MFS PPT

Ethics in Financial Services Industry

Sajad Abdul AzeezRoni K Zachariah

Rejo George

Ethics in Financial Services Industry

Ethics in Financial Services Industry

¨ Knowledge of the law – compliance with applicable laws & regulations

¨ Independence & Objectivity – not accepting gifts, benefits, compensation that might affect independence and objectivity.

¨ Misrepresentation – Need for integrity in areas like investment analysis, etc.

¨ Misconduct – Avoiding dishonesty, fraud etc.

Duties to Clients ¨ Need to act with prudence, loyalty and care. Place

client’s interests before employer and self interest.

¨ Fair dealing while making investment analysis, recommendations and taking investment actions.

¨ While in an advisory relationship with clients, investment recommendations should be made after taking into account client’s investment experience, risk and return objectives.

¨ Investments must be made suitable to the client's financial situation, and in the context of the client's total portfolio.

Duties to Clients ¨ In case of portfolio management, investment actions

must be taken that are consistent with the stated objectives and restraints of the portfolio.

¨ Investment performance information must be fair, accurate and complete.

¨ Information about clients must be kept confidential unless

¨ the activities are illegal,

¨ disclosure is required by law or

¨ the client permits disclosure.

Duties to Employers

¨ Exercise loyalty to employer.

¨ Avoid additional compensation/benefits that can lead to conflict of interest.

¨ Have adequate supervision. Supervisors must anticipate and prevent violation of rules, laws and regulations.

¨ Members must disclose to their employer, clients any compensation, consideration or benefit received from of paid to, others for the recommendation to products or services.

¨ The nature of the consideration – flat fee or percentage basis, one time or continuing benefit based on performance, etc must also be disclosed.

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.

Reasons for Ethical lapses in Financial Service Industry

1. Self-interest sometimes morphs into greed and selfishness

2. Some people suffer from stunted moral development

3. Some people equate moral behavior with legal behavior

4. Professional duty can conflict with company demands

5. Individual responsibility can wither under the demands of

the client

1) Self-interest sometimes morphs into greed and selfishness, which is unchecked self-interest at the expense of someone else. This greed becomes a kind of accumulation fever. “If you accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is the end, there’s no place to stop,” he said. The focus shifts from the long-term to the short-term, with a big emphasis on profit maximization.

2) Some people suffer from stunted moral development: this happens in three areas:

- failure to be taught- the failure to look beyond one’s own

perspective- the lack of proper mentoring

3) Some people equate moral behavior with legal behavior, disregarding the fact that even though an action may not be illegal, it still may not be moral. Some people contend that the only requirement is to obey the law. They tend to ignore the spirit of the law in only following the letter of the law.

4) Professional duty can conflict with company demands. For example, a faulty reward system can induce unethical behavior. “A purely self-interested agent would choose that course of action which contains the highest returns to himself or herself”

5) Individual responsibility can wither under the demands of the client. Sometimes the push to act unethically comes from the client.

- How many people expect their accountants to pad their expenses where possible?

- How many clients expect their insurance agents to falsify their applications or claims?

- “You like your client, you’ve gotten to know your client, you really want to help your client out—that’s just another conflicting loyalty”

Financial Institution Failures

Financial Institution Failures

Financial Institution Failures refer to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many failures were associated with banking panics, and many recessions coincided with these panics.

Reason for failures

Asset price declines

involving stocks, real estate, or other assetsFinancial institution insolvencies

a wave of loan defaults may cause bank failures

financial institutions interconnected, so insolvencies can spread from one to another

Reason for failures

Liquidity crisesif its depositors lose confidence, a bank run depletes the bank’s liquid assets

if its creditors have lost confidence, an investment bank may have trouble selling commercial paper to pay off debts

in such cases, the institution must sell illiquid assets at “fire sale” prices, bringing it closer to insolvency

The U.S. financial crisis of 2007-2009

Context: the 1990s and early 2000s were a time of stability, called “The Great Moderation”2007-2009:

stock prices dropped 55%unemployment doubled to 10%failures of large, prestigious institutions like Lehman Brothers

The subprime mortgage crisis

2006-2007: house prices fell, defaults on subprime mortgages, huge losses for institutions holding subprime mortgages or the securities they backed

Huge lenders Ameriquest and New Century Financial declared bankruptcy in 2007

Liquidity crisis in August 2007 as banks reduced lending to other banks, uncertain about their ability to repay

Fed funds rate increased above Fed’s target

Disaster in September 2008After 6 calm months, a financial crisis exploded:

Fannie Mae, Freddie Macnearly failed due to a growing wave of mortgage defaults, U.S. Treasury became their conservator and majority shareholder, promised to cover losses on their bonds to prevent a larger catastrophe Lehman Brothers declared bankruptcy, also due to losses on MBS

Lehman’s failure meant defaults on all Lehman’s borrowings from other institutions, shocked the entire financial system

Disaster in September 2008American International Group (AIG)about to fail when the Fed made $85b emergency loan to prevent losses throughout financial systemThe money market crisis Money market funds no longer assumed safe, nervous depositors pulled out (bank-run style) until Treasury Dept offered insurance on MM depositsFlight to safetyPeople sold many different kinds of assets, causing price drops, but bought Treasuries, causing their prices to rise and interest rates to fall to near zero

International financial institutions

International Financial Institutions

International financial institutions refers to financial institutions that have been established by more than one country. Their owners or shareholders are generally national governments, although other international institutions and other organisations occasionally figure as shareholders.

The best-known IFIs are the World Bank, the IMF, and the regional development banks. Some of the IFIs are considered UN agencies.

Types of International Financial Institutions

1. Bretton Woods institutions

2. Regional development banks

3. Bilateral development banks

4. Other regional financial institutions

1. Bretton Woods institutions

The best-known IFIs were established after World War II to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global financial system. They include the World Bank, the IMF, the International Finance Corporation

2. Regional development banksThe regional development banks consist of several regional institutions that have functions similar to the World Bank group's activities, but with particular focus on a specific region. Shareholders usually consist of the regional countries plus the major donor countries. The best-known of these regional banks cover regions that roughly correspond to United Nations regional groupings, including the Inter-American Development Bank (which works in the Americas, but primarily for development in Latin America and the Caribbean); the Asian Development Bank; the African Development Bank; and the European Bank for Reconstruction and Development.

3. Bilateral development banks

Bilateral development banks are financial institutions set up by individual countries to finance development projects in developing countries and emerging markets. Examples include the Netherlands Development Finance Company FMO and the German Development Bank DEG.

4. Other regional financial institutions

Several regional groupings of countries have established international financial institutions to finance various projects or activities in areas of mutual interest. The largest and most important of these is the European Investment Bank, an institution established by the members of the European Union. Other examples include the Black Sea Development Bank, the International Investment Bank (established by the countries of the former Soviet Union and Eastern Europe), the Islamic Development Bank and the Nordic Investment Bank.

Established July 1, 1944

After the onset of WWII at Bretton Woods, New Hampshire to help rebuild Europe.The first loan of $250 million was to France in 1947 for post-war reconstruction

Norwegian Delegation,Bretton Woods,

July 1944

World Bank

World Bank

The World Bank is an international financial institution that provides loans to developing countries for capital programmes. The World Bank has a stated goal of reducing poverty. By law, all of its decisions must be guided by a commitment to promote foreign investment, international trade and facilitate capital investment.

International Financial Market

-Equity-Debt

International Financial Market

An International Financial Market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds) across the borders of nations.

The group of closed interconnected markets in which residents of different countries trade assets such as currencies, stocks and bonds

Two Types of International Financial Instruments

EquityDebt

Equity

• Equity instruments– A share of stock

– It is a claim to a firm’s profits, rather than to a fixed payment, and its payoff will vary according to circumstance.

Debt

• Debt instruments– Bonds and bank deposits

– They specify that the issuer of the instrument must repay a fixed value regardless of economic circumstances.

Thank You…