Ethical Issues: formula sheet

Key formulas

Integrity

Integrity = honesty + straightforwardness + no misleading statements

Applies to what you say, what you omit and how you present risks and returns.

Objectivity

Objectivity = advice based on facts, free from bias and personal gain

Pressure from employer, product provider or your own incentives must not change the advice.

Fairness

Fairness = equal and honest treatment of all clients, with no unfair preference

Client interests come before the adviser's own interest.

Conflict of interest rule

Conflict identified → disclose → manage or avoid → client interest prevails

Disclosure alone does not excuse harming the client.

Confidentiality

Client information stays private, except where law requires or the client consents

Sharing it with product sellers for your own benefit is a breach.

Conflict handling order

Identify → Avoid → Manage → Disclose

Disclosure alone is not enough if the conflict can be avoided or if it harms the client.

Conflict of interest

Adviser's or related party's interest ≠ client's interest

It exists even if no loss has yet occurred. The possibility of biased advice is enough.

Disclosure standard

Full + clear + timely + before acting on the advice

The client must get the facts early enough to decide, not after the transaction.

Overriding duty

Client's interest > adviser's own interest

When in doubt, choose the option that puts the client first.

Core standard

Act in a fiduciary manner + best interest of the client

The adviser puts the client's interest ahead of their own. This is the answer when options conflict.

Honesty and fairness

Honesty + fairness + no misleading claims

Guaranteeing returns or hiding risks breaches this.

Diligence

Advice = based on client profile + due care and skill

Advice without knowing the client's risk profile and needs is not diligent.

Confidentiality

Client information = confidential, unless law or client permits disclosure

Sharing with others for the adviser's gain is a breach.

Conflict of interest

Disclose + avoid or manage conflicts

Disclosure to the client is required. Silence is a breach.

Compliance

Follow SEBI Act, rules, regulations and circulars

Applies to all advisory activity.

Suitability test

Suitable advice = fits (risk profile + goals + time horizon + financial position + knowledge)

If any one element clashes with the product, the advice is unsuitable.

Risk profile rule

Guiding risk level = lower of (risk tolerance, risk capacity)

A sensible rule of thumb for advisers, not a legal formula. A willing but unable client should not take high risk.

Conflict rule

Conflict of interest → identify → disclose → avoid or manage → client interest prevails

Disclosure alone does not make an unsuitable recommendation acceptable.

Confidentiality rule

Client data shared only with consent or when required by law or regulator

Applies during and after the relationship.

Review trigger

Change in client circumstances → reassess risk profile and suitability

Profiling is ongoing, not one-time.

Front running

Front running = trading ahead of a client's order, using knowledge of that order

Information used is the client's or employer's pending order. Adviser or insider benefits at the client's cost.

Insider trading

Insider trading = dealing or tipping on UPSI about a listed company

Information used is company-related and not public. Applies to securities of the company concerned.

Mis-selling

Mis-selling = unsuitable product or misleading sale, regardless of whether the product is itself good

Test: does it match the client's needs, risk profile and understanding, and were risks disclosed?

Misrepresentation

Misrepresentation = false or misleading statement, or omission of a material fact

Covers returns, risks, fees, past performance and the adviser's credentials.

Guaranteed returns

Assured or guaranteed returns on market-linked products = prohibited promise

Risk cannot be removed by a promise. Do not confuse with the stated coupon on a debt instrument, which is contractual and depends on the issuer's credit.

Churning

Churning = excessive trading mainly to generate fees or commission

Judged by purpose and client interest, not just the number of trades.

Quick revision

• The client's interest comes before the adviser's own interest.
• Advice must be suitable for the client's goals, risk profile and circumstances.
• Conflicts of interest should be avoided where possible, otherwise disclosed and managed.
• Disclosure must be clear and made to the client, not hidden in fine print.
• Client information is confidential and used only for the purpose of the advice.
• Act with honesty, fairness, diligence and care in all dealings.
• Do not guarantee or assure returns on investments.
• Do not mislead clients about risks, costs or past performance.
• Keep proper records of advice given and the basis for it.
• Follow the SEBI (Investment Advisers) Regulations, 2013 and the code of conduct in them.
• When two options look ethical, choose the one with fuller disclosure and stronger client protection.
• Check the workbook for exact rules before the exam; do not rely on memory of limits.

Common mistakes

• Treating disclosure as a full cure for a conflict of interest. Fix: Remember the order: disclose, then manage or avoid. The advice must still be in the client's interest.
• Confusing integrity with objectivity. Fix: Integrity is about truthfulness. Objectivity is about being free from bias and influence in judgement.
• Thinking disclosure removes the conflict. Fix: Remember that disclosure informs the client. The conflict still has to be avoided or managed.
• Believing a conflict exists only if the client loses money. Fix: A conflict is a situation that could bias advice. It exists before any loss.
• Thinking a client's consent cures any breach. Fix: Consent helps with disclosed conflicts. It never permits misleading advice, guaranteed returns or breaking the law.
• Treating confidentiality as absolute. Fix: Remember the exceptions: disclosure required by law or authorised by the client.
• Treating risk tolerance as the only input to suitability. Fix: Always weigh risk capacity, goals, horizon, liquidity needs and knowledge as well. If tolerance and capacity differ, be guided by the lower.
• Thinking disclosure of a conflict makes any recommendation acceptable. Fix: Disclosure is required, but the advice must still be suitable and in the client's interest.
• Treating front running and insider trading as the same thing. Fix: Ask whose information it is. Client or employer order means front running. Company UPSI means insider trading.
• Calling a sale mis-selling only when the product is bad. Fix: Mis-selling is about fit and disclosure. A good product sold to the wrong client, or sold with hidden risks, is still mis-selling.

Exam tips

• Most questions are scenarios. Name the principle first, then match the option.
• Prefer options with disclosure, client interest and suitability over options about maximum profit.
• Be careful with absolute words such as 'always' and 'never'. Confidentiality has legal and consent exceptions.
• Read negative marking carefully: on a 2-mark caselet question a wrong answer costs more, so reason before you guess.
• Link this topic to the code of conduct and conflict of interest topics, since the same principles reappear there.
• Scenario options often include one that hides the conflict and one that discloses too late. Eliminate both first.
• If an option says disclosure is enough on its own, treat it with suspicion.
• Watch for related parties such as group companies and family members in the scenario.