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Lesson 1 of 6 · 12 min
What ethics is: principles, codes and standards
Ethics is a set of moral principles and rules of conduct that guide behaviour, asking us to weigh our own interest against the effects of our actions on everyone with a stake in them.
In short
- Ethics = moral principles plus rules of conduct that guide behaviour. The word comes from the Greek *ethos*, meaning character.
- Stakeholders are everyone directly or indirectly affected by a decision: clients, colleagues, the employer, communities, regulators, the profession and the wider market.
- Ethical conduct follows moral principles and balances self-interest against the direct and indirect consequences for others.
- Rules come in three layers: laws and regulations (set by a governing body), a code of ethics (a general guide to a community's values) and standards of conduct (specific benchmarks for the *minimum* acceptable behaviour).
- Breaking a community's code harms its reputation outside and trust inside, so communities investigate, discipline and in serious cases expel violators.
Stakeholders: who a decision touches
Almost every professional decision affects people other than the decision maker. A stakeholder is any individual or group that could be affected by a decision, directly or indirectly, and so has an interest (a stake) in it.
For an investment professional the list is long: clients, colleagues, the employer, the local community, the profession, trade associations, regulators and other market participants. A single action can help all of them, help some, or help some while hurting others.
Time matters too. Conduct that seems to pay off for a few stakeholders today can hurt almost everyone later, including the person who acted, once the facts come out and trust is lost.
A useful habit: before acting, list who gains and who loses, now and in five years. Many ethical failures look attractive only because the long-run losers were never on the list.
The vocabulary of ethics
The reading builds ethics from a few linked terms. Our beliefs (what we hold to be true) shape our values (what we think has worth). A principle is a fundamental belief that serves as the foundation for a system of behaviour or reasoning.
Ethical (moral) principles are beliefs about what behaviour is good, acceptable or required and what is bad, unacceptable or forbidden. They can be personal or shared by a group. Ethics as a field studies how consequences and personal character define good conduct.
An ethical action is one seen as beneficial and in line with society's ethical expectations. 'Beneficial' means it improves outcomes for the stakeholders affected. Telling a client the full risks and costs of a product is both: it meets expectations and helps the client decide well, which in turn builds trust and satisfaction for you and your firm.
Principles that almost every group shares include honesty, transparency, fairness or justice, diligence and respect for the rights of others. Groups then build more specific rules on top of them.
| Term | Meaning |
|---|---|
| Belief | Something we hold to be true |
| Value | Something we consider to have worth or merit; values grow out of beliefs |
| Principle | A fundamental belief that underpins a system of behaviour or reasoning |
| Ethical principle | A belief about what conduct is good/required versus bad/forbidden |
| Ethics | Moral principles and rules of conduct that guide behaviour |
| Ethical conduct | Follows moral principles; balances self-interest with direct and indirect effects on others |
Three layers of rules
Laws and regulations are rules set by a governing body, such as a legislature or regulator, for everyone under its jurisdiction. They reflect widely shared beliefs about required and forbidden conduct, so they differ between countries whose values differ.
A code of ethics is a written set of principles adopted by a specific community, such as a university, employer or professional association. It communicates the organisation's values and overall expectations and serves as a *general* guide to how members should act.
Some communities add standards of conduct: explicit rules naming specific required behaviours. They are benchmarks for the *minimally acceptable* behaviour and help clarify the code. Members are free to behave even better.
By joining a community, members agree to follow its code and standards. To keep them front of mind, communities display their codes prominently and usually ask members to recommit in writing at least once a year.
| Laws and regulations | Code of ethics | Standards of conduct | |
|---|---|---|---|
| Set by | Legislature or regulator | A community (employer, university, professional body) | The same community, to expand on its code |
| Applies to | Everyone in the jurisdiction | Members who join | Members who join |
| Nature | Required and forbidden conduct | General guide to values and expectations | Specific behaviours; the minimum acceptable level |
Exam phrasing to recognise: 'benchmarks for minimally acceptable behaviour' = standards of conduct; 'general guide' or 'communicates values' = code of ethics. A code does not have to come with standards.
Different laws, different values: best interest versus suitability
Investment law shows how rules reflect values. In some places, and for some advisers, the law sets a fiduciary or best-interest standard; elsewhere, only a suitability standard applies. Both can exist side by side in one country.
Under a best-interest duty, the adviser must put the client ahead of themselves and their employer: understand the client's objectives and risk tolerance, research several alternatives, recommend the one best suited to the client's long-term goals, and keep monitoring that it stays the best option.
Under suitability alone, it is legal to recommend any suitable product, even when a similar suitable product with lower fees exists. The gap between the two standards is a gap in values written into law.
What happens when someone breaks the code
Violations damage the community's reputation with outsiders and the public. Inside the community they reduce trust between members and can split the organisation.
To protect innocent members, a community may investigate suspected breaches, repair the damage, discipline the violator and, in severe cases, revoke membership. Note the limit: having a code does not guarantee every member will behave well, which is exactly why enforcement exists.
Worked examples
Example 1 Who are the stakeholders?
Ingrid, a portfolio manager in Oslo, discovers that a trading error she made cost a client account NOK 40,000. Annual bonuses are set next week. She considers fixing the error quietly after the bonus date. Who are the stakeholders, and how do short- and long-run effects differ?
Example 2 Code or standard?
A Zurich asset manager's handbook contains two statements. (1) 'We act with integrity and treat every client fairly.' (2) 'Employees must obtain written approval before buying any security on the firm's restricted list.' Which is part of a code of ethics and which is a standard of conduct?
Example 3 Two advisers, two legal regimes
Two advisers each have a client who wants a global equity fund. Two suitable funds are nearly identical, one charging 1.6% a year and one 0.4%. Adviser A is held only to suitability; Adviser B to a best-interest duty. Which adviser may legally recommend the 1.6% fund?
On the exam
Expect definition questions: what ethics is, what a stakeholder is, and especially the difference between a code of ethics (general guide to values) and standards of conduct (minimum acceptable benchmarks).
- Ethics is not simply 'obeying the law' and not just personal opinion; it is a set of moral principles and rules of conduct, often shared by a group.
- Standards of conduct are the *minimum*, not the ideal. Members can and should go further.
- A code of ethics does not need standards of conduct to exist, and having a code does not ensure members behave ethically.
Check yourself
Q1Which description of ethics is most accurate?
Q2A professional body publishes a list of specific behaviours that every member must, at a minimum, follow. This list is best described as:
Q3An adviser who is held only to a suitability standard is most likely allowed to:
Q4Ethical conduct is best described as behaviour that:
Q5When a member seriously violates a community's code of ethics, the community is least likely to:
Answer the 5 questions: +10 XP for each one you get right first time.
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