Professional Ethics in Finance and Analytics

Experts in the world of finance and business, we like to believe, are generally responsible individuals who aim to do what’s right and strive to help their clients achieve their financial goals. However, finance specialists with good intentions can unknowingly overstep ethical boundaries if they don’t have a strong grasp of the industry’s code of ethics.¹

Learning the basic principles of professional ethics in finance and applying them in practice can help experts make principled decisions and foster trust among clients. Read on to explore ethics in finance and their significance.

Professional ethics in finance are a set of moral standards that guide decision-making in the financial industry. They aim to promote integrity, transparency and accountability.² Upholding these standards when making business decisions, however, may not always be easy, especially if there’s a conflict between an individual’s personal interests and professional obligations. Understanding industry best practices can facilitate ethical decision-making in finance, even in—perhaps especially in—morally ambiguous situations.

When conducting any business dealings, the Association for Finance Professionals (AFP) requires financial experts to:³

• Act in good faith: They should always practice honesty and uphold the best interests of stakeholders, such as employers, shareholders and clients
• Remain competent at all times: To ensure they always carry out their duties in good faith and meet legal qualifications for a finance career, professionals should continually broaden their financial knowledge and skills
• Protect private information from unauthorized access: Financial specialists should safeguard confidential business data and only disclose it when legally required
• Practice integrity when performing professional duties and making decisions: Financial experts should carry out their responsibilities honestly, competently and fairly

Additionally, finance professionals must ensure compliance with local, state and federal laws. For instance, the U.S. Securities and Exchange Commission (SEC) requires investment advisors to provide appropriate recommendations. They should consider a client’s investment objectives and financial situation in order to tailor their advice to an individual's needs.⁴

Investment managers and financial advisors have a legal obligation to act in the best interests of their clients. Ethical behavior ensures that these professionals don't prioritize their personal gain over their clients’ best interests. Institutions that uphold the highest ethical standards maintain strong reputations in the finance industry.

In addition to carrying legal consequences, unethical behavior, such as committing accounting fraud or engaging in predatory lending, can erode public confidence in financial markets and investment firms.⁵

As defined by the U.S. Office of Research Integrity, “Financial conflicts of interest are situations that create perceived or actual tensions between personal financial gain and adherence to the fundamental values of honesty, accuracy, efficiency, and objectivity.”⁶

In other words, a conflict of interest occurs when a financial expert’s personal motivations and professional responsibilities clash. For example, consider a financial advisor who knowingly recommends that clients buy financial products that aren’t in their best interests (too costly, too risky, not aligned with the clients’ financial goals, and so on), but which bring in a larger commission for the advisor.

Conflict of interest in finance is unethical because each finance professional is legally obligated to act in the best interest of investors and customers. Failing to disclose or manage conflicts of interest could be considered a breach of legal duty, resulting in regulatory penalties.⁷

This ethics violation involves buying and selling securities, such as stocks, using what's known as material, non-public information—that is, pertinent information intended to be private or not yet released to the public.⁸ Writing for Bankrate.com, Brian Baker, CFA, gives this example: "Say you work in the accounting department of a publicly traded company and help prepare the company’s financial statements each quarter. If you notice that the company’s results are particularly strong for the current quarter and purchase shares before the earnings have been announced, you’d be in violation of insider trading laws and would be subject to fines and possible jail time. At the same time, if you passed that information along to someone else, you could both be prosecuted for illegal insider trading."⁹

Making profitable trades based on confidential or non-public information:

• Gives the insider an unfair advantage
• Works to the disadvantage of investors and traders who don't have the same information
• Is a breach of fiduciary duty

As a result, the SEC has established harsh legal penalties for insider trading, including huge fines and prison time.¹⁰

Market manipulation involves influencing security prices in the trading market using illegal tactics. It involves such dubious techniques as:¹¹

• Disseminating false or misleading information about a company
• Engaging in multiple transactions to make a security appear more actively traded
• Rigging quotes, prices or trades to make it appear that the demand for a security is higher or lower than it really is

Predatory lending is the use of deceptive techniques to convince a borrower to accept a loan under unfair terms, such as overly high interest rates or unrealistic payment periods. It also involves persuading someone to take a loan they don’t need in order to trap them in a cycle of debt.¹²

The world of finance thrives on data. Ethics in data analytics outline the principles, practices and regulations by which finance professionals handle sensitive business information responsibly, legally and safely.¹³

Data ethics require financial organizations to:^{13, 14}

• Obtain consent before collecting data and keep the gathered details private: Institutions should be transparent about the information they collect from clients, how the data will be used and how the details will be protected from public exposure or unauthorized access
• Ensure fairness in analytics and ethical use of advanced technologies: A financial organization should train its data analytics algorithms with unbiased data sets to avoid discrimination, such as racial and gender bias; innovations such as artificial intelligence (AI) and big data analytics, should have adequate safeguards to prevent misuse and ethical lapses
• Use advanced technologies ethically: When using tools such as artificial intelligence (AI) in fraud detection and prevention, finance professionals should ensure these technologies are implemented with sufficient safety measures to avoid misuse
• Comply with data security requirements: Firms in the finance industry must acquire, store, share and manage data in compliance with all applicable regulations
• Use quality data in business decisions: When making data-driven decisions, the financial details should be accurate, reliable, complete and up to date; this prevents errors that could harm clients or financial institutions

Modern finance professionals must navigate ethical issues as they offer advice to customers and investors. If you’re a current or aspiring finance specialist, you can deepen your knowledge of business ethics by pursuing an Online MS in Finance and Analytics from the Leavey School of Business at Santa Clara University.

Created and run by acclaimed faculty experts, this flexible online program offers tailored education that prepares candidates for a career in capital markets, investment management or corporate finance. You’ll graduate with the values you need to make financial decisions competently and with integrity.

To learn more, schedule a call with an admissions outreach advisor today.