Module #5: Financial Ethics

What is ethics? O A system of moral principles. O Rules of conduct recognized in respect to a particular class of human actions. O Ethics is also called the determination of right or wrong; the standards of appropriate conduct or behaviour for members of a profession; what those members may or may not be.

Why are ethics important? O The finance industry has become increasingly stigmatized and stereotyped. People have suggested that the finance industry is very cynical and unethical. With these established and common beliefs, financial professionals and finance classes have begun to incorporate ethics into their learning strategies. O FIN401 and 502 both have specific classes designated solely towards ethical behaviour in the industry. O BMO Nesbitt Burns is one example of a company that provides mandatory ethical training once a year for every employee to maintain well rounded moral principles.

The Seven Principles O According to the CFP Board there are 7 principles that represent the Code of Ethics and Professional Responsibility: O Integrity O Objectivity O Competence O Fairness O Confidentiality O Professionalism O Diligence

Principle #1: Integrity O “Integrity demands honesty and candor which must not be subordinated to personal gain and advantage. Certificants are placed in positions of trust by clients, and the ultimate source of that trust is the certificant’s personal integrity. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.”

Principle #2: Objectivity O “Objectivity requires intellectual honesty and impartiality. Regardless of the particular service rendered or the capacity in which a certificant functions, certificants should protect the integrity of their work, maintain objectivity and avoid subordination of their judgment.”

Principle #3: Competence O “Competence means attaining and maintaining an adequate level of knowledge and skill, and application of that knowledge and skill in providing services to clients. Competence also includes the wisdom to recognize the limitations of that knowledge and when consultation with other professionals is appropriate or referral to other professionals necessary. Certificants make a continuing commitment to learning and professional improvement.”

Principle #4: Fairness O “Fairness requires impartiality, intellectual honesty and disclosure of material conflicts of interest. It involves a subordination of one’s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests. Fairness is treating others in the same fashion that you would want to be treated.”

Principle #5: Confidentiality O “Confidentiality means ensuring that information is accessible only to those authorized to have access. A relationship of trust and confidence with the client can only be built upon the understanding that the client’s information will remain confidential.”

Principle #6: Professionalism O “Professionalism requires behaving with dignity and courtesy to clients, fellow professionals, and others in business-related activities. O Certificants cooperate with fellow certificants to enhance and maintain the profession’s public image and improve the quality of services.”

Principle #7: Diligence O “Diligence is the provision of services in a reasonably prompt and thorough manner, including the proper planning for, and supervision of, the rendering of professional services.”

Business Ethics O Watch this video of Chuck Gallagher on Business Ethics:

Quiz

Question 1: O In your own words, why is ethics important to a financial institution?

Question 2: O Define the unethical continuum in some detail.

Case You are a sole practitioner who used to provide a range of accountancy services for a small company (Company A) that owns a hardware shop in the town where you practise. Following a brief retendering process, the client chose to engage an alternative firm of accountants. Both you and the other firm had been asked to tender for a range of services, including the preparation of year end accounts, tax compliance work, and a due diligence exercise in respect of the intended purchase of a small hardware business in the neighbouring town. You believe that you were unsuccessful in the tendering process on the basis of cost alone, as Company A is not very profitable, and suffers from the competition of the other hardware business that it intends to acquire. You are the continuity provider for another local sole practitioner. Two months ago he suffered a heart attack, and so you are currently acting for a number of his clients. He is not expected to resume practising for another two months.

…Case Continued… One of the clients of the incapacitated practitioner (Company B) operates a shop selling electrical goods. The director and majority shareholder has called you to arrange a meeting to discuss a business venture that he is considering. At the meeting, the client explains that he intends to make an offer for the same small hardware business that Company A is seeking to acquire. He is aware that there is another bidder for the business, but is unaware that it is Company A, or that Company A used to be your client. When the meeting is over, you start to feel uneasy. You want to help Company B and provide a valued service on behalf of the practitioner for whom you are the continuity provider. But you realise that you are also in possession of confidential information concerning the plans of your previous client. You are aware of Company A’s problems and its motivation for wishing to acquire the business. Provided by

Question 3: O Name 3 key principles and describe how they can be used in this case.

Question 4: O How will you ensure that you do not use confidential information relating to your previous client to the advantage of Company B?

Question 5: O Identify any relevant facts:

Question 6: O Identify affected parties:

Question 7: O Suggest a possibly course of action: