Regulation and Ethics

Regulatory Principles, Financial Crime, Ethics: Course Notes

Protect Investors: Ensure fair markets and prevent fraud.
Maintain Market Integrity: Promote transparency and prevent market manipulation.
Promote Financial Stability: Prevent systemic risk and protect the overall economy.
Build Public Confidence: Encourage participation in financial markets.
Address Information Asymmetry: Level the playing field between financial institutions and individuals.

Transparency: Clear disclosure of information about products, fees, and risks.
Accountability: Holding individuals and firms responsible for their actions.
Proportionality: Regulations should be appropriate for the size and complexity of the firm.
Consistency: Applying regulations fairly and consistently across the market.
Effectiveness: Regulations should achieve their intended objectives.
Efficiency: Minimizing the cost and burden of regulation.
Risk-Based Approach: Focusing regulatory efforts on areas with the highest risk.
International Cooperation: Collaborating with other countries to address cross-border issues.

Definition: Illegal acts involving money or financial assets.
Types of Financial Crime:
- Money Laundering: Concealing the origins of illegally obtained money.
- Fraud: Deceiving others for financial gain (e.g., investment fraud, insurance fraud).
- Bribery and Corruption: Offering or accepting payments to influence decisions.
- Terrorist Financing: Providing financial support to terrorist organizations.
- Cybercrime: Using computers and networks to commit financial crimes (e.g., phishing, hacking).
Impact:
- Erodes public trust in financial institutions.
- Damages the economy.
- Supports criminal activities.

Insider Trading: Trading on confidential information that is not available to the public.
- Illegal: Unfair advantage over other investors.
Market Abuse: Any behavior that distorts or manipulates the market.
- Includes:
  - Spreading false rumors.
  - Manipulating prices.
  - Concealing ownership.
Examples of Market Abuse:
- Pump and Dump: Artificially inflating the price of a stock and then selling it for a profit.
- Wash Trading: Buying and selling the same security to create the illusion of activity.
Consequences:
- Criminal Penalties: Fines, imprisonment.
- Civil Penalties: Fines, disgorgement of profits.
- Reputational Damage: Loss of trust and business.

Importance:
- Building trust with clients.
- Maintaining the reputation of the profession.
- Ensuring fair and ethical practices.
Key Ethical Principles:
- Integrity: Honesty, trustworthiness, and moral soundness.
- Objectivity: Impartiality and unbiased decision-making.
- Competence: Maintaining the necessary skills and knowledge to provide competent service.
- Fairness: Treating all clients equitably and without discrimination.
- Confidentiality: Protecting client's private information.
- Professionalism: Maintaining a high standard of conduct and representing the profession in a positive light.
Code of Ethics:
- Formal set of rules and guidelines for ethical conduct.
Ethical Dilemmas:
- Situations where ethical principles conflict.
- Requires careful consideration and judgment.
Whistleblowing:
- Reporting unethical or illegal behavior to the appropriate authorities.
- Protected by law in many jurisdictions.
Consequences of Unethical Behavior:
- Loss of clients.
- Disciplinary actions.
- Legal penalties.
- Reputational damage.