A banker shouldn't allow promotion prospects to cloud his judgement, says Tiina-Liisa Sexton.
Helping clients make an informed decision
Dilemma: You have been employed by a merchant bank for a number of years and are eager to secure a promotion. You have a long-standing friendship with the chair of the finance committee of a city council and you become aware that the council has substantial surplus cash to invest. You are also aware that your bank has in its inventory certain esoteric financial instruments that it would like to dispose of. You see this as a perfect opportunity to gain a promotion and proceed to contact the finance committee chair to discuss a possible investment. The chair makes you aware of the city council's policy of only investing in safe financial instruments that would protect the city's principal. The chair, who has complete faith in your competence in advising on investments, provides you with authority to proceed.
What are the ethical issues to be considered if you propose to recommend financial products from your bank's inventory?
There are a number of issues that need to be addressed and resolved before investing the city council's surplus funds:
Recommending appropriate investments
It is important to fully understand the city council's investment strategy in relation to its surplus cash. You have already been made aware of the need for safe investments.
Therefore in recommending one financial product in preference to another, it is necessary that the recommendation clearly explains the appropriateness of the investment in achieving the city council's identified needs and objectives as required by APS 12 Statement of financial advisory service standards.
It is important to assess the complexity and any associated risk associated with the proposed investment and whether it is suitable for the city council. Financial products from your bank's inventory may not provide the conservative, principal-protected investment required by the city council.
Conflict of interest As a member of the accounting profession you are required to identify and manage real and potential conflicts of interest. APS 12 requires that the conflict is disclosed to the council together with a detailed explanation of the circumstances and details of any safeguards that will be adopted to control the conflict.
This allows the council to make an informed decision as to whether to continue with your service. If the conflict cannot be adequately managed through controls and disclosure, you must avoid the conflict by declining to provide the financial service or by referring the city council to another financial adviser. In this situation, you may argue that there is no conflict of interest as there is no guarantee that you will gain a promotion from the sale of your bank's financial instruments. This argument may hold in terms of any real conflicts of interest but does not resolve the issue of a potential conflict which still remains. Therefore, it is necessary to disclose this issue, together with the fact that the financial instruments being considered are owned by your bank and employer.
Paragraph 9.5 of APS 12 further reminds those providing financial advisory services to recognise the potential threats created by personal and business relationships; the acceptance of commission or other benefits; and financial involvements, which by reason of their nature or degree, might threaten their objectivity.
Public interest
As a member of the accounting profession you have a responsibility to increase community confidence in financial advice. Advice must be of a high quality, objective, ethical and in the best interests of the client. The aim is confident and informed decision making by clients. It is therefore incumbent on members that services are executed at the highest level of performance and in accordance with ethical standards that ensure that public confidence is firmly founded. It is important that all stakeholders are satisfied that members are acting honestly and in good faith.
