FNCE30009 ETHICS IN FINANCE

SUBJECT NUMBER: FNCE30009

SUBJECT NAME: ETHICS IN FINANCE

Company directors have found a 'creative' way to profit from insider trading
The Australian Security Exchange (ASX) is home to “rife” insider trading, according to new research.Company directors and associates over the last decade had engaged in a campaign of contrarian trading – buying or selling against market moves – based on inside company knowledge, according to the research.
“My results show these contrary trades were being made with non-public knowledge, privy only to company insiders, about the future performance of the firm. This most certainly amounts to insider trading under the law,” the researcher said in a release issued to Business Insider Australia.
However, while insider trading is generally considered to be trading on a company development that takes place before it becomes public, the researcher identified an opposite trend. “If the news had the potential to boost the share price, I found the directors were selling their shares when normally, this is the time you’d expect them to be buying,” he said. That allowed the trades to fly under the radar of regulators like the Australia Securities and Investments Commissions (ASIC). Interestingly,  the findings showed that while such trades occurred  across the entire market,  they were most prominent in the mining sector – an industry prone to speculative buying and selling.
“In the safe knowledge of what’s coming in the future for their firms, these company directors are confidently trading in the opposite direction, which ultimately helps tip the share price back again,” the researcher said. “The practice is both creative and criminal.”
Due to its nature, there isn’t believed to have been a single prosecution of such trading, because the information was considered public at the time of the trade. However, the researcher said the practice allows directors to sell when share prices became overinflated and buy when companies became oversold, according to their inside perspectives.
ASIC disagrees and said the practice isn’t breaking the law. “Although we have yet to examine the research in detail, the announcement suggests it is based on a very different concept of what constitutes ‘inside information’ and ‘insider trading’ than applies in any comparable market anywhere. That is, that most directors are trading on inside information whenever they trade, breaching the law simply by virtue of having an intimate understanding of the business. By extension, this suggests that all directors should be prevented from owning shares. This proposition would be contrary to common market practice here and elsewhere.”
ASIC’s contention remains that trading with public information is entirely above board, and no different to what other investors do every day. By trading against news flows – selling on positive news and buying on negative developments – directors could be said to be simply valuing the company’s long-term prospects rather than the short-term price fluctuations.

Source: Business Insider Australia, Sep 23, 2019

DFS fines Barclays following whistleblower investigation
The US Department of Financial Services (DFS) has fined Barclays Bank $15m for violations of Banking Law stemming from a DFS investigation into attempts by the bank’s CEO to identify the author(s) of two whistleblowing letters in contravention of Barclays’ established whistleblowing policies and procedures.

The DFS investigation found that shortcomings in governance, controls and corporate culture relating to Barclays’ whistleblowing function permitted a sequence of events that potentially /could  have  had a  detrimental  impact  on the  efficacy of   Barclays’ whistleblowing programme.

Several members of senior management failed to follow or apply whistleblowing policies and procedures in a manner that protected the CEO and the bank itself. Limited gaps in the bank’s whistleblowing policies  and  procedures  became   apparent   during   the investigation,  and  it appears  that the  cultural  transformation  that  Barclay’s  Group Compliance had been working  hard to instil in the more than one  hundred thousand Barclays employees worldwide, was not nearly complete.

“Whistleblowers are vital to uncovering and addressing intentional wrongdoing.  DFS’s thorough investigation uncovered actions at the top that exposed the bank to risk and created an atmosphere in which employees might doubt that it was safe to escalate issues of concern to the bank,” said a DFS Superintendent.

“The DFS recognises and appreciates the CEO’s commendable and constructive steps to accept responsibility for his actions, apologise to employees of the bank, and recommit to DFS that he will oversee an independent and effective whistleblowing function.”

DFS’s investigation found that in June 2016, and again in July 2016, the CEO personally directed the head of Barclays’ Group Security to attempt to identify the author(s) of two whistleblowing letters. The CEO’s primary motivations in seeking to learn the identity of the author(s) were to protect a new executive (who was a friend and colleague) from a personal attack that the CEO believed was false and malicious; and to defend his own ability as CEO to continue recruiting high-level executives to the Bank.

However, the CEO was conflicted, because the letters criticised his own role, and the role of  the   bank’s  management,  in  recruiting  and  employing  the   recently   hired  senior executive with whom he had worked at another bank.

Source: Banking Newslink, 21 December 2018

Content problems?

.  There is mention of “Barclays’ established whistleblowing policies and procedures,”

which suggests that a proper policy/process is in place.

Implementation problems?

.  Several  members  of  senior  management  failed  to  follow  or  apply  whistleblowing policies

.    Limited gaps in the whistleblowing policies and procedures;

.    Failure to change culture.

.    Failure to complete introduction/familiarity across the (global) institution.

Compliance problems?

.  There seems to be a governance problem, with the CEO (who is ultimately responsible to uphold the policy) intervening in, and thereby violating the whistleblowing policy.

.  The CEO is clearly not acting as an independent arbiter.

.   By intervening, the CEO prioritised personal interests (his own, and his friendship with the “new executive”) over the best interest of the company – thereby failing in the Duty to Employer.

But perhaps most importantly: a failure to preserve the anonymity of the whistleblower and confidentiality of the whistleblowing.

Is this the ethical way for payday lending?

An ethical payday loan may sound like a contradiction, but that is what new provider FridayFriday.com says it is offering. The web-based lender promises to limit the use of controversial "rollover" loans, where borrowers are given a new loan as soon as an old one ends, to cap the annual percentage rate and take a less aggressive approach to debt collection.
"We charge £25 for each £100 loaned a month, but the maximum number of loans that someone can take out is limited to three consecutively. We then put the borrower on a single loan, charging 30 per cent over six months," says Jason Gardiner, the founder of FridayFriday. "It is not in our interests to put borrowers into difficulty by loading on the fees. In addition, bad debtors are given weekly reminders rather than hassled at work or on their doorstep."
But this hardly qualifies FridayFriday as an  "ethical"  provider,  according to the UK's biggest debt charity. "While limiting the number of times that someone can rollover a payday loan to three is a good step, this is still extremely expensive credit, particularly when you can borrow up to £1,000 each time," says Una Farrell of the Consumer Credit Counselling Services. "Paying 30 per cent interest on £1,000 is very steep, especially for someone who is in financial difficulty."

The Office of Fair Trading is investigating the payday industry, following revelations about sales tactics. Lenders have been criticised by consumer groups for targeting the young and vulnerable, while credit  reference  agencies  are  unhappy  that  payday  lenders  are  not fulfilling their statutory obligations to let them know when people are building up debts. Borrowers can slip into serious debt without this being logged on their credit record.

"The  industry  has  a  bad  name  and  rightly  so,"  admits  Mr  Gardiner.  "We  need  tight regulation of lenders by the Financial Services Authority and lenders must pass on the details of new loans to the credit reference agencies," he adds.

Source: The Independent, 24 June 2012