CONTINUING EDUCATION FOR FINANCIAL SERVICE PROFESSIONALS

WHY ETHICS MATTER

Copyright © 2022 CLIFE Inc.

All rights reserved. Any reproduction of parts or all of this course and its
contents by any means electronic or mechanical is prohibited.

***

The information in this course is provided for educational purposes only; it

should not be construed or interpreted as providing advice. Agents and
advisors should always seek guidance from their principals and compliance
experts in regards to informing themselves and others about details of the
products they sell and other considerations of their business.

***

We welcome all feedback and suggestions for additions to the course.

Please send your comments to info@clifece.ca.

CLIFE INC.
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Why Ethics Matter provides continuing education credits upon satisfactory

completion of an online test. Please see the website for details or email
info@clifece.ca.

This CE activity has been approved by FP Canada as meeting the minimum

requirements for CE Approval as outlined within the FPSC Continuing
Education Guidelines. The views and opinions expressed in this presentation
are those of the presenter/content author and do not necessarily reflect the
views of FP Canada.

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INTRODUCING ETHICS

Your learning goals for this course are to:

ü Define ethics, morals, virtues, and values.
ü Identify ethical issues in your business.
ü Determine how to apply ethics.

What to expect:
Ø An overview of ethics.
Ø Definitions of ethics, virtues, values, and morals.
Ø Ethics in the context of investing.
Ø Ethics in practice.
Ø Obstacles to ethics

• There’s a lot of chatter around the subject of ethics: everyone wants to be

thought of as being ethical. Who cares? Why do ethics matter?

• Ethics tell us what we should do --- how we ought to act according to a

system of morals or rules of behaviour. They matter because they answer
the notion of what is right --- a concept firmly ensconced in the directive to
put client interests first.

• Values are one element of ethics; morals are another.

• Financial ethics are one branch amongst the many branches of ethics. Other
branches include medical ethics and legal ethics. However, the trunk of the
tree is the fundamental values from which each branch grows.

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 • The purpose of financial ethics is to provide solutions for moral dilemmas in
finance through the application of ethical principles.

• A code of ethics or ethics training cannot cover every situation in which you
might find yourself. Not every situation is black or white; many fall into a grey
zone. A problem with ethics is that what is ethical to you may not be ethical
to me due to us both having a different set of values and different morals.

• Therefore, guidance is needed for decision making to best handle the issues of
the grey zone and to ensure ethical principles transition into ethical behaviour.

• Ethics in a profession or organization is frequently established in a code. A

code of ethics:
o guides decisions because it focusses on values and principles that
influence judgment;
o helps to build professional standards;
o boosts stakeholder confidence;
o creates a set of expectations for its members, stakeholders, and in its
market;
o enables consistent decisions to be made between what is right and
what is wrong.

• A code of conduct is quite distinct from the code of ethics. It focusses on

actions and how members of an industry, organization, or company are
expected to behave.

• A code of conduct also often established by organizations for their members.

The Mutual Fund Dealers Association (MFDA) sets out their Standard of
Conduct to:
o deal fairly, honestly and in good faith with its clients;
o observe high standards of ethics and conduct in the transaction of
business;
o not engage in any business conduct or practice which is
unbecoming or detrimental to the public interest; and

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 o be of such character and business repute and have such
experience and training as is consistent with the standards
described in this Rule or as may be prescribed.

• An “umbrella” code of ethics encompassing the Canadian investment

industry does not exist. Individual organizations, such FP Canada--- the
body that governs Certified Financial Planners® in Canada --- have each
developed a code of ethics specific to their business. The FP Canada Code
of Ethics on the following page is provided as an example of values and
principles key to its participants.

• You may well question if you are being ethical by being compliant and following
the rules sets for you. But, as stated by the Business and Organizational Ethics
Partnership ---
Ethics and compliance are two separate functions. Compliance is not
an art form – it's about rules, policies, and regulations. Ethics is an art
form, and to practice it, you have to understand the business you're in
and how best to communicate its values to employees and other
stakeholders.

• Ethics, as a personal characteristic, are highly valued professionally and

personally.
“A survey of 842 employers in 40 countries found hiring organizations
regard skills directly tied to ethical decision-making as top attributes in
business school graduates. These skills include integrity, ethics, critical
thinking, problem solving, and leadership…However, the same survey also
reveal these skills are considered rare among graduates.”

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Principles of the FP Canada Code of Ethics
Principle 1: Duty of Loyalty to the Client
The Duty of Loyalty encompasses:
• The duty to act in the client’s interest by placing the client’s interests first.
Placing the client’s interests first requires the Certificant (the CFP
professional) place the client’s interests ahead of their own and all other
interests;
• The obligation to disclose conflicts of interest and to mitigate conflicts in the
client’s favour; and
• The duty to act with the care, skill and diligence of a prudent professional.

Principle 2: Integrity A Certificant shall always act with integrity.

Integrity means rigorous adherence to the moral rules and duties imposed by honesty
and justice. Integrity requires the Certificant to observe both the letter and the spirit of
the Code.
Principle 3: Objectivity A Certificant shall be objective when providing advice and/or
services to clients.
Objectivity requires intellectual honesty, impartiality and the exercise of sound
judgment, regardless of the services delivered or the capacity in which a Certificant
functions.
Principle 4: Competence A Certificant shall develop and maintain the abilities, skills
and knowledge necessary to competently provide advice and/or services to clients.
Competence requires attaining and maintaining a high level of knowledge and skill,
and applying that knowledge effectively in providing advice and/or services to clients.
Principle 5: Fairness A Certificant shall be fair and open in all professional
relationships.
Fairness requires providing clients with what they should reasonably expect from a
professional relationship, and includes honesty and disclosure of all relevant facts,
including conflicts of interest.
Principle 6: Confidentiality A Certificant shall maintain confidentiality of all client
information.
Confidentiality requires that client information be secured, protected and maintained
in a manner that allows access only to those who are authorized. A relationship of
trust and confidence with the client can be built only on the understanding that
personal and confidential information will be collected, used and disclosed only as
authorized.
Principle 7: Diligence A Certificant shall act diligently when providing advice and/or
services to clients.
Diligence is the degree of care and prudence expected from Certificants in the
handling of their clients’ affairs. Diligence requires fulfilling professional commitments
in a timely and thorough manner and taking due care in guiding, informing, planning,
supervising, and delivering financial advice and/or services to clients.
Principle 8: Professionalism A Certificant shall act in a manner reflecting positively
upon the profession.
Professionalism refers to conduct that inspires confidence and respect from clients
and the community, and embodies all of the other principles within the Code.

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 • Here are three key reasons to champion investment industry ethics:
o To put client interest first;
o Gain professional reputational excellence among peers,
managers, clients, and competitors;
o Consistently apply approaches and solutions.
§ When you know the right thing to do in one situation, you
can apply that approach to other, similar situations. The
same, or a similar, beneficial outcome will result. Other than
being the right thing to do for the client, this can save you
countless hours of analysis to reach a decision.

• Further, it is well established that ethical behaviour and corporate social

responsibility can bring significant benefits to a business.

• Of course, being ethical is simply the right thing to do. Virtually everyone
would agree on that point. But, when questioning whether the effort of ethical
learning, practice, and training is worthwhile, what price can a business or
individual put on choosing the ethical high ground?

• Consider these potential cost benefits of ethical behaviour and its attendant
reputational excellence:
o Trust is established and customers are attracted to the individual
and/or the firm, thereby boosting sales and profits;
o A firm easily attracts employees, and those employees are likely to,
themselves, have high ethical standards;
o Conflict between employees or employees and managers or
employees and clients is reduced or eliminated;
o Talented employees are attracted to the business and are more
likely to be productive employees;
o Employee turnover is reduced, lessening costs associated with
hiring and training;
o Improved business opportunities arise when others seek to
associate their activities with those of the company or individual, or
the company or individual seeks partnership with others;

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 o A firm or individual with a leadership position has no need to
discount its products or services in order to attract customers;
o A point of differentiation with competitors;
o Investors are attracted to the firm and in doing so, keep its value
high while reducing the chance of takeover;
o An employee or a company is less likely to face regulatory fines or
sanctions or legal costs.

• Reputation is considered to be one of the most important assets of an

individual and a company, and one of the most difficult to rebuild. What is
your reputation? What would someone pay to be associated with you and
share your brand? Is that price a reflection of ethical choices you have made?

• Those who demonstrate the ability to make ethical decisions and, then, to act
accordingly have the internal guidance system necessary to be business and
societal leaders. This is perhaps more true now than ever due to the current
stew of lies and false news that are promulgated on a daily basis, foreign
influence, and absence of accord to laws protecting privacy by some of the
largest international firms and influencers.

• This is an excellent time to increase your exposure to ethical thought to be

able to critically assess current developments in financial services.

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 CASE

Ethical lapses result in poor decisions. Sometimes the decisions

are so poor, they also become illegal and sanctionable by
regulatory authorities. A case in point: a client wanted to use her
account to fund her eventual retirement. She never personally
met the advisor and had no recollection of the objectives set out
in her new client account application. However, she ended up
with an account in which her objectives were incorrectly stated
as 60 percent high risk.

The advisor pursued an aggressive investment strategy, which

included frequent trades in high-risk securities in the energy and
materials sectors. After a few years, the client’s account
contained 100 percent high-risk investments, with approximately
75 percent concentrated in energy and materials. She lost
approximately $41,000, which was 38 percent of her portfolio.

Maybe the advisor believed he was building the retirement

savings the client wanted, however he did not have discretionary
authority over the account and he benefitted from the
commissions. His poor decisions eliminated any hopes she had for
her retirement savings . It is an extreme understatement to say
her best interests were not served by his actions.

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 Reasons for ethics in business
Why ethics matter:
A B
With ethics Without ethics
Public image is Public image is not
strengthened whether for strengthened or possibly
a business or an weakened in the absence
individual. of ethical behaviour.
Associated with long-term Success of any duration
success. may not be attainable.
Employee morale is Productivity will be low
higher in a company with since employees will be
well-developed values. concerned about the next
“bad” thing to happen.
Builds trust among There can be no trust
customers and partners between people or in
or suppliers business relationships
because the person or thing
is not trustworthy.
Legal and moral Legal and moral obligations
obligations are met. may not be met leading to a
snowball effect of
misdemeanors.
People know what Double standards in the
expectations are for their workplace cause employee
behaviour. confusion and anger.
Decision-making is Decision-making will be
guided by accountability knee-jerk reactions that can
and transparency and change from incident to
therefore becomes easier incident.
and more consistent.
Some examples…
Wells Fargo: B (Fake
accounts; failure to
implement mandated
risk management
program.)
Microsoft: A
Starbucks: A
Volkswagen: B (Software
detected when diesel
cars were being tested for
compliance with
emissions rules; the
software then adjusted
the engines so that they
passed.)
Facebook: B (Prioritizes
profits over people; uses
its algorithms to foster
social discord; negatively
affects the mental health
of young girls through its
photo app, Instagram;
enables drug cartels and
human traffickers to
openly conduct business
on its platform.)*
Apple/Foxconn: B
(Foxconn manufactures
for Apple in Taiwan
where it is alleged to
employ child labour.)
Toyota: B (Intentional
misleading about
unintended vehicle
accelerations;
systematically violating
emission reporting
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 requirements.)
Norms of behaviour are Norms of behaviour do not United Airlines: B
established across the exist, leading to erratic (Witness paying
board to be truthful, keep outcomes. passenger dragged
promises or be helpful to down the aisle by
others employees to give the
seat to another
customer.)
Ethical people and Time and effort will be Equifax: B
businesses have more wasted trying to establish (Enormous data
credibility because they credibility. breach.)
are predictable.
Enables a more fulfilling Life is comprised of many Peloton B
life. unhappy interactions and (Parody commercial of
reputation may be tattered. actor Chris Noth failed
to consider allegations
of his sexually
inappropriate
behaviour.)
Ethical situations are Ethical situations are Better.com (B)
guided by the ethics of misguided by the absence (CEO fired 900
the person or of ethics of the person or employees on a Zoom
organization. They can organization. call.)
be resolved quickly They are not easily
because a guide exists. resolved because rules are
not applied or past actions
cannot provide guidance.
An unethical situation can An unethical situation can KPMG: B (stole
be more readily identified get out of hand because it inspection information;
and dealt with is not quickly recognized for cheating on personnel
accordingly. what it is. training tests.)

* Source: Compliance Week: Top ethics and compliance failures of 2021; online:
www.complianceweek.com/opinion/top-ethics-and-compliance-failures-of-2021/31120.article)

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CAN I BECOME A
MORE ETHICAL PERSON?

• The cynical answer to this question would be “yes,” because otherwise

there really is no point to this course.

• However, a better answer is “yes,” because learning and education drive

moral education and advance an individual’s understanding of ethics.

• This approach is supported by IIROC member firms, who not only require
new entrants to their business to complete the Conduct and Practices
Handbook (CPH) Course, but also mandate re-taking of that course when
unethical behaviour is identified in the actions of a licensed individual. The
firms are using the CPH to develop learning about ethics.

• A person’s ability to develop ethics in later life was studied by Harvard

psychologist, Lawrence Kohlberg.
(Source: Markkula Centre for Applied Ethics, Can Ethics be Taught? Online:
https://www.scu.edu/ethics/ethics-resources/ethical-decision-making/can-ethics-be-taught)

• Kohlberg postulated three stages of moral development:

o The pre-conventional level defines wrong and right in term of what
authority figures say are wrong and right. There is no introspection
by the individual: these people do not understand the reasons an
action is wrong or right---they simply parrot what they are told to
think;
o The conventional level sees a person adopt the allegiance of a
group with which he or she identifies; this could be loyalty to friends,
a religious group, or to one’s country;
o The post-conventional stage has arrived when a person develops
moral principles from a universal point of view and takes everyone’s
interest into account. This is big-picture thinking about universal

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 ideals and justice and is the most mature and sought-after stage of
moral development.

• Education is crucial to moral growth and gaining a higher standard of moral

development.

• Therefore, to ratchet up your personal ethics, take advantage of reading

about ethics and simply thinking about what it means to you and the
situations that confront you.

CASE

A registered representative (KBB) at an IIROC-member firm
failed to report four complaints that had been made by
clients about another registered representative (MM). The
clients stated their signatures on their account were forged.

MM was terminated by his firm for forging the documents
of one client.

KBB was fined $10,000, suspended from registration for
nine months, and required to rewrite the Conduct and
Practices Handbook course, among other sanctions. The
CPH requirement showed she clearly needed a reminder of
her ethical and regulatory obligations.

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DEFINING DIFFERENCES

• What is the difference between ethics, morals, virtues, and values?

Each element does not stand on its own; together they contribute to a
whole.

Ethics

• Ethics tell us what we should do --- how we ought to act according to

morals or rules of behaviour.

• Ethics is oriented towards decisions and doing the best possible thing in
a given situation. An ethical decision may pit two right outcomes against
each other, a right against a wrong, or two wrongs. Deciding the better
of two wrongs is the toughest; everyone involved will be hurt; the hurt is
a matter of degree.

• Ethical principles provide a foundation for action.

What Ethics Is Not

• Looking at “the other side of the coin” can sometimes enhance
understanding a subject. In this case, here are some ideas about what
does not comprise ethics:

• Feelings or emotions:
o Feelings or emotions have no place in ethical practice because
they are not values driven. For instance, decisions motivated by
fear are unlikely to be ethical. It is quite possible to feel very badly
about making a highly ethical decision that results in a greater
good.

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 Ethics, morals, virtues, and values
It is obvious these subjects are deeply
interconnected, since --- as stated above --
- we use one subject to define another,
“emotions have no place in ethical
practice because they are not values
driven.”

In common practice, what are some
common personal values?
• Courage;
• Dependability;
• Creativity;
• Honesty;
• Loyalty;
• Respect;
• Fairness;
• Justice;
• Kindness;
• Wisdom.

o One of the major hurdles to conquer when addressing an

ethical situation is the feeling that it is a no-win situation. That
is often the nature of an ethical dilemma: right and wrong are
combined and there is no clear winner.

• Religion:
o Many religions espouse ethical standards but, quite simply,
many of the religious do not practice what they preach.

o Also, many people do not follow any particular religion while

ethics applies to everyone.

• Law:
o Law, at its best, incorporates many standards we recognize
as ethical. Law can become ethically corrupt as evidenced by
some totalitarian regimes. For instance, even though North
Korea has laws, few would agree that there is any evidence of
ethics in law such as that of generational punishment in which

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 a lawbreaker, his parents and children are punished for his
wrongdoing.

o When law serves the interests of narrow groups alone, it is

unethical.

• Culture:
o Cultural practices of a society, or nation may be unethical.
The holocaust is sure evidence of the failure of cultural ethics.

• Science:
o Science should be ethically neutral, but it can be the source of
highly unethical technology, such as the use of personal
information to change electoral outcomes in democratic
societies.

Morals

• The words, morals and ethics, are sometimes used interchangeably

and there is a connection between them. However, there is a nuanced
difference: morals underpin ethics. They are the principles held by an
individual that inform the person about what is right and wrong. As
stated previously, ethics tell the person how to act.

• Morality is considered to be the basis of character. Some common

examples of morals are to show empathy or to keep promises. A
person with a moral character is a good person and a good citizen.

• Moral principles can also be imbued in corporations and their

transactions. Morality is crucial to virtually every financial transaction
because of the trust that must exist on the part of the consumer in the
institution with which they are dealing. The customer must trust that
they are adequately informed about their purchase, trust that their
money will be returned as promised, and trust that their sensitive

16
 information will be kept confidential. Making false claims and failing to
honour promises and agreements is morally objectionable.

• How do morals morph into ethics? Ethics are moral values in action. A
person who knows the difference between right and wrong and chooses
right is moral. And by doing right, despite difficulty or danger, the
person has chosen the ethical path.

Virtues and virtue ethics

• Virtue ethics can be traced to ancient times, and was the dominant
approach in moral philosophy until the 19th century. The virtue ethics
tradition encompassed many topics familiar to us and our studies of
ethics today: virtues and vices, motives and moral character, moral
wisdom, friendship and family relationships, and the sorts of persons
we should be and how we should live.

• A virtue is a character trait and a disposition based on excellence. It

makes a person morally good or admirable and supports collective well-
being. Virtues are not a habit, like good manners, but they run all the
way through a person and define the choices of that person and how
she behaves.

• There are many interpretations of the qualities that are considered to be

virtues but some include moderation, generosity, patience, friendliness,
and wit.

• A person who, for instance, values the virtue of patience will

demonstrate her respect for this virtue in all her actions. If her life is a
small pond, and a rock representing patience is thrown in, the ripples
disrupt the entire pond.

• In this way, one can see how possessing a virtue is a commitment to

character because it affects the entirety of the person. For instance, to

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 show the virtue of patience in the perspective of her entire life, she will
choose to be patient with those with whom she works, to raise her
children to be patient, and she will be patient to others. She deplores
impatience. She lives by this virtue; it defines her.

• Virtues are a result of nature and nurture; they are driven by what
makes us each individually unique and they result from the culture in
which we are raised. To succeed, they need a dose of practical
wisdom, which is achieved through life experience. Practical wisdom
objectively assesses the likely consequences of an action and is
mindful of behaviour that might be reckless, thoughtless, or
shortsighted.

• Virtues tell us how we should live our life and be true to universal
concepts of what is good. Virtues are hard-wired into our psyche.

You will have heard the expression: patience is a

virtue. Why? It is evidenced by waiting calmly,
without frustration. Showing patience means an
individual has persistence and self-control, and will
wait for the results he or she wants. By not cutting
corners to get an immediate result, the result of
patient behaviour is more likely to be moral. Both
self-compassion and compassion for others is built
when you can step outside of your wants and see why
patience is a virtue during times when it is required.

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 Values

• Values are both the morals prescribed in rules and laws, and highly
personal traits. A value may be a matter of opinion or taste, and driven
by culture, religion, habit, circumstance, or environment.

• Values are not carved in stone; they can change for an individual, a
circumstance, a corporation, or a society. For example, when people
are younger they value friendships, freedom, and fun. As they age,
these individuals may turn to family, philanthropy, and community as
important values.

• Values are expressed:

o by a society: Canadian values include respect for human rights,
freedom, democracy, equality, and the rule of law;
o by a profession: Values are defined by a professional body and
determine the standards of behaviour that members need to live
up to;
o by corporations or organizations: Values expected of employees in
the performance of their jobs. Core values describe “how business
is done around here”;
o personally: the principles and beliefs important to a person and
that guide him or her in all parts of life.

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CASE

We’ve determined that ethics tell us what we should do. Fair to say
this case study illustrates a total absence of ethics.

Over a two-and-a-half year period, a licensed rep
recommended and facilitated off-book investments for his
clients in two companies without the knowledge and consent
of his firm. Unbeknownst to the firm, he also indirectly
received compensation through his spouse from these two
issuers. This created a direct conflict, which he failed to
disclose to or address with his firm or his clients.

The off-book transactions that were undertook amounted to $5.4

million, of which the rep received $669,500 in compensation. He
arranged for much of the remuneration to be paid to his wife in
order to disguise the activity. He also denied to his firm that he
was undertaking any outside business activity and
misrepresented the compensation that he received from these
issuers. Finally, the rep took steps to remove email records and
disconnect his backup server in order to deprive his firm from
properly investigating his conduct.

The hearing panel noted that the misconduct was “as disgraceful
and egregious as one could imagine in the investment industry.”

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WHY INFORMATION ETHICS MATTER

• Ethical discourse now also centres on information ethics, a newer area of

research that investigates the ethical impacts of issues such as privacy,
security, and technology (including artificial intelligence and e-commerce)
on human life and society.

• However, information ethics is not as new as you might think. Some issues
in information ethics such as the confidentiality of information, or bias in
information provided to clients or consumers were raised as early as 1980.

• Issues of information credibility are a common concern, e.g., assessing and

evaluating the credibility of web sites that purport to provide information.

• The ethics of information is fundamental to the newly formed notion of

surveillance capitalism, in which personal data gleaned from Internet use,
including browsing and social networking sites like Facebook, becomes a
saleable commodity.

• Throughout this course, our recurring theme will be that ethics tell us what
we should do --- how we ought to act according to a system of morals or
rules of behaviour. What does ethics tell us to do about information?

• Information ethics applies to the gathering of information, and

dissemination of information. Just as values apply to a person and a “thing”
(money), so too do certain values apply to information. These include
security, reliability, honesty, creativity, and integrity.

• Consider as you gather information through research and know-your-client

(KYC) obligations, and share information through your obligations for
disclosure, that information --- a collection of factual data --- is:

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 o a resource;
§ The quality of information can mislead decisions and product
development.
§ KYC obligations are intended to provide a resource of client
information to guide recommendations.
o a product;
§ The information provided in the investment industry as a
product, such as a prospectus, Fund Facts, or website may
be depended on for decision-making. There is a need for
accessibility of the information product by its intended
audience including how the information is presented and
how the information is made available. Information written to
advance the knowledge of a portfolio manager may be
inappropriate in many ways for clients.
o a target.
§ Identity theft illustrates how personal information is targetted
for misuse.

• One of the foremost ways information ethics affects you is through your
requirements for privacy and confidentiality.

• The Personal Information Protection and Electronic Documents Act (known

generally as PIPEDA) protects the collection, use, and disclosure of
personally identifiable information. It is always worth reviewing PIPEDA
requirements for consent and disclosure.

• New legislation will replace PIPEDA. If it is similar to Bill C-11, which was
not enacted, it could incorporate PIPEDA into the Digital Charter
Implementation Act as the Consumer Privacy Protection Act and the
Personal Information and Data Protection Tribunal Act.

• The Act stipulates that you need consent to collect, use or disclose
personal information about people, except in a few specific circumstances.

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 You can use or disclose personal information only for the purpose for which
consent has been granted.

• You must limit the collection, use and disclosure of information to purposes
that a reasonable person would consider appropriate under the
circumstances.

• Individuals have a right to see the personal information that your business
holds about them, and to correct any inaccuracies.

• Personal information may also be disclosed to third parties who are

subsidiaries or affiliates when an individual has requested a service.

• When a client provides specific and informed consent to the specific

disclosure of the his information, it may be obtained in a number of ways,
including requesting the client’s signature or initials at a designated place
or that the client place a check in a check box. A “negative option” to obtain
consent is not permitted. A “negative option” would, for example, occur
where a client who did not check a check-off box or initial an initial box
would nonetheless be deemed to have consented.

• Information may be disclosed without consent:

o To a lawyer;
o To a debt collection agency;
o To comply with a legal demand, such as a warrant;
o To the Financial Transactions and Reports Analysis Centre of
Canada (FINTRAC);
o To a government body or investigative agency that needs the
information for legal purposes;
o To an archival institution that collects unpublished records and
documents;
o When an emergency affects the individual;
o It is needed for study or research, if the Privacy Commissioner is notified
first;

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 o 20 years after the individual’s death and 100 years after the record is
created;
o When it is publicly available.

• A good example of the legal need to breach privacy can be seen in the
activities of FINTRAC: the Financial Transactions and Reports Analysis
Centre of Canada. FINTRAC detects, prevents, and deters money
laundering and the financing of terrorist activity through the Proceeds of
Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its
Regulations. In order for FINTRAC to be successful in its operations it must
access personal information that would be protected by privacy laws, use
that information in its investigations, retain it for current and future use, and
possibly disclose it to others, such as the Royal Canadian Mounted Police.

• Equally important as the protection of the information within your purview is

the need to delete data when it is no longer needed for the purpose it was
gathered. This respects the confidentiality of the data itself, and the person
to whom the data applies.

• To handle sensitive information and accord it its ethical due:

o Lock up and restrict access to sensitive information when it is not being
used. With digital documents this will involve a combination of
electronic and physical safeguards to limit access only to authorized
employees or clients. For paper documents, it may involve locked filing
cabinets or a safe.
o Always label sensitive information and train employees to follow
guidance on the handling of labelled information. If information is not
labelled, employees should ask for assistance or clarification to make
sure they are handling it correctly. Digital information can be grouped
by sensitivity on a common server, in a specific database or
individually labelled.
o If you have to destroy any sensitive information, the electronic
destruction methods must also be thorough. Usually if you “delete” a
file on your computer, the file is not actually removed until the space is

24
 overwritten by something else. Commercial “secure erase” or deletion
tools can completely destroy your sensitive information, much like
putting a paper document through a shredder.
o When you dispose of storage media, it is best to destroy it physically.
For example, CDs and DVDs can be put through some paper
shredders.
o When destroying paper records, a high-quality shredder that crosscuts
the paper into small pieces should be used, or use a professional
document and media destruction company.

• All safeguards are of limited effect if a disgruntled employee or visitor can

steal a device, or gain access to a computer and download sensitive
information on to a memory stick.

• Only allow employees access to areas of the business that they have a
legitimate need to be in.

• Follow best practices at workstations, known as the “clean desktop”

principle. Put away sensitive items when not at the work area. These can
include:
o Documents that contain sensitive or confidential information about
your business.
o Personal information, especially if it pertains to clients.
o Portable electronic media including CDs, USB memory sticks or
other items that can be easily removed.

• Always lock a business computer when leaving the work area. A computer
does not need to be shut down to do this — most operating systems allow
users to enter a combination of keys to disable access until they re-enter
their password.

• Finally, the employee termination process is relevant to security. There

have been many cases of former employees accessing internal networks
and stealing data or planting malware. When an employee or contractor is

25
 terminated or indicates that they are leaving, access to the computers and
information of your business must be terminated, and business property
such as laptops, keys, and access badges returned — as soon as possible
after termination. Passwords need to be immediately disabled.

Physical measures such as door locks and sign-in

procedures can be the least costly and the most
effective means of preventing unauthorized
access to data.

26
WHY ETHICS MATTER TO INVESTING

• Investment professionals may experience ethical challenges arising from

their investment actions (including buying, selling, exchanging,
transferring, or recommending) based on issues of:
o disclosure;
o suitability;
o conflict of interest;
o fund holdings.

• Let’s review how to make ethical decisions in regards to these issues.

Disclosure

• In a word, disclosure is ethical. Therefore, if your objective is to be

ethical you will disclose all that is needed to achieve information
symmetry with your client.
o The Canadian Securities Administrators (CSA) points out
“information asymmetry between clients and registrants” is a key
concern for the client-registrant relationship.
o Information asymmetry is an elegant way to say, advisor/registrants
know more than clients and have access to information that clients
do not. Disclosure is intended to level the playing field by reducing
information asymmetry inasmuch as the rules allow.
Advisor/registrants will be well aware of information that must not be
shared until the appropriate time.

• Your ethical obligation for disclosure can be summed up in one word:

transparency.

27
 • By revealing all the details that would impact a client’s decision, you are
putting their interest first --- which is always a good and ethical outcome
and a requirement of the client-focussed reforms introduced in 2021.

• Effective communication and disclosure is one of the most important

tasks an investment advisor faces. If it is done well, many other ethical
issues become moot.

• Disclosure is achieved by:

o clearly communicating needed information;
o providing information accurately, whether written or verbal;
o providing complete information.

• The advisor should always make it a practice to provide more

information than may be strictly necessary. All information given to a
client should be documented.

• Information provided should never be cherry-picked to highlight benefits

while failing to mention or discounting the negative.

• Lack of fee disclosure and misrepresentation are cited as top complaints

to OBSI (Ombudsman for Banking Service and Investments) among
those 60 and older.

• You are required to disclose facts about restrictions, costs, and

limitations regarding the products and services you offer.
o Mutual fund fees have come under scrutiny in recent years and
have been the source of complaints to regulators.

• Any client communication that contains or refers to a rate of return must:

o Disclose an annualized rate of return (calculated in accordance with
standard industry practices);

28
 o Explain the methodology used to calculate the rate of return in
sufficient detail and clarity to reasonably permit the client to
understand the basis for the rate of return.

• You are also required to disclose to clients, in writing, that any activities
related to an outside activity in which you are involved are not the
business of the firm and are not the responsibility of the firm. An outside
activity includes any activity in which an approved person:
o Receives or expects to receive a benefit, such as a payment or
compensation;
o Is involved as an officer, director, or equivalent position;
o Is involved in any position of influence.

• Further, you must not hold yourself out in a way that could reasonably
be expected to deceive or mislead existing or prospective clients in
regards to:
o Your proficiency;
o Your experience;
o Your qualifications.

• For each new account opened, a firm shall provide written disclosure to the
client that (see MFDA Rule 2.2.5 for all details):
o describes the nature of the advisory relationship;
o describes the products and services offered by the firm;
o describes the firm’s procedures regarding the receipt and handling of
client cash and cheques;
o informs the client of the complaint handling process and provides a Client
Complaint Information Form (CCIF);
o describes the obligation to ensure that each order accepted or
recommendation made for any account of a client is suitable for the client
and advising when the suitability of the investments in the client’s account
will be assessed;
o describes the various terms with respect to the know-your-client
information collected by the firm and describing how this information will

29
 be used in assessing investments in the account;
o describes the content and frequency of reporting for the account;
o describes the nature of the compensation that may be paid to the firm and
referring the client to other sources for more specific information;
o describes the type of transaction charges the client might be required to
pay;
o includes a general explanation of how investment performance
benchmarks might be used to assess the performance of a client’s
investments and any options for benchmark information that might be
available to clients.

• If all the necessary information has been fully and properly disclosed at
the beginning of a client relationship and for the duration of that
relationship, and a record exists that you have done so:
o A conflict of interest cannot arise or be alleged to have occurred
because you have revealed all relevant information to the client;
o Know-your-product requirements are satisfied because you have
disclosed to the client all the information relevant to his purchase,
holding, or sale of a product;
o Know-your-client and suitability requirements are satisfied because
you have disclosed to the client what you need to know in order to
align characteristics and needs with the most appropriate product.

• In short, the client knows what he or she needs to know to make

informed decisions because you respect that need.

• With these factors in mind, you may choose to make effective

communications and disclosure a priority with all clients.

• Communications encompass:
o verbal dialogue and instructions:
§ in person and virtual meetings;
§ over the telephone;
o correspondence:

30
 § email;
§ text messages;
§ formal letters;
o sales literature;
o social media:
o personal website;
o personal Twitter messaging;
o Facebook.

• Comprehension is fundamental to communication: the person receiving

the message needs to understand what you are saying and complete
any tasks expected of him or her.

• The importance of using plain language in all communications to build

comprehension cannot be overstated.

Suitability

• Unsuitable investments are the leading complaint to OBSI by older

investors.

• It is important to understand a little around the issues of suitability in order

to introduce its ethical element.

• Suitability must be established at the time of account opening and

thereafter. During the life of the account, material changes to products or
the investor may occur that could change suitability assessments; regular
reviews are a must to review KYC information.

• The Ontario Securities Commission (OSC) instructs that an unsuitable

investment and/or recommendation is one that is inconsistent with the
client's personal circumstances including current financial situation,
investment knowledge, investment objectives and time horizon, risk
tolerance and the current investment portfolio composition and risk level

31
 of the other investments within the client's account or accounts at the time
of the investment and/or recommendation.

• The Commission goes on to say: Where an unsuitable investment is

identified within an account, an appropriate measure or course of action
may include contacting the client in a timely manner to recommend
changes. Where a client does not want to dispose of the unsuitable
investment, it may be appropriate to recommend changes to other
investments within the account in order to ensure the suitability of the
overall portfolio.

• Suitable investments are fundamental to a financial plan. They are

necessary to fulfill the client’s goals and optimize the client’s financial
position. Identifying what is suitable is part of the financial planning
process.

• Rules of behaviour are specified at length for the investment professional to

attain and maintain suitability. Following those rules will yield an ethical
approach to suitability.

• It is not ethical to make recommendations or purchase investment funds

based on your needs or that of your firm.

Conflict of interest (COI)

• Conflict of interest (COI) is one of the key topics addressed in the Client-
Focussed Reforms that came into force in 2021.

• The definition of COI includes any circumstance in which:

o The interest of different parties, such as a client and advisor, are
inconsistent or divergent;
o An advisor is influenced to put his or her interests ahead of the
client’s;

32
 o Monetary or non-monetary benefits made available to the advisor, or
potential detriments to which an advisor may be subjected, may
compromise the trust that a reasonable client has in his or her advisor.

• Some conflict of interests include:

o Trading, recommending or distributing proprietary products without
equivalent attention to non-proprietary products;
o Receiving compensation from a third-party for the recommendation
or sale of its products;
o Compensation received for referrals in which the client pays more
for the same or substantially similar products or services;
o Compensation or incentives to recommend certain products and
services over others.

• COI was earmarked for special attention because conflict is not uncommon.
The ethical approach sees a choice between:
o Avoiding conflict by disclosure;
o Resolving conflict in the client’s best interest.

Fiona is an investment advisor at a large bank. She

frequently advises clients on the funds available
through the bank and provides full disclosure about
their risks and rewards. She slots every fund client
into a bank-sponsored fund or a fund from one of
the bank’s subsidiaries because they are the only
funds in which she can make transactions.

Fiona has a conflict of interest because she only
recommends and sells proprietary products. They
are good business for the bank --- which is her
employer. However, they are not necessarily the
best choice for the clients.

To overcome this conflict, Fiona should advise her
clients that she is restricted to selling the funds
offered through the bank and that other funds are
available elsewhere. Her disclosure is key.

33
CASE STUDY: Conflict-of-Interest
Source: FP Canada Standards Council™, Statement of Allegations; https://www.fpcanada.ca/docs/default-
source/standards-and-enforcement/statement-of-allegations---phippen.pdf?sfvrsn=1b9985bd_2

Financial advisors are encouraged not to act as executor for clients; a case from 2010 illustrates the reasons why.

The financial advisor (FA) in the case was a Certified Financial Planner ® professional. He provided advice about
estate planning options for his client. He was both estate executor and sole trustee, and acted as financial planner.
After the client’s death, the FA submitted a $100,000 claim for trustee compensation, which was not paid.

The son and beneficiary of the client alleged the FA had a conflict of interest due to the roles he fulfilled for the client.
As sole trustee he was responsible for the prudent investment of the trust property; as a financial planner, he stood
to personally benefit from such investments.

The FA did not disclose the conflict of interest.

Subsequently, the FP Canada Standards Council™ alleged that the FA failed to:
§ Put the client’s interest first;
§ Failed to act with objectivity and fairness;
§ Failed to make written disclosure of the conflict;
§ Take steps that would eliminate the conflict-of interest.

The Rules and Principles of the CFP® Code of Ethics from 2010 apply as follows:
Rule 202: A CFP professional shall act in the interests of the client.
Rule 401: A CFP professional shall make timely written disclosure of all material information relative to the
professional relationship. Written disclosures that include the following information are considered to be in
compliance with this Rule:
a) A statement indicating whether the CFP professional’s compensation arrangements involve fee-for- service,
commission, salary, or any combination of the foregoing. A CFP professional shall not hold out as a fee-for-
service practitioner if the CFP professional receives commissions or other forms of economic benefit from
other parties other than the client;
b) Where financial products are used in implementing the planning strategy, the client must be informed of the
basis upon which the CFP professional is compensated. To this end, the CFP professional is governed by the
accepted sales disclosure guidelines and regulations covering securities, mutual funds, real estate, insurance
and other financial products utilized in fulfilling the plan;
c) A statement describing material agency or employment relationships a CFP professional (or his/her firm) has
with third parties, including the nature of the compensation arrangements;
d) A statement identifying conflicts of interest; and
e) The information required by all laws and regulations applicable to the relationship.
Rule 403: A CFP professional shall inform the client of changes in circumstances and material information that arise
subsequent to the original engagement that may have an impact on the professional relationship or services to be
rendered. Such changes include, but are not limited to:
a) conflicts of interest;
b) the CFP professional’s business affiliations;
c) compensation structure affecting the professional services to be rendered; d) new or changed agency
relationships.

Principle 2: Objectivity: A CFP professional shall be objective in providing financial planning to clients.
Objectivity requires intellectual honesty and impartiality. It is an essential quality for any professional. Regardless of
the particular service rendered or the capacity in which a CFP professional functions, a CFP professional should
protect the integrity of his or her work, maintain objectivity, and avoid the subordination of his or her judgment,
which would be in violation of this Code.
Principle 4; Fairness: A CFP professional shall perform financial planning in a manner that is fair and reasonable to
clients, principals, partners, and employers and shall disclose conflicts of interest in providing such services. Fairness
requires impartiality, intellectual honesty, and disclosure of 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 one would want to be treated and is an essential trait of any professional.
34
CASE STUDY: Fraud
Source: FP Canada Standards Council™, Statement of Allegations: https://www.fpcanada.ca/docs/default-
source/standards-and-enforcement/2021-11-24-decision-summary-on-merits---joan-
mccarthy.pdf?sfvrsn=fbca4759_2

The financial advisor (FA) in the case was a registered representative with an IIROC-member firm from
2002 through 2019. The FA was also a Certified Financial Planner® professional.

During this period, the FA is alleged to have received 160 cheques on behalf of six elderly clients. The total
sum of the cheques was about $775,000. The FA told colleagues that the clients preferred to pick up their
cheques at the office; the logbook showed the cheques were being delivered to clients. The FA forged the
client signatures and deposited the sums to a personal account.

Additionally, the FA:
§ Withdrew funds from client accounts without authorization;
§ Mislead the employer;
§ Failed to cooperate with the IIROC investigation;
§ Failed to respond to the FP Canada Standard’s Council for information and documentation.

Subsequently, the FA was criminally charged with:
§ Fraud over $5,000;
§ Forgery;
§ Uttering a forged document;
§ Possessing property obtained by crime.

Applicable Standards:
(34) A Certificant shall comply with an order by the FP Canada Standards Council Disciplinary Hearing
Panel and/or the FP Canada Standards Council Appeal Hearing Panel. This rule applies equally to current
and former Certifcants.

(35) A Certificant shall reply promptly and completely to any communication from FP Canada or the FP
Canada Standards Council in which a response is requested.

(36) A Certificant shall cooperate fully with a FP Canada Standards Council investigation of a complaint
unless legally prevented from doing so. This rule applies equally to current and former Certificants.

Guidance
The obligation to respond and cooperate with the Standards Council is an ethical duty owed by a member
of a profession.

Cooperating with investigations into complaints ensures that members of the public have confidence that
when they raise concerns about a Certificant’s conduct, those concerns can be reviewed and, where
necessary, appropriate action taken in the public interest.

35
Fund holdings

• As you are well aware, a mutual fund is a pool of investment selected by its
manager for their suitability to the fund’s objectives, such as risk.

• Over time it is possible for a fund to stray from its original course due to
decisions made by its manager. In such a case, the original suitability of the
fund can be called into question. If the fund is no longer suitable to its
investors, a switch is not only recommended, it is mandatory.

• The introduction of responsible investing (RI) has incorporated an ethical

element to fund investing by aligning ethical concerns of investors with
firms that either have similar ethical concerns or whose business is outside
the realm of activities that are ethically unsuitable to the investor.

• RI investing began in the 1960s to address the negative environmental

consequences of pesticides, and the social impact of civil rights, feminism,
and workers’ rights.

• RI is a sort of filter applied to investing. The filter captures investments that

integrate environmental, social, and governance (ESG) factors; those
investments then align with people who have similar environmental, or
social, or governance concerns. Ethics, therefore, are inherent in the
design of RI funds.

• RI encompasses:
o socially responsible investing;
o ethical investing;
o sustainable investing;
o green investing;
o community investing
o mission-based investing;
o impact investing.

36
 • Responsible investing can reduce exposure to risks that may not be visible
on a company’s financial statements. Analyzing a company’s ESG
performance, in addition to financial metrics, provides a more holistic view
of a company’s quality of management and its long-term prospects for
success.

• Why is risk reduced when RI is adopted? Fair to say that firms that fall
under the RI umbrella are taking the high road --- perhaps in one of the RI
fundamentals, perhaps in more than one. Therefore, they are employing a
philosophy of business growth but not at any cost.

• RI firms pursue profits with a conscience. This thinking may be

extrapolated to company operations as a whole. Therefore, RI companies
do not take risks that other non-RI firms might employ and correspondingly,
they are less risky firms in which to invest.

37
ETHICS IN PRACTICE

• How can a commitment to ethics be implemented? This is a matter of

personal ethical resolve and personal and corporate leadership.

• Personal ethical resolve is evident when an individual uses the following

principles to develop and live by a personal code of ethics. These
principles can be summarized as, “The way I do things.” In a following
chapter we explore how to create a personal code of ethics.

• Ethical leadership in an organization is just as important as individual

ethics. They are shown by actions that are, “the way we do things
around here.”

• The principles of ethics in practice are:

o respect;
o trustworthiness;
o responsibility;
o service;
o justice;
o honesty;
o community.

Respect

• To treat others with respect means to treat others as ends in themselves

and never as a means to an end.

• Recall, ethics is how we ought to act according to morals and rules of

behaviour.

38
 • Respect is shown through:
o civility;
o courtesy;
o decency;
o dignity;
o tolerance.

• Respect for others is shown by:

o listening closely to opposing points of view;
o appreciating the worth of others and valuing their individual
differences;
o treating subordinates in ways that confirms their beliefs, attitudes,
and values.

• Being respectful is one part of being ethical.

Trustworthiness

• Trustworthiness embodies:
o honesty;
o integrity;
o reliability;
o loyalty.

• Trust between buyers and sellers underlies financial transactions, and

financial ethics underlies this trust. Consumers will not trust individuals,
corporations, financial firms, or businesses that make false claims about
their products, fail to honour their agreements, or engage in other morally
objectionable behavior.

• Ethics requires us to be trustworthy.

39
Responsibility

• Responsibility for others is evidenced by accountability. When you follow a

rule set down for you, you are held responsible (or accountable) for the
minding of that rule and you will be held responsible (or accountable) if you
do not follow it.

• Your responsibilities are especially tested when advising those who are
considered vulnerable---primarily, in your position, by those who are older,
in cognitive decline, or who have implemented a power of attorney. This is
because accountability changes, and perhaps this is at the root of
vulnerability itself. That is, vulnerability is created when accountability for
actions to others is absent, or diminished.

• You are also responsible to yourself and this is seen in self-restraint and a
pursuit of excellence.

• You are ethical when you behave responsibly and take responsibility for
what you say and do.

Service

• Service is an example of altruism, in which the welfare of others comes

first.

• Ethical leaders have a responsibility to be of service to others, and make

beneficial decisions pertaining to them. They contribute to the greater
good of others.

• Ethical leaders in the investment industry must be:

o customer-centred;
o place customer interests first;
o prepared to act in ways that benefit others.

40
Justice

• Concern about fairness and justice is fundamental to ethics. No one

should receive special treatment or special consideration except under
those rare circumstances when his or her situation demands it. When
individuals are treated differently, the grounds for different treatment
must be clear, reasonable, and based on moral values.

• Fairness is similar to the ethic of reciprocity, otherwise known as the

Golden Rule --- Do unto others as you would have them do unto you. If
you expect to be treated fairly by others, then you must treat others
fairly.

• The principles of fairness require you to:

o Treat people equally;
o Handle similar situations in a similar fashion and with
consistency;
o Sanction those who violate laws, regulations, or moral standards;
o Correct errors made by you or your employer promptly and
voluntarily;
o Not take advantage of others, including their absence of
knowledge;
o Make decisions with an open mind after gathering, verifying, and
evaluating facts
o Put client interest first: the client has entrusted savings or
investments to your expert care, and you are being paid to
provide expertise pertaining to the client and his or her needs.
Therefore, it is only fair to do your job and serve the client.

Honesty

• The importance of honesty can only truly be appreciated when

dishonesty is considered. Dishonesty, whether by lying, cheating or

41
 stealing, creates distrust. Dishonest people are considered
undependable and unreliable. They are not respected.

• Lying to others hides or distorts information. Meanwhile the liar has the
truth. This puts the dishonest person ahead of the other, and clearly
defeats the client interest first directive.

• Honesty is about telling the truth, being open, and representing reality as
fully and completely as possible. Ethics demands honesty.

Community

• Community is built when a person influences a group to achieve a

common goal. The leader must take everyone’s purposes into
consideration and this concern for others means that the will of the
leader is not imposed on the group.

• An ethical leader is concerned with the common good, in its broadest

sense.

Being honest means, “Do not promise

what you can’t deliver, do not
misrepresent, do not hide behind
spin-doctored evasions, do not
suppress obligations, do not evade
accountability, do not accept that
the ‘survival of the fittest’ pressures
of business release any of us from the
responsibility to respect another’s
dignity and humanity.”

42
STEPS TO ETHICAL DECISIONS

• Before considering the best way to reach an ethical decision, you must first
recognize whether the issue before you is an ethical one. The hallmarks of
an ethical decision include:

o Are there conflicting values among differing interests?

o Are there equally justifiable alternatives?
o Are there significant consequences to stakeholders?

• A “yes” answer to these questions will rule out issues that are actually
based on law, regulation and rules.

• It is necessary to specifically identify aspects of the issue that may relate to

its ethics:
o Who are the stakeholders?
o What are their interests? What is in their best interest?
o Who might be harmed?
o What consequences do they face by the identified alternatives?
o What are the alternatives to the proposed course of action, or action
taken?

Ethics Check
A key question to check your decision-making is:

“Would I have done things differently if I had seen
the bigger picture and realized the consequences
of my actions?”

This is hindsight in action: understanding a
situation only after it has happened. However,
insights gained from hindsight can be a learning
experience for the future.
43

 • This is all part of the first step in the decision-making process: gathering
facts.

• Determining facts requires you to resolve what you know and what you
need to know. You may need additional information, and you may need to
check assumptions that you and others bring to the issue.

• Because information is collected and brought forward as a fact does not

mean that everyone agrees that a fact is a fact, or that your facts are their
facts. A fact may be a fact only in the eye of its beholder. This requires you
to analyze whether the facts you have are real and true, and not the result
of hearsay or gossip.

• Think about the source(s) for your facts --- are the people providing the
information reliable? Are they a stakeholder with a vested interest in the
outcome of the decision? Can their memory be relied on? Are they being
honest?

• It can be challenging to correctly identify a problem and its cause. The 5

Whys Approach was developed by Toyota Industries in the 1970s and is
still widely used for simple or moderately complex problem solving. It is
used to get at the root of a problem so that a counter-measure can be
proposed and implemented so that the problem will not recur.

• The technique is very simple: the question “why” is asked at least five times
about the problem that has been identified. Every answer to the “why”
question must be factual and forms the basis for the next question.

o For example, Sharon has complained that her advisor, Matt, put her into
unsuitable investments and she has lost over 40% of the value of her
savings.
§ Why did Matt purchase these investments for Sharon?
§ Why did Sharon agree to Matt’s recommendations?
§ Why did the investments perform so poorly?

44
 § Why did Sharon not step in earlier to put a stop to her losses?
§ Why did disclosure not raise a red flag about suitability?

• You must be confident that you have all the real and true facts and that you
have the objectivity needed to set aside facts that are not relevant. With
facts in hand, it may be appropriate to stop and analyze the situation you
face. Doing so can provide a cooling-off period in which all parties can
reconsider their positions. This can be particularly true if people have been
rushed or pressured initially.

• Find alternatives to the decision taken. What would be another way of

meeting this goal? What could have been done differently? Arriving at
options may require you to consult with others and ask them what decision
they would have made in the circumstance.

• Consider the consequences to these alternatives. Run through the answers to

see what outcomes might be.

• Analyze each choice:

o Is it feasible?
o What are the risks?
o What are the consequences?
o Does it solve the problem?
o Are there short-term or long-term implications?

• Broad frameworks for ethical decisions can guide your choice. They are:

The Consequentialist Framework

This framework focusses on the results of an action. Who will be directly or
indirectly affected? What kind of outcome should I try to produce?

The Duty Framework

This framework focusses on following moral rules regardless of outcome. One
has a duty to always do the right thing. What are my obligations in this situation?

45
The morality of intentions

A fundamental question that must first be addressed when a poor decision has
been made is: was it a mistake or a bad decision? A mistake is a choice of action
without intent. Bad decisions are the result of intent. The person has weighed the
consequences of a decision, and intentionally made a choice knowing the
outcome may not be what is desired.

Is the finding of a recommendation for an unsuitable investment a mistake or a

bad decision? If the representative had all facts before him and recommended
the unsuitable investment without regard for his own interests, he made a
mistake. If he all the facts and made that recommendation, but chose the
investment that would benefit him, he made a bad decision. If he made the
recommendation without all the facts and unmindful of his obligations, such as for
KYC, he made a bad decision.

It is not uncommon for people to classify a bad decision as a mistake because a

mistake is unintentional --- “I didn’t know…,” or “I didn’t see…,” or “I didn’t hear…”
So, “I didn’t see the No Parking sign and got a ticket.” shows the person did not
intend this outcome. Sometimes, admitting to a mistake requires a high level of
maturity since it can be painful to “own up.” If you make a bad decision, you may
not intend a bad outcome but you know a bad outcome is a distinct possibility. “I
saw the No Parking sign and got a ticket.” shows an entirely different thinking
process.

A person who makes the same bad decision repeatedly because he considers it
to be “only a mistake,” needs to appreciate the consequences of his decisions.

46
The Virtue Framework
• This framework focuses on what a virtuous person would do and is, therefore,
oriented towards character development. What kind of person should I be and
what will my actions say about my character?

• Using these frameworks together may result in the same or similar conclusion
about what you should do, but they typically give different reasons for reaching
the same conclusion.

• You may also evaluate your options by asking:

o Which action will produce the most good and do the least harm? (known as
the Utilitarian Approach)
o Which action respects the rights of all who have a stake in the decision?
(known as the Rights Approach)
o Which action treats people equally or proportionately? (known as the Justice
Approach)
o Which action serves the community as a whole, not just some members?
(known as the Common Good Approach)
o Which action leads me to act as the sort of person I should be? (known as
the Virtue Approach)

• Finally, the time comes to act. This may happen even if all the information is not
available, or you are unable to consult with others. It can be instructive to hold
your decision against any of these tests:

o Would I want people to do this to me? (The Golden Rule Test)

o Does this action represent the whole truth and nothing but the truth? (The
Truth Test)
o Would I want everyone to do this (lie, cheat, steal, etc.)? Would I want to live
in that kind of world? (The What-If-Everybody-Did-This Test)
o How would my mother feel if she found out I did this? What advice would she
give me if I asked her if I should do it? (The Mom Test)
o Does this go against my conscience? Will I feel guilty afterwards? (The
Conscience Test)

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 o Might this action have bad consequences, such as damage to relationships
or loss of self-respect, now or in the future? Might I come to regret doing
this? (The Consequences Test)
o How would I feel if my action were reported on the front page of my
newspaper? (The Front Page Test)
o How would I feel if my action was widely shared over social media
(Facebook, Twitter, LinkedIn, Instagram, Snapchat, TikTok, Pinterest,

Reddit, YouTube, and WhatsApp) (the Social Media test)

• Monitor the outcome of your decision. Despite best efforts, decisions can --- and
will --- go wrong. By being aware of the consequences of your decision you can
choose whether to modify the decision, and try again and/or choose a different
course of action in the future.

Ask yourself if a decision is a source of pride in

your abilities and what you accomplished for
the client especially if it presented challenges
that could have caused a mistake. If you answer,
“yes” then you have passed the Mom Test, The
Conscience Test, The Consequences Test, The
Front Page Test, and the Social Media test. In
short, your decision and subsequent actions
were ethical because you have done the right
thing.

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OBSTACLES TO ETHICS

• What prevents ethical behaviour and decisions? As it turns out, a lot of

obstacles are thrown up --- some as excuses, others as personal failings
or limitations, and others as failures of the industry. An individual might just
want to take the easy or cheap way out, or find a solution that benefits
them personally.

• We cannot possibly review every reason a poor decision might be made.

We are providing some obstacles of which you should be aware because
self-awareness is key to improving your ethical decision-making skills.

• Knowing about obstacles can also help your awareness of how to conquer
them.

Rationalizations

• A very cynical saying goes along the line of, “Rationalization is the key
to mental health.”

• A rationalization attempts to explain or justify behaviour or an attitude

with logical reasons --- even if those reasons are inappropriate or wrong.
In other words, it takes the guilty party off the hook personally because
he or she has an excuse for doing what they did.

• Here are some rationalizations that relate to your business.

o It’s just business.
o If it’s necessary, it’s ethical.
o No one will ever know.
o If it’s legal and permissible, it’s proper.
o It’s just part of the job.

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 o It’s for a good cause.
o I was doing it for you.
o I’m just fighting fire with fire.
o It doesn’t hurt anyone.
o Everyone makes mistakes.
o It’s ok if I don’t gain personally.
o I can still be objective.
o I meant well.

• When rationalizations are used, the individual is not taking

responsibility. As said earlier, ethical behaviour is taking responsibility
for what you say and do.

Lack of Emotional intelligence

• Emotional intelligence (or emotional quotient, EQ) is a two-way street: You

can use it to affect people around you, and when you have client
responsibilities, you are on the receiving end of the client’s emotional
intelligence.

• Emotional intelligence is a form of emotional maturity. It is focussed on self-

awareness and self-control. When emotions run high, an individual with a
high level of emotional intelligence will recognize those emotions in him or
herself and temper them accordingly. He will consciously try to cool off. He or
she will also aim for that result when others are being similarly over-
emotional.

• Emotional intelligence also encompasses empathy, which is the ability to

understand and share the feelings of others.

• A lack of emotional intelligence can be an obstacle to decision making when

emotions drive behaviour instead of values.

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 Poor Critical Thinking Skills

• Critical thinking is thinking about a subject or problem with objectivity,

analysis, logic, and fairness. It requires effective communication and problem-
solving abilities. Critical thinkers consider the rights and needs of others, and
communicate effectively with others to figure out solutions to problems.

• A person who thinks critically will:

o think open-mindedly and recognize assumptions, implications and
consequences;
o identify problems and raise vital questions about them;
o gather and assess relevant information;
o come to well-reasoned conclusions.

• Therefore, a person who has good critical thinking skills will be more likely to
make good ethical decisions because they will appropriately assess a
problem, and in considering others’ needs and the overriding requirement to
put client needs first, will be able to determine a best course of action. The
reverse will be equally true of the individual who does not possess a high
level of critical thinking.

Mental Traps

• Mental traps are assumptions that impede logic. They are unproductive
thinking habits said to include using blame, procrastination, persistence (to
a fault), resistance and anticipation.

• Mental traps are always negative. To overcome this form of thinking, an

individual must consciously step back, take a deep breath to clear the
mind, and observe the thoughts that have developed and the reason they
have developed.

• Set aside the negativity and gather the facts to support objective thinking.

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 Cognitive Biases and Heuristics

• You bring bias to the table where they can impede decisions. So does your
client, with the same possible outcome.

• Ethics is your behaviour; your behaviour is shaped by your cognitive

biases. Cognitive bias is a systematic error in thinking. Therefore, to be
ethical, you must manage your cognitive biases.

• For instance, if you show overconfidence as a bias, recommendations you

make could be unsuitable because you believe they will turn out for the
best whether or not the evidence supports that belief. The point is, you
believe it to be so because you are biased in thinking you always make
good recommendations.

• Heuristics are mental shortcuts that can lead to cognitive bias. Their use
results in the ability to make decisions faster because only limited
information is used to make the decision. Short cuts, rules-of-thumb, and
good-enough calculations are some of the basis for heuristics.

• Heuristics is being used when intelligent guessing, trial and error, the
process of elimination, and use of past formulas solve a problem.

• In their defense, heuristics are handy because people are limited in the
amount of time in which they can make a decision, by the amount of
information available, and the amount of information they can process. If
you have to make a recommendation to a client, you cannot possibly
review every single form of investment available. How long would that
possibly take? Months? Years? You don’t have the luxury of that amount of
time so you will use a heuristic to arrive at a reasonable subset of
investments, or a single choice.

• However, heuristics can be misused if they reduce the mental effort required
to make a choice or decision. In other words, laziness is not an option.

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 • There are three forms of heuristics that will apply to decision-making:
1. The availability heuristic.
• You make a decision based on how easy it is to bring the subject to mind.
For example, if you have recently participated in a product presentation,
then you may find you recommend that product soon thereafter. Why? It
is top-of-mind and you can quickly access the product details in your
mind.

2. The representative heuristic.

• You make a decision by association. For example, if the recent product
presentation has reminded you of another product, in which returns never
achieved forecasts and your clients experienced losses, you might
assume the same of the new product.

3. The affect heuristic.

• You make a decision based on your current emotional state of mind. For
example, you attend the new product presentation after confirming you
are receiving a large raise. You feel great. You transfer these feelings
onto the product, and conclude it will be fantastic.

• Heuristics can lead to inaccurate judgments and unsuitable decisions. Be

aware of how they can become obstacles to decision making.

Self-interest

• An individual who is unable to have empathy for another and put their
needs first is simply unethical.

• He or she may be unethical because they have already successfully

accomplished smaller unethical violations without repercussions. They
need to see their actions in light of the bigger picture.

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Peer pressure

• If peers are getting away with breaking the rules, there may be a tendency to
succumb to peer pressure and join the crowd.

• It is important to remember that you alone must take responsibility for your
actions and that others hold you accountable for your actions. So, a defense
along the line of, “the whole team does it” does not make the action ethical.

Lack of experience

• If you are new to the industry or your job, you might not be aware of rules
or expectations for your behaviour. Even if you are experienced, you may
be confronted with a new situation that requires an ethical choice. You may
make a mistake as you learn, but the point will be to develop learning about
ethics and apply that learning.

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YOUR PERSONAL CODE

• As we’ve seen, a code of ethics outlines expectations for employees and

demonstrates integrity to the public.

• Even if the industry in which you work, or the firm for which you work, does
not articulate a code of ethics, there is nothing stopping you from creating a
code of ethics that will be your personal ethical north star. A code of
ethics is a set of rules and responsibilities individuals and/or
businesses promise to adhere to, formulated by the individuals and/or
businesses themselves. It does not need to be shared publicly and you
may prefer this commitment to be private.

• The essential word in the definition is “promise.” What are you prepared to
promise your clients, your colleagues, your manager, and/or your
employer that you will do in carrying on business? What promises can you
keep? Are you prepared to live by your promise, even when the going gets
tough? Will you test your actions against your promise to check for
consistency of commitment?

• It is essential to bear in mind that a code of ethics is not evidence of your

integrity. It is a commitment to perform with integrity. The integrity is shown
in how you act, and fulfills your commitment.

• Integrity is a notion associated with virtue ethics. But what is it? Integrity
stems from the Latin word ‘integer,” which means whole and complete.
Therefore, integrity applies to the whole of a person: you simply cannot be
a person who has integrity at work but not in life outside the office (or the
other way around). Integrity results from the whole person being rational
and consistent, honest, and truthful. Integrity is a virtue.

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 • Rationality and consistency means approaching situations in the same
way, acting the same, and resolving any issues similarly by calling upon
appropriate values and morals that were used in previous, similar
circumstances. A person who shows this behaviour is, therefore,
predictable. Another person whose mood swings lead to rash decisions on
one day, and thoughtful decisions on the next may be displaying
consistency since the swings between the two types of decisions occur
regularly. However, rationality is absent because this is simply an irrational
or illogical way to behave. Therefore, when all the actions of a person are
rational and consistent, he is showing one element of integrity.

• Honesty applies to words and deeds. It implies a refusal to lie, steal, cheat
or deceive in any way. It promotes openness and enables you to develop
consistency in how you present the facts. The qualities of honesty are
evidenced by people who:
o are not concerned about personal popularity: they are who they
are and others can take it or leave it;
o stand up for their beliefs: they speak their mind even if it means
going against authority or the majority;
o are thick skinned: those on the receiving end of hearing the truth
may be angry or resentful and will try to find a way to hurt the
honest individual. The honest person has to be prepared to stand
up against the criticism or lies that may be lobbed his or her way
and continue as if nothing unusual or untoward has occurred. He
or she is prepared to stand his ground.

• Honest people enjoy close friendships and are trusted by others. As difficult
as it may be to speak the truth, those who hear it recognize it for what it is
and appreciate the person who has taken the risk of bringing it forward.

• Truth speaks for itself. You are or you are not a truthful person. Massaging
facts or information to suit your purpose, even though you may not be
technically lying, makes you untruthful.

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 • There is a nuanced difference between honesty and truthfulness. They are
not the same:
o Honesty means not telling lies.
o Truthfulness means making the full truth of a matter known.

• You can choose to develop integrity as a personal characteristic by:

o behaving, acting, and speaking consistently;
o monitoring your behaviour, actions, and speech and when finding
that integrity is missing, then acknowledging that failure,
apologizing, and correcting course;
o actively developing integrity through reading, coaching, listening to
others, attending leadership development seminars and courses,
and reflecting on how to develop character.

• Will integrity be part of your personal code of ethics?

An advisor could in all honesty recommend a fund to

a client, who has a long track record with stocks, that
the advisor believed is in the client’s best interest for
aggressive growth. However, if that advisor was to be
truthful, he would inform the client that a fund is not
his best choice due to the attachment the client has to
stock investing. Recommending a fund was not
deceptive, but recommending ongoing stock market
trading recognizes the full truth that the client likes
trading, has experience, makes good choices, and can
withstand the risks.

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CONCLUSION

• These have been many of the ethical expectations, requirements, and

remedies laid out for you as a member of the investment industry. Of course,
there will be other thoughts on this subject, but they should not conflict with
the information you have been given.

• Let’s reiterate why ethics matter:

1. Ethics in practice put client interests first.
2. Mastery of ethical practices can yield business and personal advantages.
3. You control ethical outcomes by your choices.
4. The need for disclosure is at the root of many requirements. It is foundational.
5. Playing by the rules is how you should behave.
6. Put into practice the principles of ethical leadership: respect, trustworthiness,
responsibility, service, justice, and honesty.
7. Understand the important distinction between a mistake and a bad decision;
try not to make bad decisions.
8. Develop emotional intelligence and critical thinking skills.
9. Practice objectivity: you must be able to be unbiased to make ethical
decisions.
10. Live by a code of ethics that describes how you will behave.

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