Fri | Dec 1, 2023

Oran Hall | Ethical conduct, a pillar of the securities industry

Published:Monday | February 6, 2023 | 3:46 PM

Ethics is a set of moral values, such as honesty and trustworthiness, which guide behaviour, so ethical conduct is conforming to the general rules and standards of general conduct. Ethical conduct is about operating at the highest standard of...

Ethics is a set of moral values, such as honesty and trustworthiness, which guide behaviour, so ethical conduct is conforming to the general rules and standards of general conduct.

Ethical conduct is about operating at the highest standard of professional behaviour. This is critical to engendering trust in the financial system, which is deeply involved in the managing of people’s financial assets, to make it stable and build confidence in it.

Good ethical conduct requires that the business of a client remain confidential. It should not be divulged without the permission of the client except in cases in which the proper legal authority requires such disclosure. Therefore, I am surprised to hear the disclosures being made in the public space about the account of the track hero who is believed to have been the victim of fraud.

Good ethical conduct requires paying attention to the duty of care owed to the client. A duty of care exists when one party is in a position of trust and responsibility relative to another, by virtue of having superior knowledge and skills, for example, and is required to act in the best interest of that party. This explains the value of the ‘know your client’ or KYC rule in the securities industry in particular, which guides investment advisers and managers in making suitable recommendations to their clients.

Good ethical conduct requires that investment professionals, for example, eschew conflict of interest situations, that is, situations in which the private interest of the service provider clashes with the interest of the person being served. Such situations make it difficult to be impartial or fair. Sometimes there is no real conflict; there may only appear to be one. In any case, there are acceptable ways to deal effectively with conflict of interest issues when they arise.

Some employers have a written standard of ethical conduct, called a code of ethics. Its purpose is to make the employees know the ethical standards of the business and to let them know what is expected of them.

There are also standards of professional conduct that are often twinned with the code of ethics, which set the benchmark for ethical behaviour.

Investment and other professionals have a wide range of responsibilities. They have, for example, responsibility to their profession or industry, which requires them to maintain a high level of knowledge about their industry, to maintain a high level of professional conduct and to treat colleagues and competitors with respect.

They also have responsibilities to their employers, which include serving clients in a professional way, reporting suspicions of unethical or illegal activities and acting within their authority.

Responsibilities to clients include indicating to them the basic characteristics of investment instruments and matching products to the needs of the client. Investment professionals are also responsible for distinguishing between fact and opinion when making recommendations to their clients, keeping the business of clients confidential, executing trades for clients according to the agreed instructions, disclosing conflicts where they exist, and not guaranteeing the performance of any investment.

Professionals should also eschew improper trading practices, which generally affect clients adversely. Some examples are pressuring a client to make a particular decision, leading clients to believe they can suffer no loss from taking a particular investment decision, and improperly placing one’s order above the client’s to gain an advantage.

Employers have a duty to communicate to their employees what their ethical standards are as well as the behaviour expected of them. They should also provide the necessary training and supervision.

Training should be practical in that various scenarios should be illustrated so that the trainees develop more than head knowledge of what ethical behaviour is about and will be better equipped to make the right decision in various situations.

Governments have a vested interest in high ethical standards being s in the society at large and in the financial sector particularly. This helps to engender confidence in the system and encourage investment such that economic growth can be achieved and maintained.

It is for the above and other reasons why governments assume an oversight role in regard to the financial sector through the laws they pass and the regulatory bodies that they set up with powers to keep market participants in line and to penalise violators, but also with the responsibility to make timely and useful reports to the appropriate minister or authority.

The public must also practise ethical behaviour in its dealings with financial service providers and call attention to breaches by them when these occur, even going as far as reporting them to the authorities when this is warranted.

- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and