Diploma in Professional Financial Advice
UNIT 1:
FINANCIAL SERVICES, REGULATION and
ETHICS
Chapter 10 - The Code of Ethics and professional
standards to business behaviours of individuals
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Contents
Chapter
10. The Code of Ethics and
professional standards to
business behaviours of
individuals
Section
10.1 The over-arching Code of Ethics
10.2 The professional principles and
values on which the Code is based
10.3 Identifying ethical dilemmas
10.4 The steps involved in managing
ethical dilemmas
Page
3
5
6
8
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Chapter 10: The Code of Ethics and
professional standards to business
behaviours of individuals
In this chapter we start to focus our attention on how to apply the
code of ethics and professional standards to the behaviours of
individuals in a business arena.
Ethics (also known as moral philosophy) is a branch of
philosophy that addresses questions about morality—that is,
concepts such as good and bad, noble and ignoble, right and
wrong, justice, and virtue.
The overall regulatory approach, driven by the Financial Services
and Markets Act (FSMA) is values-based. However, the FSA and
the industry generally, have a role to play in raising standards
generally and ethical standards of behaviour in particular. The
FSA‘s principles – their high level standards – are based on ethical
values.
Promoting standards of ethical behaviour improves outcomes for
customers and their perception of the financial services industry. A
customer‘s perception stems from their view of the behaviour and
culture established by high street brands as much as that of
individual advisers.
Ethics apply at all levels, so attempts to ring fence certain
behaviours or individuals may give a misleading impression that
others do not have to follow ethical behaviours. This would be an
unsatisfactory outcome.
10.1
The over-arching Code of Ethics
As discussed in the FSA paper DP18, the Financial Services and
Markets Act and the FSA‘s principles and commitments embody a
framework of core values.
In summary they can be seen as:
 open, honest, responsive and accountable
 committed to acting competently, responsibly and reliably
 relating to colleagues and customers fairly and with respect
Throughout the various FSA Consultation Papers on the Retail
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Distribution Review, there are numerous references and
discussions on the proposed development of an over-arching
Code of Ethics for the industry.
The FSA Consultation Paper CP 09/18 contains a possible draft
over-arching Code of Ethics:
1. To act honestly and fairly at all times when dealing with
customers and to act in the best interests of each customer
2. To act with integrity in fulfilling the responsibilities of your
appointment and seek to avoid any acts, omissions or business
practices which damage the reputation of your organisation and
the financial services industry
3. To observe applicable law, regulations and professional conduct
standards when carrying out financial service activities
4. To observe the standards of market integrity, good practice and
conduct required or expected of participants in markets when
engaging in any form of market dealings
5. To be alert to and manage fairly and effectively and to the best
of your ability any relevant conflict of interest
6. To attain and actively manage a level of professional
competence appropriate to your responsibilities and commit to
continued learning to ensure the currency of your knowledge, skills
and expertise
7. To decline any engagement for which you are not competent
unless you have access to such advice and assistance as will
enable you to carry out the work competently
8. To uphold the highest personal and professional standards
In addition, most of the Industry Professional Bodies, such as the
Personal Finance Society (PFS) and the Institute of Financial
Planning (IFP) have developed their own Codes of Ethics based
on the FSA Principles and can be seen as potential models for an
over-arching Code of Ethics. These can be found on their
respective websites.
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10.2
The professional principles and values on which the Code is
based
The FSA Handbook sets out the Statements of Principle and Code
of Practice for Approved Persons.
There are at present 7 statements of principle as follows:
Statement of Principle 1
An approved person must act with integrity in carrying out his
controlled function.
Statement of Principle 2
An approved person must act with due skill, care and diligence in
carrying out his controlled function.
Statement of Principle 3
An approved person must observe proper standards of market
conduct in carrying out his controlled function.
Statement of Principle 4
An approved person must deal with the FSA and with other
regulators in an open and cooperative way and must disclose
appropriately any information of which the FSA would reasonably
expect notice.
Statement of Principle 5
An approved person performing a significant influence function
must take reasonable steps to ensure that the business of the firm
for which he is responsible in his controlled function is organised
so that it can be controlled effectively.
Statement of Principle 6
An approved person performing a significant influence function
must exercise due skill, care and diligence in managing the
business of the firm for which he is responsible in his controlled
function.
Statement of Principle 7
An approved person performing a significant influence function
must take reasonable steps to ensure that the business of the firm
for which he is responsible in his controlled function complies with
the relevant requirements and standards of the regulatory system.
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The first four statements apply to all approved persons, regardless
of which function they perform. These can be summarised as:




Statement of Principle 1 – act with integrity
Statement of Principle 2 – act with due skill, care and diligence
Statement of Principle 3 – observe proper standards of market
conduct
Statement of Principle 4 – deal with the FSA and with other
regulators in an open and cooperative way and disclose
appropriately any information of which the FSA would
reasonably expect notice
In addition, the FSA propose adding additional descriptions of
behaviour to those already set out under statement of principles 1
and 2.
These additions are:


―paying due regard to the interests of a customer‖
―deliberate acts, omissions or business practices that could be
reasonably expected to cause consumer detriment‖
The FSA have chosen these particular areas as they believe they
emphasise personal accountability and how actions impact public
perceptions.
Although these in themselves are not a Code of Ethics, they are
the basis for building an over-arching Code of Ethics. This will be
developed by both the FSA and the industry and will be in place by
the end of 2012.
10.3
Identifying ethical dilemmas
In the Financial Services industry, ethical dilemmas can arise for a
variety of reasons, but the two most common reasons are personal
gain and profit pressures.
In other words, the adviser can find themselves in a position where
they must make a moral and ethical choice between working to the
benefit of the customer and working to the benefit of themselves or
the company they work for.
It would seem to be a very straightforward choice, but all sorts of
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personal and business pressures can lead to decisions that can be
detrimental to the customer.
Some questions based around the core values mentioned in 10.1,
and published in the FSA Discussion Paper DP18, can help to
recognise, apply and balance values in everyday decisions and
actions:
Open, honest, responsive and accountable
 Who is left out or kept in the dark and why?
 How happy are we to be associated with our decisions/actions?
 Are we listening or just hearing?
 What can we learn?
 How do we help others to understand us?
 How do we recognise and deal with conflicts of interest?
Relating to colleagues and customers fairly and with respect
 Do we treat everyone as we would like to be treated?
 Do we deal with people with respect and without prejudice?
 How do we keep rights and obligations in balance and
proportionate?
 When do we hold to our commitments and resist ‗fudging‘?
 Who benefits and who loses out? Should they?
Committed to acting competently, responsibly and reliably
 Do we do what we say we will do?
 Under pressure do we swap co-operation for coercion?
 Do we dither or delay?
 How is error treated?
 Do people trust us?
 If not, why not?
 Can we meet our commitments and plans?
 Do we apply ethical criteria simply to gain an advantage or
because we believe we should?
The FSA have published a substantial list of behaviours which are
deemed to be inappropriate in the FSA Handbook. This can be
found on the FSA website in both the general and specific Codes
of Practice for Approved Persons.
(http://fsahandbook.info/FSA/html/handbook/APER)
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10.4
The steps involved in managing ethical dilemmas
The most effective way of managing ethical dilemmas is to ensure
that ethical behaviours are fully embedded both at a personal and
a cultural level.
The following steps are a useful guide to managing ethical
dilemmas:
1. Recognise that managing ethics is a process.
As has been mentioned above, ethics is a matter of values and
behaviours. However, these values and behaviours are part of an
advice process, and as such can be seen as a specific deliverable
within the process itself and so can be measured and evaluated.
2. Embed the right behaviours in the workplace.
The best of ethical values are meaningless unless they generate
the right behaviours in the workplace. Lists of ethical values and
codes of ethics must also generate policies, procedures and
training that translate those values to appropriate behaviours.
3. Avoid ethical dilemmas in the first place.
Codes of ethics and best practice are important. Understanding
ethical considerations and the implications of failing to follow best
practice will minimise the chances of unethical behaviour occurring
in the first place.
4. Develop shared purpose, loyalty and fulfilment.
Working towards a shared goal with the customer and within an
organisation will produce better quality decisions by including all
interests and perspectives, and increases the credibility of the
outcome by reducing suspicion of unfair bias.
There will always be occasional instances of ethical dilemma, but
by ensuring that there is a code to follow, and that the right
behaviours are demonstrated, these instances should be easily
recognised and avoided.
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Chapter 11: Evaluating the outcomes that
distinguish between ethical and compliance
driven behaviours
The FSA Discussion Paper DP18 states that:
―Ethics and regulation meet because standards of behaviour affect
our ability to achieve our objectives set down by FSMA. Poor
ethical standards clearly have detrimental effects. They pose risks
to market confidence and consumer protection. They can increase
the scope for financial crime and have a negative impact on public
awareness and confidence. In contrast, the highest ethical
standards can generate significant benefits for all stakeholders.‖
Compliance rules have an important part to play in the Financial
Services industry, but it is vital that ethical behaviours as
discussed in chapter 10 are not seen as being driven or led by
compliance. In this way we can maximise the potential benefits of
ethical behaviours.
11.1
Typical behavioural indicators
It is important to be able to recognise the positive and negative
behaviours involved in the balance between compliance and
ethics. It is easy to see the Code of Ethics or the FSA Statements
of Principle as a list to be ticked off. Yes, ethical behaviour is part
of the advice process, but it is vital to both the adviser and the
customer that ethical behaviours are part of the adviser‘s ethos
and are demonstrated as such.
The FSA will look closely at the ethical behaviours and values of
individuals and firms, and will adapt their monitoring to the positive
or negative behaviours and values demonstrated.
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Examples of negative behaviours and values and the
corresponding regulatory response:
Values and culture of firms
Minimum standards
 Unthinking, mechanical compliance
 Does as little as can get away with
 Culture of dependency
 Tries to abdicate decisions and
responsibilities
Regulatory relationship
Policing
 Monitoring boundaries
 Detecting and responding
to crises
 Enforcement ‗lessons‘
 Basic training
Compliance culture
 Reliant on guidance
 By the book
 Unaware of some risks
 Bureaucratic
Supervising / educating
 Developing ethics and
competence
 Looking for early warning
signs
 Early action to bounce
firms back on track
 Themed /focused visits
Examples of positive behaviours and values and the
corresponding regulatory response:
11.2
Values and culture of firms
Beyond compliance
 Risk focused, self policing
 ‗Buying in‘ at senior level
 Ethos integrated into most business
processes
 Ethos seen as assisting business
Regulatory relationship
Educating / consulting
 Facilitating the
development of
competence and culture
 Values scorecard
 Lighter touch
Values-led business
 Internalised ethos of core values
 Spirit not just letter
 Values focused, goes beyond rules,
not just compliance
 Well developed individual
responsibility and a sense of
involvement by all staff
 Focus on prevention
 Continued reassessment and
improvement of approach
 Awareness and discussion of
ethical considerations at senior and
all levels
 Open relationships
 Strong learning culture
Mature relationship /
benchmarking
 Reinforce good practice
 Lead by example
 Re-allocate resources to
problem firms
 Sustainable regulation
The outcomes which may result from behaving ethically
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Demonstrating ethical behaviours and values is not simply an
academic exercise to comply with the regulator. Positive ethical
behaviours have a direct and measurable outcome for the
industry, the firm, the adviser and, most importantly, the customer.
Potential outcomes of demonstrating ethical behaviours and
values for the industry are:
Market Confidence:
Differentiating the UK financial services sector as being renowned
for good ethical practice. A good ethical track record for the sector
could help it to absorb some ‗shocks‘ such as the recent global
financial downturn.
Financial Crime:
To change the perception that it is easy to launder money in the
UK, and to reduce the scope for our firms and markets to be
targeted by criminals in the first place. This can be done by
developing individual responsibility and a sense of involvement by
all staff and so help to demonstrate, through customer interactions,
the seriousness that the industry takes this sort of behaviour.
Public Awareness and Confidence:
Higher business and individual standards of behaviour promoting
the integrity and the general probity of all working in financial
services will enhance public perceptions and trust in the firms and
individuals concerned.
Potential outcomes of demonstrating ethical behaviours and
values for the individual firm are:
Brand Loyalty:
Ensuring customers are being treated fairly and ethically increases
the loyalty they will feel towards the company and the probability
that they will remain a customer over the long term.
Recommendations:
A customer that feels brand loyalty will be the best ambassador for
that company. Business that has been recommended is is far
more likely to be retained in the long term.
Potential outcomes of demonstrating ethical behaviours and
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values for the individual adviser are:
Credibility:
An adviser who demonstrates the correct ethical values and
behaviours to their customer will be rewarded by increased trust
from the customer and a greater potential for current and future
business.
Potential outcomes of demonstrating ethical behaviours and
values for the customer are:
Consumer Protection:
Improved ethical standards might include a better relationship
between firms and customers which would be reflected in, for
example, improved explanations in the advertising and selling of
financial products.
Consumer Confidence:
If the customer is confident that the adviser and the firm are
demonstrating ethical behaviours, them the customer will have
more confidence in the advice being given and the suitability of
that advice to their own personal circumstances.
11.3
The outcomes which may result from limiting behaviour to
compliance with the rules
Conversely, demonstrating behaviours and values that are limited
to merely complying with the basic rules of any Code of Ethics or
Statements of Principle have a direct and measurable negative
outcome for the industry, the firm, the adviser and the customer.
Potential outcomes of demonstrating limited compliant behaviours
for the industry are:
Contraction of the Industry:
Ultimately, a lack of trust in the integrity of financial advice will lead
to, or increase, the poor reputation of the industry and reduction in
the amount of business conducted.
Potential outcomes of demonstrating limited compliant behaviours
for the individual firm are:
Potential Regulatory Consequences:
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Adherence only to the letter of the regulations will attract far
greater scrutiny from the regulator and the potential for fines or
other regulatory consequences.
Potential outcomes of demonstrating limited compliant behaviours
for the individual adviser are:
Conflicts of Interest:
Adhering to only the regulatory minimum of ethical behaviour
opens the adviser up to a far greater potential for unintentional
conflicts of interest or ethical dilemmas (See chapter 10). Not all
the potential circumstances for unethical outcomes are listed in the
rules or codes, only a full and rounded understanding of the ethical
issues and a belief in ethical behaviour can minimise the potential
for conflicts.
Potential outcomes of demonstrating limited compliant behaviours
for the customer are:
Lack of Confidence:
A customer that does not have confidence in the behaviour of the
adviser will not have faith in the advice being given. At best this
may mean a customer seeking advice from another adviser, at
worst it will mean a customer missing the opportunity for sound
financial advice.
It can be seen, therefore, that ethics is not just a theoretical set of
rules, but is a system of values and behaviours that directly affect
the whole of Financial Services from the industry to the customer.
Ethical behaviour is as much an integral part of the financial
planning process as the factfind and recommendation are.
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