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FNCE30009 Ethics in Finance

ONLINE Summer, 2020

Student ID: (Do NOT write your name anywhere on this exam booklet)

THE UNIVERSITY OF MELBOURNE FACULTY OF BUSINESS AND ECONOMICS FINAL EXAMINATION – SUMMER SEMESTER 2020 SUBJECT NUMBER: SUBJECT NAME: COMMON CONTENT: EXAM DURATION: READING TIME: TOTAL MARKS: NO. OF PAGES:

FNCE30009 ETHICS IN FINANCE - ONLINE NONE 2 HOURS 15 MINUTES 70 8 (including cover page)

AUTHORIZED MATERIALS 1. This is an OPEN BOOK exam. Students are permitted to have any materials in their possession including a foreign language dictionary. 2. Students are permitted to use a foreign language dictionary. INSTRUCTIONS TO STUDENTS

1. Write your student ID number in the boxes at the top of this cover page. Do NOT write your name. 2. HIGHLIGHTING of text in the newspaper stories/questions is permitted! 3. Students are to write answers ONLY in the answer spaces provided in this document – do NOT add pages to the document! 4. Use font size 12, Calibri or Times New Roman. 5. The completed Word document: EthicsExam (ONLINE) 2020S.docx must be submitted through Turnitin by the end of the exam at 14:30pm (AEST). 6. Exam submissions received AFTER 14:40pm (AEST) will NOT be accepted. 7. The following is required: Total Questions 3

Total Marks 70

Required Attempt all THREE (3) questions

Examiners Use Only

Q1 (25) Q2 (20) Q3 (25)

Total (70)

Final Examination ONLINE Summer, 2020

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FNCE30009 Ethics in Finance

QUESTION 1

ONLINE Summer, 2020

25 marks

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

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Market Integrity Discuss the ethical issues raised in this story.

Type your answer here:

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FNCE30009 Ethics in Finance

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FNCE30009 Ethics in Finance

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QUESTION 2

20 marks

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 the 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

Whistleblowing – Duty to Employer What do you think are the core deficiencies in Barclays’ whistleblowing policy?

Final Examination ONLINE Summer, 2020

Marks

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FNCE30009 Ethics in Finance

ONLINE Summer, 2020

Type your answer here:

Final Examination ONLINE Summer, 2020

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FNCE30009 Ethics in Finance

QUESTION 3

ONLINE Summer, 2020

25 marks

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

Ethics Theories Discuss FridayFriday’s business model from an outcomes-based (teleological) and a virtue-based (Aristotlean) ethical point of view.

Marks

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FNCE30009 Ethics in Finance

ONLINE Summer, 2020

Type your answer here:

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