Ethics in the Finance and Investment Industry

Modified: 6th Dec 2017
Wordcount: 2563 words

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Ethics can be defined as the study of what institutes of right or wrong behavior in terms of one’s principle and integrity expected to be by society. It is the branch of philosophy that focuses on morality and the way in which moral principles are derived or the way in which a given set of moral principles applies to one’s conduct in daily life. Different people face different ethical questions in their day to day life and as well as in their business life. Ethics usually assumes people are rational and make free choices correctly. We can also give or take that it has got certain rules to follow in our collaborations and our actions that affect others. There can be ethical questions that have influence in our daily life or in business life like fairness, justness, rightness or wrongness.

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Both ethics in finance and investing are part of business and business ethics focuses on what constitutes right or wrong behavior in the business world and on how moral and ethical principles are applied by business persons to situations that arise in their daily activities in the workplace and their handling of client asset. Ethics that are faced in personal life is much more different and complex in business life.

Social Influences on Ethics

When evaluating professional decisions and behavior in the finance and investment industry, high standards of ethics and blatant violations of ethical conventions are difficult to explain solely in terms of individual traits and personality. Situational factors may lead to considerable differences in the ethical standards of behavior of a single individual in different social situations-a fact that has been revealed time and again by media reports. Thus, a true understanding of the psychology of ethics in the world of finance and investment requires awareness of how people interact and influence each other ethically. 1

1. See: Thomas Oberlechner Webster University Vienna “The Psychology of Ethics in the Finance and Investment Industry” Research Foundation of CFA Institute from

Ethics in Finance

When anyone thinks about financial market they think about money, that also trillions of dollar. With that amount of money in greed, which can be defines as excessive desire to posses wealth, mixed with competition can be powerful combination to introduce unethical behavior. This is not solely concerned with the individuals but also with financial markets and financial institutions. Financial ethics is more to do with maintaining trust between the financial industry and client. If we analyze how financial system works, it is easy to see that it is easy for financial fraud and deceit. As almost all the people in United States have a 401K which is invested in financial market through different financial companies. All the people investing their money come from different walk of life and have limited knowledge in financial market. The only way public can believe in an investing firm to invest in their lifetime saving is by trust. This trust is built over the years by these firms by following correct ethical procedure (by the firm and its staffs).

Ethics in the Investment Profession

Ethical practices by the investment professional benefit all market participants and stakeholders and lead to increased investor confidence in global capital markets. Ethical practices instill a public trust in the fairness of markets, allowing them to function efficiently. In short, we can say that good ethics is a fundamental requirement to the investment profession.

The Code of Ethics for Finance and Investment

  • Act with integrity, competence, diligence, respect and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.
  • Place the integrity of the investment profession and the interests of clients above their own personal interests.
  • Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.
  • Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.
  • Promote the integrity of, and uphold the rules governing, capital markets.
  • Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals. 


Ethical and Professional Standards and Quantitative Methods. Level I 2008. Pearson Custom Publishing

The Psychology of Ethics in the Finance and Investment Industry

Financial and investment professionals are mainly susceptible to ethical misconduct. But what makes some obviously violate ethical standards and even violate the law while others behave highly ethically? Besides in all the courses taught in the entire business program we are taught that the objective of rationale individual is to maximize wealth. The psychology of ethics tries to find out why and when does a person behave (un) ethical way, their motivation, influence and social dynamic behind a certain active. It also tries to analyze individual cognitive and emotional dynamics. This analysis will help figure out the most effective may an ethical code can be written and implemented.

Approaches to Ethics

When people talk and write about ethics in the finance and investment industry, they approach the topic in variety of ways and address different realms of ethics. Usually, their dealing with ethics takes one of three main directions: (1) what investment professionals should do, (2) what they actually do, or (3) how finance and investment professionals can be helped to get from what they actually do to what they should do.

Normative Ethics

What should finance and investment professionals do? As the name implies, normative ethics aims at establishing norms and guidelines for professionals regarding how they should behave. This approach to ethics is inherent in, for example, the ethical theories of moral philosophy, theology, and definitions of professional norms, standards, and acceptable behavior for a professional field. Thus, a normative approach to ethics in finance and investments defines what is ethical in this profession. It tells practitioners how investment professionals should act to be ethical, which behavior should be considered ethical, and which behavior should not.

Descriptive Ethics

What do investment professionals actually do? Descriptive ethics aims at describing not how people should behave but how they actually do behave. And descriptive ethics attempts to explain and predict the unethical behavior of people in real-life situations (O’Fallon and Butterfield 2005). Psychological research conducted in controlled laboratory studies and real world settings of professional decision makers offers a systematic and comprehensive basis for descriptive ethics in finance and investing. Only this psychological and descriptive approach allows us to understand when and why people and organizations in the investment industry engage in ethical behavior and when and why they do not.

Prescriptive Ethics

How can finance and investment professionals be helped to get from what they actually do to what they should do? Based on descriptive insights about the factors influencing actual ethical decision making, the Prescriptive approach to ethics aims at helping people and organizations toward ethical decision making by giving advice about how to create environments that foster ethical decisions and how to improve the ethical component of decisions. The two main questions addressed by prescriptive ethics are the following: How can we create organizations that foster ethical behavior? How can we train professionals to readily perceive the ethical dimensions of their own behavior and to act ethically? Thus, prescriptive ethics suggests tools that assist people in making the prescribed decisions. 4

4 See: Thomas Oberlechner Webster University Vienna “The Psychology of Ethics in the Finance and Investment Industry” Research Foundation of CFA Institute from

Ethics and Investment in Global Perspective

As the financial market now is more open globally, investment flows from one country to another more efficiently. With this comes an ethical risk for a financial firm. E.g. A financial firm in US investing in Singapore, but the ethical standard in both this countries financial market are different. Now which ethics standard should the firm or its employee follow? Can a firm’s employee ignore financial ethics code in US when he travels to Singapore? In this situation a firm should always follow the ethics code which is stricter. If US ethics code is stricter than the one in Singapore, it should still follow the US code of ethics.

For individuals, the ethics code will apply globally i.e. if a person travels to jurisdiction outside of United States he is still bound by code of ethics and SEC laws. He is still not supposed to disclose all the protected financial information to any individual or firm.

When analyzing investment opportunities in emerging market a financial firm much always check the ethical code of the country he is investing in. Even if the probability of profit is high but there has been high number of cases of ethical violation then the investment might not be a good idea. A good example of this is the amount of investment that went in China during China’s IPO boom, a lot of companies from that boom is no where to be seen and the financial report present were falsified.

Ethical Issues in Finance Industry

Ethical issues in the financial services industry affect everyone, because even if you don’t work in the field, you’re a consumer of the services. The public seems to have the perception that the financial services sector is more unethical than other areas of business.

In the real business scenario there are many positions where we act without considering the ethical implication. Sometime what we think is ethical (because of the way we are brought up in society) might not be an ethical one in the world of finance or business. For example, one can have close friend with whom he share everything in life. Like normal individuals they talk about their work along with other stuff. But for the person who works in financial market there are certain discloser standard he has to follow. Let us say their discussion is related to financial market. So is it ethical for this person who is working with a financial firm to tell his friend all about the things he has information on, that is covered under discloser standard, or is it ethical for him to tell his best friend that he can’t talk about this information and then risk his friend feeling that he does not trust him?. Because let’s face it if I know something and I don’t tell you that means you don’t trust me, that is the idea implanted in our brain from our childhood. This is an example of social ethics dilemma that intertwines with financial (professional) ethics. Therefore the boundary between ethical and unethical is quite skinny. So, how can do companies ensure that the company and staff follow ethical behavior?

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Most large firms have implemented their own code of ethics-a set of general professional guidelines to inspire employees to behave ethically and responsibly as an individual or as a group representing the company. But as in our examples these codes are stringent do’s and don’ts that will cause more harm than good as the employee might be hesitant to even do the right ethical thing. As there is a thin line between ethical and unethical behavior this might give the employees a false notion that anything if it is not specifically prohibited would be acceptable. In addition to the company specific codes of ethics, companies and professionals are also bound by ethical codes of conducts of numerous professional organizations and institutions. Companies should train employees to these organizational code of ethics would be more effective as employee would think that it’s a global financial society standard.

As global financial market is more combined with millions of transactions daily, the chances of business and professions using to more unethical conduct in today’s age compared to previous decades. However, in this internet age, business condition and the resulting troubles are more complex. For example, companies and CEOs (for a public company) have to put their shareholders interest first before any other. The shareholder interest is to get maximum profit; CEOs are paid million of dollar in benefit and salary to achieve the goal of maximum profitability. They are under tremendous pressure to keep the company profitable every quarter and also outperform its competition. This might lead to a situation where the companies higher level staff might think they have found a loophole in the system and perform unethical adjustments of financial numbers. Recent example we can find is the collapse of ENRON because of fraud and FANNIE MAE accounting irregularities in start of this decade.

It can also be pointed out that that ethical behavior is governed more by the individual rather than the environment. If we can establish a norm on the financial industry that it’s not only immoral to do unethical activity but its also immoral to not to notify of other peoples unethical activity, then there will be more violations reported. There have few instances where whistleblowers have reproted unethical behavior or violations of the company’s code of ethics and brought big corporations down to their knees. But these kind of whistle blowing is rare. Research shows that this rarity is because whistleblowers are scared of getting fired from their jobs, especially if the violators are of higher post. In ones mind question arises is it ethical to whistleblower a violation and risk getting fired or is it ethical to keep quite and not risk putting food on family table? Companies should try to resolve this kind of dilemma , by implementing anonymous whistleblower program and by rewarding a them anonymously. A company code of ethics is useful only when the company’s actions are consistent with it. Only then can it be followed consistently within the company.


Our society is interworking of people built in the pillar of trust. This trust is based on molarity and ethical behavior. For financial market not only Ethics is the pillar, it is also a ladder for success. Lose that trust and the firm or individual is going downhill. So financial firms should not only keep code of ethics in paper but also promote self-regulation. For financial market Ethical integrity is paramount and clients always come first.


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