Gap fill: All you need to know about ethics

In an industry first, IFAonline brings you a series of structured CPD articles fully accredited by the IFP and confirmed as meeting the RDR learning outcomes as set by the FSA. This week: Lawyer Adam Samuel on ethics.

THERE ARE 10 ETHICS LEARNING OUTCOMES, OUTLINED BELOW. ONCE YOU HAVE READ AND UNDERSTOOD THEM, TAKE A SHORT ONLINE TEST (INFO AT END OF ARTICLE) AND CLAIM YOUR CPD CERTIFICATE FOR YOUR RECORDS.

ONCE YOU HAVE DONE THIS, YOU CAN CONFIDENTLY TICK OFF ANY ETHICS KNOWLEDGE GAPS YOU HAVE.

A key part of the FSA’s approach to the RDR has been to stress the need for ethical behaviour on top of that strictly required by the rules.

Professional bodies such as the Institute of Financial Planning (IFP) and the Chartered Insurance Institute (CII) have had Codes of Ethics for some time.

The FSA’s approach has been to draw on these codes and the Principles (PRIN) and Code for Approved Persons (APER) provisions of its own rulebook to devise its general approach to ethics.

LEARNING OUTCOME 1: The Principles for business and the discretionary obligations they place on firms

The FSA’s PRIN state a firm must:

• Conduct its business with integrity
• Conduct its business with due skill, care and diligence
• Take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems
• Maintain adequate financial resources
• Observe proper standards of market conduct
• Pay due regard to the interests of its customers and treat them fairly
• Pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading
• Manage conflicts of interest fairly, both between itself and its customers and between a customer and another client
• Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment
• Arrange adequate protection for clients’ assets when it is responsible for them
• Deal with its regulators in an open and cooperative way, and disclose to the FSA anything relating to the firm of which the FSA would reasonably expect notice.

These Principles provide an enormous scope for appreciation on the part of the regulated firm.

They also contain a number of references to ethical concepts such as ‘integrity’ and doing things fairly such as managing conflicts of interests and communicating with clients.

A definition of ethics

At this point, one should indicate some idea of what ethics means. It may be simplest to explain what it does not mean. Complying with the FSA Handbook is not an ethical act.

Equally, one can breach the Handbook and still be acting ethically, notably through a momentary loss of concentration.

While aspiring to comply with the rules and to reach the appropriate standards of skill must be an ethical requirement, failure to achieve compliance and excellence is not a matter of ethics.

LEARNING OUTCOME 2:Corporate culture and leadership

The FSA, throughout its treating customers fairly project, focused heavily on the need for firms to have a strong corporate culture.

In ethical terms this means that the board, or even the principal, of a small firm must be strongly driven to act in the firm’s clients’ best interests and show integrity, skill and diligence.

In practice, this means that the senior managers must be open to challenge and criticism and be receptive to feedback about the business. The management must be interested in learning about the rest of the company and how it is carried on. Only then can it communicate appropriate messages to staff.

A recent, positive, example involved a casual conversation this author had with two administrators who, when asked how they worked, said they were committed to seeking excellent service for their clients and to meet their clients’ expectations. Perhaps unsurprisingly, the managers of this small business shared that commitment.

In its various enforcement work in recent years, the FSA has drawn attention to decisions made at board level or the lack of awareness by senior managers of problems with the business, typically because systems and controls have blocked crucial information about how things work from reaching the board.

A failure to insist on adequate quality management information about crucial parts of the business is a constant regulatory theme.

Equally, senior management has been rightly blamed for failing to send down to the operational parts of the business a commitment to quality and a message of openness towards challenge.

Senior managers are responsible for establishing a strong ethical tone to the business and communicating this to everyone else.

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