Ethical Issues Arising in a Financial Market

        FINANCIAL MARKETS

ETHICAL ISSUES ARISING IN A FINANCIAL MARKET

[pic 1]

Submitted by:

Sanjay Biswal
PGDM 2018-2020
Roll No- 180101140
Section – D

The first question that needs to be answered is why are ethics important in financial markets? Financial markets are built on trust and it is very important to have trust and consensus between participants for any financial market to exist or any financial transaction to occur. For them to operate efficiently, participants need to have confidence that markets are fair and transparent. The important components of areas of ethical behaviour for a financial market are professionalism, the integrity of the capital market, duties of the client, duties of employers, investment analysis, recommendations and action & conflicts of interest. Financial intermediaries must keep to rules of laws, industry standards and act ethically. We have read and seen greed and unethical behaviour by market participants is a culprit for financial crises and therefore it would be unwise to ignore the areas of ethics and the requirements of ethics put in a financial market. Dealing with the ethics is not a side-line of the financial service industry but should be a part of its core. Ethics is an area for more interpretation than laws and industry standards.

The initiation point is to examine the ethical aspects of the financial service industry towards stakeholders, uncovering standards of conduct in the industry and explore stakeholders view on current ethical conduct as well as trends. The working professionals of the firm are responsible for compliance with legal requirement and industry specific regulations, compliances and best practices for the industry. Taking the example of investment analysis and recommendations, it’s important that the analyst is not on the “side” of the analysed company but is being objective. Even worse would be to recommend customers to buy security the analyst's company wants to get rid of. “Federal, state and market regulators singled out three of the firms - 52 Citigroup's Salomon Smith Barney, Merrill Lynch, and Credit Suisse First Boston - and accused them of fraud in issuing worthless research.” For example, before the dotcom bubble burst in the year 2000, Merill Lynch recommended investors to buy tech stock while they themselves were selling and they were fined USD 100 million. Cheating and lying deceiving are examples of non-accepted conduct. The service providers were caught with miss-conduct may create a bad reputation for the whole industry. Even any legal conduct can reflect badly upon reputation, then it must be avoided. To mislead, make a false statement or leave out an important fact is a misrepresentation. An example is when a financial service provider guarantees a high risk free return when in fact there are risks involved with the investment. There were several such cases in the subprime crises. Collateral Debt Obligation (CDO) was sold as virtually a no risk investment. Investors took loans to leverage their investment since it was hundred per cent safe according to brokerage houses. Now, these investors and investing companies sit on the loan and worthless securities. A so-called safe investment did not just lead to the loss of invested capital, but even further losses. The recurring nature of investment market ethical issues can be seen through a historical review of market collapses in various eras that raised concerns about the ethics of market professionals. There are many situations where ethical issues or dilemma may arise and need to be avoided. These situations are as follows

The integrity of Participants: The new generation of market manipulators has emerged. And the old fashioned insider trading involved maybe a few people sneaking out ahead of the starting line. The new market-manipulating Insider Trading version 2.0, it almost involves you have to imagine it folks that can move the starting line closer to the finish. The other competitors are still in the blocks—they don’t know the starting line has been moved. Insider trading is illegal and unethical and its rule varies between different markets. An insider can be defined as anyone with access to material non-public information. It is the responsibility of the participants to be the trust and reputation intact because lost reputation can destroy a financial market participant. Moreover, the participants should not manipulate the market that is to buy and sell in a way to create an illusion that there is more interest in security than the real interest. It’s not just immoral but also illegal. These unethical practices can help to make bubble larger and create a crisis in securities markets, therefore, it is a major concern. Duties to clients: If you consider brokerages and investment banks to put their client first before their own self-interest or their companies interest. Since the client is the one paying for a service and has the right to loyalty. And if the other case the institution is investing clients’ money they must act with prudence and be as careful as if the money was their own. Employees loyalty to Employer and clients: Loyalty to by the employees is a two way street i.e. one for the employer and the other is for the client. Employees must be diligent, carful, thorough and without conflicts of interest.When giving advice it’s important that the advisory separates facts and opinion. Exercise diligence, independence, and thoroughness. Documentation of investment analysis and advice given should be kept. It is also importan that the communication is made simple making sure the client understands all implications and risks’. Conflict of Interest: If the issue can lead to a conflict of interest then the issue can lead to conflicts of interest, the issues must be disclosed. A client transaction always has more priority of investments in own book. The conflict of interest would occur if the same financial service provider provides analysis, investment banking services, and brokerage. And the corporation issuing stock or bond may pay for a report or analysis. When the report is published it must be stated who financed it since it does create a conflict of interest and no investor is to believe that it’s an independent report created by someone without a vested interest in the corporation analysed. Another way to make the conflict of interest less severe is to have the corporation pre-pay and after that have no say in recommendations, outcome, and conclusions. Incase advisor earns commission, compensation or other benefits from recommending a product, service or asset this fact is material and must be disclosed. Not all trading by insiders is necessarily illegal or unethical. For example, the U.S. Securities and Exchange Commission (SEC) provides a ‘‘safe harbor’’ where insiders can sell their stocks by setting up automated selling programs in advance. Presumably, these sales are arranged long enough in advance that any material non-public information possessed by the insiders, or at least the short-term market moving variety such as earnings information, will have been released before the pre-arranged trades take place. As non-lawyers, we note that U.S. courts seem to apply a ‘‘smell test’’ in insider trading cases. If the conduct smells bad, the courts have a tendency to uphold convictions. Our goal in this endeavour is to help future legislators, regulators, judges, scholars, and others develop a keener sense of smell in order to differentiate between what is truly pestilential and what is strong smelling but not necessarily evil. Thomson Reuters also trumpeted the value of getting the information first, as seen from the following promotional material for the CSI (Consumer Sentiment Index) in the figure given below