Ethics and Professional Standards
The principles behind the rules
Ethical standards rest on a small set of principles: integrity, fairness, competence and diligence, confidentiality, objectivity, and proper management of conflicts of interest. Exam questions rarely ask you to recite them; they present a scenario and ask what a professional should do. The answer is almost always the one that puts the client's legitimate interest first, is transparent, and is documented.
Where conflicts arise
Conflicts appear through commission and inducements, gifts and hospitality, soft-pound arrangements, referral fees, proprietary product preference, performance targets and personal account dealing. The professional response is a hierarchy: avoid the conflict if possible; otherwise manage it with segregation, independent oversight, or clear disclosure - and disclosure alone is the weakest remedy, not a cure. Personal account dealing normally requires pre-clearance and prohibition around dealing while in possession of inside information.
Market abuse deserves separate attention: insider dealing, disclosing inside information (tipping - the tippee is equally liable), front-running client orders, and manipulation. Information about a client's large pending order is itself inside information.
Trap: "everyone in the market does it", "the client did not ask", and "it was disclosed in the small print" are never defences. Nor is a personal relationship with a client a justification for preferential treatment.
Rule of thumb: the sunlight test - would you be comfortable if the decision, with your name attached, appeared on the front page of a newspaper? If not, do not do it.
Example: an adviser learns from a client's finance director that a takeover is imminent. He may not trade, and may not tip anyone, including family. He must escalate the information and refuse to act on it.