ETHICS IN FINANCE

Group 10

Ahanta – b09065|Karthik – b09084|Mohit – b09092|Nishant – b09097|Pavani – b09100|Varun – b09116

Introduction
 Financial professional - implies wide range of activities
Investment advisor
○ Actively involved in investment decision.
Financial analyst
○ Less involved in the investment decision, analyses securities and provides
research for clients.
Corporate finance
○ Manage the finances of a company.
Commercial banking
○ Provide services to small customers en masse
Investment banking
○ Provide a large boutique of services including securities underwriting, M&A
advisory, investment advice
 All these examples, there is a fiduciary relationship between the
client and the financial professional
Involves handling of other people’s money
Lessons from History
 Major scandals from the past:
 In March 2009, Bernie Madoff plead guilty of having
orchestrated a “Ponzi” scheme that defrauded thousands of
investors of billions of dollars.
 A rogue trader named Jerome Kerviel, in 2007, single handedly
caused losses worth $ 7.2 billion through bogus trades on
futures.
 In 2000, Enron’s shareholders lost nearly $11 billion when it
was revealed that the company, through the use of accounting
loopholes, special purpose entities, and poor financial
reporting, was able to hide billions in debt from failed deals and
projects.
 Michael Lewis in his book “Liar’s Poker” describes how the 1980’s
era of deregulation created a Wall Street generation free of
scruples, exploiting the ignorance of others to make money.
Code of Ethics
 Important for clients to be able to trust
their financial advisor
Scandals undermine financial profession.
Gives it the image of being fuelled by greed.
 To develop trust, client needs to be
assured of several things from the
financial professional:
Code of Ethics (contd.)
 Honesty (he won’t swindle our money)
 Diligence (he won’t be careless with our money and exercise
prudence)
 Knowledge of the law (he won’t get us into trouble due to his
actions)
 Objectivity in action (he won’t be influenced by personal gains in
providing advice)
 Fair Dealing (he won’t give preferential treatment to certain clients)
 Suitability (he will tailor his investment advice to the specific needs
of the client)
 Maintain Confidentiality of clients
 Transparency (he will explain in clear layman terms all the terms
and conditions of the service as well as performance)
 Reveal conflicts of interest
Ethics in Practice – Chinese Wall
 Information barrier implemented within a firm to
separate and isolate persons who make investment
decisions from persons who are privy to undisclosed
material information which may influence those
decisions.
 Helps contain exploitation of insider information.
 Avoids conflict of interest problems.
 Eg. Corporate-advisory area and the brokering
department of investment banks have fences in order
to separate those giving corporate advice on
takeovers from those advising clients about buying
shares.