Ethics in the Real World: Complex products

Monday 24 January 2022

Author: Roshni Bhayani

After the fourth of our new ethical case studies, we invited members to join the discussion and provide us with their views. Afterwards, Michael Barker, CFA, Miles Galaska, CFA and Liam Gilchrist, CFA collated responses and highlighted the issues that were raised.

In August 2021, CFA UK’s Ethics Steering Committee posted the fourth of its ethical case studies, looking at ethical scenarios with no ‘correct answer’, and invited respondents to provide feedback and meaningful debate on the problems and issues raised by the scenario.


Case Study Summary: 

In our fourth scenario, Complex products, Security State Bank offers a diverse range of products, dealing with a range of customers from retail customers to large corporates. The firm has a natural advantage with retail customers due to strong brand recognition, a well-established network, and a large sales force.

John has been a supervisor within Security State’s wealth management division for 5 years, having previously worked as a customer advisor. John has taken a keen interest in the full range of products produced by Security State and regularly attends seminars on new products that are being launched. Mark, a member of John’s team, has the second largest portfolio of clients in the team, behind Ryan, who has sold complex structured products to a large number of his clients. In one to ones, John is always keen to discuss sales of structured products with Mark, where he regularly lags behind the rest of the team.

Mark recommends that Mr and Mrs Smith invest £500,000 in the Income Plus Structured product. This product provides an annual return of 6% for ten years. The product guarantees a return of capital after 10 years providing that a number of indices do not fall outside of a set range. Mr Smith states that he does not fully understand the product but that, based on Mark’s advice, they will proceed.

 

Watch members of CFA UK Ethics Steering Committee discuss the case study 4: Complex products


CFA UK invited readers to provide feedback, asking about what behaviours they most agreed with and the steps that could have been taken to prevent a potential conflict. Ethical Steering Group members Michael Barker, CFA, Miles Galaska, CFA and Liam Gilchrist, CFA collated responses and highlighted the issues raised.      

The Steering Group discussed the challenges that investors face when relying on the professional views of senior managers and the pressures that can be applied to focus on favourable reports for investment opportunities.

The majority of respondents, around 33%, believe that the Mark failed to demonstrate due loyalty to his clients when making recommendations. The second most common response, 26.67% suggest that the firm’s financial strategy impacts the advisor’s independence and objectivity, leading to potential mis-selling.

CFA UK members recognise that selling complex products is not the right solution for all circumstances, event if that is company strategy.  Clients should always be made aware of the risks through proper disclosure and discussion, using relevant client facing documentation. There should be clarity from the beginning to avoid any miscommunication. 

 

Give your opinion on our new ethics case study: xxx

Picture of Michael Barker, CFA

Michael Barker, CFA, CFA UK Ethics Steering Committee

 

 

 

 

 

 

 

 

Picture of Miles Galaska, CFA

Miles Galaska, CFA, CFA UK Ethics Steering Committee

 

 

 

 

 

 

 

 

Liam Gilchrist, CFA

Liam Gilchrist, CFA, Founder and CEO of Lexical Labs 

 

 

 

 

 

 

 

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