Marketing of Financial

Services
Sajad Abdul Azeez

Ethics in Financial
Services Industry

Ethics in Financial Services Industry

Knowledge of the law compliance with applicable
laws & regulations
Independence & Objectivity not accepting gifts,
benefits,
compensation
that
might
affect
independence and objectivity.
Misrepresentation Need for integrity in areas like
investment analysis, recommendations, etc.
Misconduct Avoiding dishonesty, fraud and deceit.

Duties to Clients
Need to act with prudence, loyalty and care. Place
clients interests before employer and self interest.
Fair dealing while making investment analysis,
recommendations and taking investment actions.
While in an advisory relationship with clients,
investment recommendations should be made after
taking into account clients investment experience,
risk and return objectives.
Investments must be made suitable to the client's
financial situation, and in the context of the client's
total portfolio.

Duties to Clients
In case of portfolio management, investment actions
must be taken that are consistent with the stated
objectives and restraints of the portfolio.
Investment performance information must be fair,
accurate and complete.
Information about clients must be kept confidential
unless
the activities are illegal,
disclosure is required by law or
the client permits disclosure.

Duties to Employers
Exercise loyalty to employer.
Avoid additional compensation/benefits that can lead
to conflict of interest.
Have adequate supervision. Supervisors must
anticipate and prevent violation of rules, laws and
regulations.

 Members must disclose to their employer, clients any

compensation, consideration or benefit received from
of paid to, others for the recommendation to products
or services.
The nature of the consideration flat fee or
percentage basis, one time or continuing benefit
based on performance, etc must also be disclosed.

Ethical issues in the financial services

industry affect everyone, because
even if you dont work in the field,
youre a consumer of the services.

Reasons for Ethical lapses in

Financial Service Industry
1.

Self-interest sometimes morphs into greed and selfishness

2.

Some people suffer from stunted moral development

3.

Some people equate moral behavior with legal behavior

4.

Professional duty can conflict with company demands

5.

Individual responsibility can wither under the demands of

the client

1) Self-interest sometimes morphs

into greed and selfishness, which is
unchecked self-interest at the expense
of someone else. This greed becomes a
kind of accumulation fever. If you
accumulate for the sake of
accumulation, accumulation becomes
the end, and if accumulation is the end,
theres no place to stop, he said. The
focus shifts from the long-term to the
short-term, with a big emphasis on
profit maximization.

2) Some people suffer from stunted

moral development: this happens in
three areas:
- failure to be taught
- the failure to look beyond ones own
perspective
- the lack of proper mentoring

3) Some people equate moral

behavior with legal behavior,
disregarding the fact that even though
an action may not be illegal, it still may
not be moral. Some people contend that
the only requirement is to obey the law.
They tend to ignore the spirit of the law
in only following the letter of the law.

4) Professional duty can conflict with

company demands. For example, a
faulty reward system can induce
unethical behavior. A purely selfinterested agent would choose that
course of action which contains the
highest returns to himself or herself

5) Individual responsibility can

wither under the demands of the
client. Sometimes the push to act
unethically comes from the client.
-

How many people expect their accountants to pad their

expenses where possible?

How many clients expect their insurance agents to falsify their

applications or claims?

- You like your client, youve gotten to

know your client, you really want to
help your client outthats just another
conflicting loyalty

Financial Institution
Failures

Financial Institution Failures

Financial Institution Failures refer to
a variety of situations in which
some financial institutions or
assets suddenly lose a large part
of their value. In the 19th and
early 20th centuries, many failures
were associated with banking
panics, and many recessions
coincided with these panics.

Reason for failures

Asset price declines
involving stocks, real estate, or other assets
Financial institution insolvencies
a wave of loan defaults may cause bank
failures
financial institutions interconnected,
so insolvencies can spread from one to
another

Reason for failures

Liquidity crises
if its depositors lose confidence, a bank
run depletes the banks liquid assets
if its creditors have lost confidence, an
investment bank may have trouble
selling commercial paper to pay off
debts
in such cases, the institution must sell
illiquid assets at fire sale prices,
bringing it closer to insolvency

The U.S. financial crisis of 20072009

Context: the 1990s and early
2000s were a time of stability,
called The Great Moderation
2007-2009:
stock prices dropped 55%
unemployment doubled to 10%
failures of large, prestigious
institutions like Lehman Brothers

The subprime mortgage crisis

2006-2007: house prices fell, defaults on
subprime mortgages, huge losses for
institutions holding subprime mortgages or the
securities they backed
Huge lenders Ameriquest and New Century Financial
declared bankruptcy in 2007

Liquidity crisis in August 2007 as banks

reduced lending to other banks, uncertain
about their ability to repay
Fed funds rate increased above Feds target

Disaster in September 2008

After 6 calm months, a financial crisis exploded:
Fannie Mae, Freddie Mac
nearly failed due to a growing wave of mortgage
defaults, U.S. Treasury became their conservator and
majority shareholder, promised to cover losses on their
bonds to prevent a larger catastrophe
Lehman Brothers
declared bankruptcy, also due to losses on MBS
Lehmans failure meant defaults on all Lehmans
borrowings from other institutions, shocked the
entire financial system

Disaster in September 2008

American International Group (AIG)
about to fail when the Fed made $85b emergency loan
to prevent losses throughout financial system
The money market crisis
Money market funds no longer assumed safe, nervous
depositors pulled out (bank-run style) until Treasury
Dept offered insurance on MM deposits
Flight to safety
People sold many different kinds of assets, causing price
drops, but bought Treasuries, causing their prices to rise
and interest rates to fall to near zero

International financial
institutions

International Financial
Institutions
International financial institutions refers to
financial institutions that have been
established by more than one country. Their
owners or shareholders are generally national
governments, although other international
institutions and other organisations
occasionally figure as shareholders.
The best-known IFIs are the World Bank, the IMF,
and the regional development banks. Some of
the IFIs are considered UN agencies.

Types of International Financial

Institutions
1. Bretton Woods institutions
2. Regional development banks
3. Bilateral development banks
4. Other regional financial institutions

1. Bretton Woods institutions

The best-known IFIs were established after
World War II to assist in the reconstruction of
Europe and provide mechanisms for
international cooperation in managing the
global financial system. They include the World
Bank, the IMF, the International Finance
Corporation

2. Regional development banks

The regional development banks consist of several
regional institutions that have functions similar to the
World Bank group's activities, but with particular focus
on a specific region. Shareholders usually consist of the
regional countries plus the major donor countries. The
best-known of these regional banks cover regions that
roughly correspond to United Nations regional
groupings, including the Inter-American Development
Bank (which works in the Americas, but primarily for
development in Latin America and the Caribbean); the
Asian Development Bank; the African Development
Bank; and the European Bank for Reconstruction and
Development.

3. Bilateral development banks

Bilateral development banks are
financial institutions set up by individual
countries to finance development
projects in developing countries and
emerging markets. Examples include
the Netherlands Development Finance
Company FMO and the German
Development Bank DEG.

4. Other regional financial

institutions
Several regional groupings of countries have
established international financial institutions to finance
various projects or activities in areas of mutual interest.
The largest and most important of these is the European
Investment Bank, an institution established by the
members of the European Union. Other examples
include the Black Sea Development Bank, the
International Investment Bank (established by the
countries of the former Soviet Union and Eastern
Europe), the Islamic Development Bank and the Nordic
Investment Bank.

World Bank
Established July 1,
1944
After the onset of WWII
at Bretton Woods, New
Hampshire to help
rebuild Europe.
The first loan of $250
million was to France
in 1947 for post-war
reconstruction

Norwegian
Delegation,
Bretton Woods,
July 1944

World Bank
The World Bank is an international financial
institution that provides loans to developing
countries for capital programmes. The World
Bank has a stated goal of reducing poverty. By
law, all of its decisions must be guided by a
commitment to promote foreign investment,
international trade and facilitate capital
investment.

International
Financial Market
-Equity
-Debt

International Financial Market

An International Financial Market is a
mechanism that allows people to buy and sell
(trade) financial securities (such as stocks and
bonds) across the borders of nations.
The group of closed interconnected markets
in which residents of different countries
trade assets such as currencies, stocks and
bonds

Two Types of International

Financial Instruments
Equity
Debt

Equity
Equity instruments
A share of stock
It is a claim to a firms profits,
rather than to a fixed payment, and
its payoff will vary according to
circumstance.

Debt
Debt instruments
Bonds and bank deposits
They specify that the issuer of the
instrument must repay a fixed
value regardless of economic
circumstances.