisions impact others (customers, employees, etc.). 4.​ Options: Explore multiple options and think creatively. 5.​ Test and Decide: Test the decision’s impact and refine if necessary. 6.​ Reflection: Reflect on the decision’s outcomes and adjust if needed. Ethical Considerations: ​ Maximize benefits and minimize harms. ​ Maintain personal integrity within a team. ​ Promote the common good and care for others. ​ Consider ethical implications of decisions from all perspectives. Trust and Ethics: ​ Trust is built through care, skills, and integrity. ​ Being honest, reliable, open, and transparent is essential.  ​ Ethical decision-making fosters trustworthiness and benefits society. Section D: Ethical leadership Context of Leadership: ​ Leadership positions offer opportunities for ethical influence. ​ Humans are naturally inclined to trust, but in business, distrust is growing. ​ Trust in institutions (government, businesses) has declined, making trust-building a continuous effort for leaders. Trust and Business: ​ During the COVID-19 pandemic, trust in governments increased. ​ Business has an opportunity to rebuild trust, especially on issues like climate change and social justice. ​ Changes in business relationships (e.g., moving away from personal bank interactions) have eroded trust. Social Issues and Business Leadership: ​ Businesses and CEOs now weigh in on social issues (e.g., marriage equality, indigenous rights). ​ Historically, businesses focused only on profits and services; this has shifted. ​ Some leaders face pushback (e.g., BlackRock's stance on climate, NASDAQ's gender diversity quotas). Key Attributes of Ethical Leaders (Institute of Business Ethics, London): 1.​ Openness: Be approachable and open to different viewpoints. 2.​ Fair-Mindedness: Know what’s fair and right. 3.​ Honesty: Ensure actions align with promises. 4.​ Courage: Have moral courage to challenge wrongdoings or the status quo. 5.​ Listening: Engage with others' perspectives to understand and adapt. Engagement and Perspective: ​ Ethical decision-making involves considering multiple points of view. ​ Example: viewing a picture from different angles to see the full picture. ​ Practice understanding others' experiences (e.g., how would an elderly person experience an airport?). Anticipating and Responding to Unintended Consequences: ​ Decisions have predictable and unpredictable outcomes.  ​ Example: Signage to warn about accidents may distract drivers and increase accidents. ​ Be proactive in identifying and mitigating unintended consequences. The Importance of Apologies: ​ Leaders must apologize when things go wrong, acknowledging impact and offering solutions. ​ A good apology involves empathy, taking responsibility, and outlining steps for change. Ethical Dilemma 5: ​ Multiple Levels of Conflict: The film explores both personal and professional conflicts of interest in finance. ​ Ethical Dilemmas in Investment Banking: Conflicts of interest are a common ethical challenge, involving individual, corporate, and stakeholder interests. ​ Pressure to Close Deals: Due to redundancies and business challenges, investment bankers are under pressure to complete deals, potentially leading to ethical compromises. ​ Information Asymmetry: Unequal access to information creates unfair advantages in negotiations, raising ethical concerns. ​ Fairness in Conflict Resolution: Fairness is crucial for long-term business sustainability, as unethical practices may eventually surface and damage reputation. Practice case docs 11 Bendigo CEO warns Market concentration ​ Pros ○​ Reduce risk of rogue and unethical behaviour as big 4 are well known/reputation ○​ Guaranteed government intervention/bail out (too big to fail) ○​ Scale advantages (lower cost) ○​ One stop shop (big banks are conglomerates – they offer a full range of financial services) ​ Cons ○​ May lead to collusion at the expense of clients ○​ May reduce choice for clients ○​ High regulatory cost (to monitor rent seeking by big 4) ○​ Moral hazard – big 4 taking excessive risks ​ Utilitarian POV: if innovation can only be achieved with market concentration, then the greater good may be served – in line with the teleological point of view. However, with too much market concentration (a monopoly), then there wont be any innovation, but all the shortcomings apply. Answer: ​ 3 pros, 3 cons ​ Understanding of teleological ethics ​ Understanding long term value of innovation 11 Buy now, pay later Ethical concerns about buy now pay later operators (from a duty based ethical perspective) ​ A set of moral principles (duty based) would guide decision-making on responsible lending. In this case: do not lend money to customers who cannot afford to repay! BNPL violates that test ​ BNPL lender's business model is geared towards customers failure to pay on time and then be hit by late fees ​ The inability to repay on time is most severe for those who already struggle to pay essentials ​ There are no standards (no legal requirements to make affordability assessments or credit checks; no hardship provisions) To encourage innovation and competition, governments are reluctant to regulate the BNPL market. Are they right?  ​ No they're not ​ BNPL is not an innovation (it is credit) ​ And its unregulated nature has the potential to harm vulnerable customers. Its business model thrives on vulnerable customers who would not qualify for credit cards - rather than create competition in the credit card market 11 Ethical theories Ethical theory best captures position take by the co-op bank ​ Dentological ethics: restores reason to moral life (thing we ought (not) to do by virtue of being rational). Respecting and adhering to a binding moral law - irrespective of consequences. Decision making is principles (intentions) based. Doing right rather than good. ​ How do we know which are absolute moral rules? Kants principle: act only on rules that you would be willing to see everyone follow! ​ Vales, and ethical principles, enshrined in a code of ethics/conduct 11 Invest in afterpay Comparing this story from a teleological (ends based) and deontological (duty based) ethics perspective, what are the ethical concerns about afterpay. ​ Austrailan ethical is an ethical investment fund. According to their code of ethics (ethical charter), they do not invest in companies that cause persistent and growing indebtedness and lead BNPL customers ultimately into financial distress. This is very much a principles-based (or duty based) deontological approach ​ Duty based failure - while afterpay borrowers are liable to repay on time, they are not bearing the cost of the interest free loans. Afterpay charges a fee to the store, which it then recovers by charging higher prices to all customers including those who do not use the afterpay service ​ Australian ethical argues that the afterpay service is most attractive to young customers, who would be financially vulnerable, with low income and limited financial resources. These customers would often not have a track record with a bank or a credit score, precluding them from credit/loans that are available to older customers. A teleological/ends-based ethical position would justify the ocassional financial default by pointing out the overall benefit of (cheap) provision of credit to the vast majority of customers - allowing them the benefits of economic consumption Answer ​ Understand of, and distinguishing between teleological and deontological ethics ​ Which theories are most relevant  ​ Justify the ethics of afterpay based on the other (less relevant) theory 33 ASIC Action Ethical concerns that prompted the regulator (ASIC) to take action? (from a market integrity perspective) ​ Pressure selling of highly risky assets ​ Financial literacy concerns (completixy of CFDs and potential for unbounded losses). E.g. sirius investor had limited knowledge ​ Deception, claiming that these are safe assets, misleading customers ​ Provision of personal advice, while unlicensed to do so ​ Executives were directly involved, and dound not competent to lead a financial services business Greater concern to ASIC: price manipulation or fraudulent financial executives? ​ Price manipulation is worse ​ As manipulation distorts price discovery, which threatens the core function of the financial market (providing accurate price signals) ​ As it has systemic consequences (economic decisions based on distorted price signals). 33 Banks offering advice Why are banks keen to resume financial advice? What are the concerns from a duty to client point of view? ​ Banks are conglomerate institutions - cross selling (product lines) is an important part of their revenue. Providing advice as well as selling assets ‘locks-in’ clients. ​ The concerns for clients: ○​ Conflicted interests (client, employee, employer) ○​ compensation/bonus tied to sales of assets ○​ Neglect of duty of care to clients ○​ Inappropriate asset recommendations (lack of suitability) ○​ Poor product disclosure transparency ○​ Limites to financial literacy 33 Duties to clients What are ethical concerns about NAB’s financial advisory services ​ The story is all abou the (lack of) suitability of advice. Suitability aims to ensure that an investment/financial strategy (general or specific financial advice) meets the objectives and means of an investor. In the story there is a mention of “mis-selling of insurance products” ​ Compliance with policies and procedures that assure suitability: ○​ Client identification (ultimate beneficiary) ○​ Investore objections (return objectives, risk tolerance) ○​ Investor constraints (liquidity needs, time horizon, tax considerations) ○​ Performance measurement benchmarks would have been breached repeatedly ​ The duty to clients would have been compromised, particularly due to lack of ○​ Loyalty - forging of signature and manuipulating documents ○​ Prudence - lack of review of advice for clients of advisers NAB sacked ○​ Care - avoiding harm to clients 33 Good advice What are ethical concerns in this proposed new ‘good advice’ regime for the provision of financial advice? ​ Subjectivity of what is meant with ‘best’ and ‘good’ are these semantics or do they really differ? ​ Best interest duty (BID) considers process, where good advice is principles based that means that the process may be flawed as long as the ultimate advice is good for the client. ​ The quality of advice review proposes therefore to regulate the advice outcome, rather than the BID ​ That will then also allow banks, super funds, etx, to give potentially conflicted advice, as long as it turns out to be “good” advice ​ Education standards and code of ethics should be sufficient to protect client interests when removing BID from the corporations act Advice practitioners may argue that the quality of advice can only be assured with (brokerage) commissions allowed. Do you agree? ​ No, as any advice that is potentially conflicted based on commissions would be perceived as biased ​ The argument is that removal of commissions will make advice unaffordable for most. So if customers can only afford cheap advice, then that advice will be inferior. 33 Mortgage application inaccuracies Discuss the duty-to-client ethics in this story ​ This story is all about care in the duties to clients, in particular safeguarding them from financial default and increasing indebtedness. In riding the property boom, borrowers have overextended their ability to service their loans by misstating their financial circumstances ​ Banks have supported those borrowers (partly because their mortgage brokers may not have prioritised the duty to client over the duty to their employers) possibly with a lack of due diligence. Of course, a teleological ethics position could argue that by putting more weight on the likelihood of momentum in the boom (further price rise expectations), home ownership became possible to people who would otherwise be disqualified based on insufficient income/wealth ​ There is an implied fiduciary duty to clients in the sense that mortgage borrowers need to meet the lending standards set by the regulator, including the ability to repay their loans, and the minimum required deposit on the property purchase price, as a further safeguard from financial default 44 Conflicts of interest Discuss the conflict(s) of interest in this story, and how they are managed ​ Citigroup is an integrated financial services group, with an investment banking arm, a corporate relations division, brokerage, and equity analysts. Its equity analysts would provide valuation for citis corporate clients (IPOs, rights issues, etx) as well as valuation/recommendation for citis brokerage clients. That creates a significant conflict of interest between best interest of the brokerage clients and best interest of the corporate clients. ​ Citis analysts are sell side analysts, as the IB services to corporates tend to have priority in this conflict. As citi would often underwrite share offerings, it has a direct interest in a positive valuation itself. To make matters worse, the research analysts are often compensated based on the results in the IB division ​ There may also be conflict of interest between two (or more) or citis corporate clients ie if two are involved in a takeover ​ The story by citis director of research suggests that there are scale benefits to keep the research analysts together (which suggests that the chinese walls are established case by case). ​ Need eliminate the compensation/reporting incentive 44 Integrity of financial markets Discuss the ethical concerns as they relate to share market integrity ​ Effective and efficient markets rely on fairness and equal information. Hence, equity markets have mandatory disclosure regulations of an material non-public information to be revealed instantly before trading commences. Insider trading is illegal and results in fines and possible jail time to the individual perpetrators. ​ In this story, cooperman obtained non-public material information providing a window of opportunity to profit (guaranteed) from trading before it became public. ​ Specific points of interest ○​ He used his privileged position as a key shareholder to obtain the information ○​ He represented a major hedge fund, and abused his position to obtain the information ○​ He held a prominent reputation for a long time and worked for prestigious investment banks ○​ His employment within fianncial institutions (and the privileged access it gave) should have held him to higher standards than individual traders ​ He should have upheld finance industry standards, and ​ He should have upheld his duty to employers ​ He traded on the information, not just for his own benefit, but also for his hedge funds, and for a family members benefit 44 Milklab Consider the materiality of the information. Why is ASIC taking action? ​ Information is material if its disclosure would likely have an impact on the price of a security or if reasonable (rational) investors would want to know the information before making an investment decision…if its release would significantly alter the total information set currently available on and relevant to the value of a security wuch that the value of the security would be affected. ​ In this case misleading information about debts/writdowns directly linked to shareholder value(following revelation the shares dipped to a five year low.) ○​ Extent to which it is different from public information - failure to disclose the value of the writedowns, keeping the public (and the freedom foods directors) in the dark ○​ Nature of the information - incorrect accounting information ○​ Reliability of the information - making writedowns public would have a clearly proportionate impact on share value  ​ ASIC’s intervention is preserving market integrity (characterised by dissemination of all material information, fairness, effectiveness and efficient markets) by halting the erosion of confidence in australias financial markets following accounting misstatements and a failure to disclose material information. Of particular concern is the breakdown in governance when directors do not have the right information - thereby failing the shareholders, with systemic consequences 55 International ethics What are the ethical challenges for Telstra in operating in Asia? ​ Absolution (global rules) vs relativism (local rules) ​ Understanding culture ​ Accepting alternative ways of doing business (customs and practices). ​ Dealing with less developed legal and regulatory systems ​ Managing workforces of expats and locals ​ Engagement with local community ​ Criticism of multinationals like telsra ​ Market power ​ Dubious moral conscience ​ Encourages cultural homogenisation ​ Unfairly benefit from weak institutional and legal frameworks 55 Tik tok Finfluencers What are the ethical concerns about “finfluencers” ​ This is price manipulation if the influencers distort the information set determining the fair value of the stocks they discuss. ASIC is concerned about the integrity of price discovery if it can no longer control and verify the information flow, which is now dominated by social media. The story specifically mentions pump and dump behaviour ​ There are three ethical issues with finfluencers. First, are they providing a financial services? If thats the case, then they should be held to the same ethical standards (including an australian financial services licence). Second, are the influencers making misleading or deceptive statements in their communications? And third, is the intent of spreading misleading/deceptive information akin to market manipulation?  ​ Influencers are unlikely to hold an Australian financial licence and therefore are not subject to requirements to act honestly, efficiently and fairly or to have capital buffers set aside in case of investor loss. Inexperienced investors may be increasingly acting on financial advice from such unlicensed providers. This may result in conflict (there is mention of finfluencers getting paid for pushing investment products) or poor advice being provided to users who may suffer financial loss. Their followers may not be able to grasp the difference and distinguish between influencers and financial advisors. Poor behaviour from influencers may then tarnish the reputation of financial advisors. Poor behaviour from influencers may then tarnish the reputation fo financial advisors as well. ​ A positive contribution by influencers could be making the market more accessible to younger investors, who might then be taking more interest in financial saving and wellbeing. It is also possible that influencers focus their communications on the many listed stocks that get limited to no attention from (sell-side) analysts. Influencers could then improve the information flow, through increased liquidity and thereby improved price discovery. Rubric ​ Understanding ethics of price manipulation ​ Understanding ethics around perception of financial advice ​ What could be a positive outcome of influencers 66 Whistleblowing What are the conditions for justified whistleblowing? How does a reward system fit within these conditions? ​ Is the situation of sufficient moral importance to justify whistle-blowing? ○​ A product or policy of an organisation needs to possess the potential to do harm to some members of society ​ Do you have all the facts and have you properly understood their significance ○​ Documentary evidence should be in the possession of the prospective whistleblower to be presented to external audiences ​ Have all internal channels and steps short of whistle blowing been exhausted? ○​ The concerned employee should first of all report the facts to the immediate superior, and if he/she falls to act effectively, then take the matter to a more senior managers, exhausting all available internal channels in the process. ​ What is the best way to blow the whistle?  ○​ Once you go ‘public’, to whom and how much information should be revealed (anonymously)? Clear plan of action is needed ​ What is my responsibility in view of my role in the organisation? ○​ The prospective whistleblower must believe that the necessary changes will be implemented as a result of their whistleblowing act. A reward could potentially undermine the sufficient moral importance, or skip the internal channels. It could further jeopardise the act in good faith requirement, by incentivising employees to prioritise reward over a desire to improve bad behaviour. Practice exam answers Question 1 – Conflict of Interest Describe the conflict of interest in this story. How should it be managed? Hostplus invests the superannuation entitlements of its members for their retirement. Hostplus has a fiduciary duty to its members. Hence, it needs to prioritise on all occasions its member’s best interest. Also, Hostplus needs to act with prudence, and has a duty of care to its membership. That duty includes making prudent investment decisions on behalf of its members. Appropriate diversification of risk across the portfolio and within each asset class are very much part of those decisions. The “within asset class diversification” requires avoiding excessive manager concentration risk, i.e. investing too much with too few managers. The review of Hostplus by Lonsec suggests that Hostplus has in fact prioritized its own related investment vehicles (IFM and Industry Super Property Trust, ISPT) by investing a ‘larger than prudent’ asset allocation with those related companies. The allocations suggest bias towards related parties (IFM and ISPT) in making manager allocation decisions. Bias is a marker of a possible conflict of interest. While there is no evidence of an actual conflict, the vertical integration (by virtue of ownership) certainly creates a perceived conflict. To manage a perceived conflict requires transparency. Note that the Lonsec report was not publicly released. Hostplus marketed the portfolio as well-diversified multi-manager, without providing any further disclosure of their specific asset allocations. That is clearly inconsistent with the Lonsec report. It could be oversight but the lack of disclosure and ‘misleading’ characterisation has harmed trust in Hostplus’ integrity. The first step therefore needs to be proper disclosure. Followed by an explanation of why the manager concentration is so high (and the benefits that might come from that). And as a third step, Hostplus should consider regular verification by an independent party (like Lonsec) and report its findings to the members. Answer in 4 parts: ·​ Fiduciary duty – 5 marks ·​ Related-party conflict of interest – 10 marks ·​ lack of trust – 5 marks ·​ risk management – 5 marks Question 2 – Social License Discuss the ethical issues that arise from the 5 stakeholders. Regulator (ASIC) public concern with increasing numbers of scams and customers’ losses. Non-public concern that imposing new obligations on banks (name-checking on transactions) could backfire if that would lead banks opting out of a voluntary ePayments code. But also wonders why banks bother with account names, but then not use them for name-checking purposes. Banks’ non-public concern is being required to implement new obligations (significant investment in new systems) to reduce the risk of scams and reimburse customers’ scam losses. That would make customers’ complacent and less likely to be vigilant. Banks’ public concern is that the additional layer of name-checking will cause friction and delay payments – and lead to confrontations between frontline staff and customers. Banking industry body (ABA) is concerned about moral hazard (whereby customers no longer feel the need to be cautious) and urges for greater personal responsibility. Whereas the member banks are more concerned about who should be liable to pay for cyber security, the ABA seems more concerned about the systemic impact of (a lack of) customer responsibility. Customers are concerned that while banks have first encouraged them to go online and embrace digital banking (allowing significant cost savings by closing down branches), but then expect the risk of scams or digital corruption to fall with the customer. Consumer bodies (ACCC, CFA) are concerned about customer exposure to scams generally, but specifically to “business email compromise.” They see the name-checking tool as an additional protective layer for customers. Banks enjoy a license to operate. With that social license comes an obligation to look after client interest. That would include investing in cyber security of client transactions – acknowledging the need for client vigilance (minimizing moral hazard) in meeting basic security criteria. The UK regulations seem to strike that balance. Answer in 3 parts: ·​ Identify all 5 stakeholders – 5 marks ·​ Identify their concerns – 10 marks ·​ Social license – 10 marks Question 3 – Market Integrity Discuss the ethical concerns for Sebi. This story considers market integrity in India, a rapidly emerging market economy. Rampant economic growth requires market integrity (market participants’ trust in market fairness), but uncontrolled growth also makes markets vulnerable to fraudulent/unfair practices. Which explains why SEBI faces an increasing range of violations of trade practices that threaten the integrity of securities trading in India. While the total number of violations (fraudulent and unfair trade practices) has dropped, front running cases have increased. This is despite “robust” monitoring systems. What should be of concern to Sebi is · ​ the range of violations · ​ the number of violations (reducing but only slowly) · ​ the court rulings against Sebi’s enforcement of securities’ law · ​ the significant backlog of court cases (1043 of 1149 older than two years) · ​ that financial penalties might not be sufficiently severe · ​ that front running is usually done by market “insiders” (brokers and market makers) whereas the other violations tend to come from market “outsiders” (companies and investors) – the increase in front running cases is therefore even more damaging to the market’s integrity All of which undermines Sebi’s enforcement actions and diminishes the effectiveness of fines and other penalties as a deterrent for future violations. Answer in 3 parts: ·​ Identify the vulnerability of markets in rapidly emerging markets like India – 5 marks ·​ Identify at least 4 concerns – 10 marks ·​ Note that front running on the rise is a bad signal for market integrity – 5 marks Standard practice handbook summary 1. Overview ​ Published by the CFA Institute, this handbook provides ethical guidelines for investment professionals. ​ The CFA Institute Code of Ethics and Standards of Professional Conduct serve as a global benchmark for ethical behavior in the investment industry. ​ Ethical conduct is essential for maintaining trust in financial markets. 2. Code of Ethics CFA members and candidates must: ​ Act with integrity, competence, diligence, and respect. ​ Prioritize client interests over personal gains. ​ Maintain and improve professional competence. ​ Promote ethical conduct within the investment industry. 3. Standards of Professional Conduct I. Professionalism ​ Knowledge of the Law: Comply with all applicable regulations; follow the stricter rule in case of conflicts. ​ Independence and Objectivity: Avoid conflicts of interest and undue influence. ​ Misrepresentation: Do not mislead stakeholders. ​ Misconduct: Avoid dishonesty, fraud, or unethical behavior. ​ Competence: Maintain professional skills necessary for responsibilities. II. Integrity of Capital Markets ​ Material Nonpublic Information: Do not use insider information for personal gain. ​ Market Manipulation: Avoid practices that distort financial markets. III. Duties to Clients ​ Loyalty, Prudence, and Care: Act in clients' best interests. ​ Fair Dealing: Treat all clients fairly.  ​ Suitability: Ensure investments match clients’ goals. ​ Performance Presentation: Communicate investment performance transparently. ​ Confidentiality: Protect client information unless required by law. IV. Duties to Employers ​ Loyalty: Act in the best interest of employers. ​ Additional Compensation Arrangements: Disclose any extra compensation. ​ Responsibilities of Supervisors: Ensure subordinates comply with ethical standards. V. Investment Analysis, Recommendations, and Actions ​ Diligence and Reasonable Basis: Conduct thorough research before making recommendations. ​ Communication with Clients: Clearly explain investment strategies and costs. ​ Record Retention: Maintain proper documentation. VI. Conflicts of Interest ​ Avoid or Disclose Conflicts: Be transparent about potential conflicts. ​ Priority of Transactions: Client transactions must come first. ​ Referral Fees: Disclose compensation received for referrals. VII. Responsibilities as a CFA Institute Member or Candidate ​ Conduct in CFA Programs: Maintain integrity in exams and professional conduct. ​ Reference to CFA Designation: Do not misrepresent CFA status. 4. Recent Updates (2023) ​ New Standard on Competence (I.E): Emphasizes maintaining relevant professional skills. ​ Revised Client Communication (V.B): Requires disclosure of investment service nature and associated costs. ​ Updated Conflict of Interest (VI.A): Now explicitly states that conflicts should be avoided or disclosed.