A summary of the differences between both, and how they can contradict each other
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Ethical vs. Legal Standards in Finance: What’s the Difference?
Ethical vs. legal standards: what’s the difference? Making decisions that are both ethical and respectful of laws is something that investment professionals around the world are constantly mindful of. Such decisions stem from knowledge of the legal system, having the interests of all parties at heart and an individual’s own professional judgment. Nonetheless, there exist situations where possible actions violate either professional ethics or the law. In this article, we will explore the differences between both and guide decision making in such scenarios.
Defining Ethical Standards
Ethics refers to the moral course of action that takes into account and strives to benefit all stakeholders in a given situation. Prior to making an ethical decision, an individual must be able to identify the possible unethical course of action and label it as such. Ethical conduct also involves striving to create the bestoutcomes for the investment professional, the client and the firm.
For example, an investment fund may explain the risks of investing in different asset classes prior to creating a portfolio or promising clients a certain expected return. While such adisclosure may dissuade some potential new clients, it will improve the firm’s long-termprofitability since this action may reduce the chance of dissatisfied clients pursuing legal action against the firm. An investment firm is not necessarily obligated to make such a disclosure but may do so in a bid to be perceived as ethical.
Defining Legal Standards
Within the investment industry, defining legal standards is much easier than ethical standards. Acting legally means respecting the applicable bodies of law in the firm’s jurisdiction. For example, a company may be required to have accounting practices that adhere to the GAAP or IFRS standards.
Such laws have been put into place by regulators after considering all impacts that new legislation will have. Laws are usually reactive, meaning that they are implemented after major scandals and aim to remedy an unhealthy environment; such as the Sarbanes-Oxley Act. The best laws are proactive and aim to prevent scandals by requiring preventative, best-practice actions.
Ethical, but Illegal
Going back to ethical vs. legal standards dilemma, a decision can be ethical but violate certain laws. A common example of this is “whistleblowing,” or an individual’s disclosure of dishonest, corrupt or illegal activity. While it may be ethical to denounce such activity, doing so may violate organizational policies and thus be considered illegal.
When faced with a dilemma like this, an investment professional should consider the repercussions of his actions prior to acting. There may be alternative systems put into place to remedy such activity such as having internal discussions or using an anonymous tipping service. Point being, there are no set frameworks in place to guide an individual’s behavior in such situations. The investment professional will have to resort to his/her best judgment and follow the course of action that will bring the most benefit to clients, family, colleagues, employers, and market participants.
Unethical, but Legal
Conversely, a decision can adhere to certain bodies of law but be seen as unethical. For example, some countries do not have laws that prohibit trading while in the possession of insider knowledge. Thus, while it may be legal to trade under these circ*mstances, it is considered by many to be highly unethical.
Here again, an investment professional should consider the full repercussions of his/her actions. For instance, the professional may ask themselves why they are in possession of such information in the first place and take actions to avoid being in such situations again in the future. Alternatively, the professional may choose to ignore this information and continue trading as per normal.
Conclusion
When investment professional finds themselves in a situation where the only obvious courses of action violate ethical or legal principles, they must assess the situation and consider new courses of action that don’t. More importantly, firms and individuals must constantly take proactive action to mitigate the likelihood of such situations arising.
Additional Resources
CFI now offers the Business Essentials Bundle with courses on Microsoft Excel, Word, and PowerPoint, business communication, data visualization, and an understanding of corporate strategy. To keep learning, we suggest these resources:
- Professional
- Accounting Ethics
- GAAP
- IFRS Standards
- Sarbanes-Oxley Act
- See all ESG resources
FAQs
Laws clearly define what a person can and cannot do; breaches of law result in punishment and/or penalty. Ethics and codes of ethics guide people regarding what is good or bad, right or wrong.
What are the differences between law and ethics? ›
Ethics and law are the different forms of rules by which humans are expected to behave themselves in the society. Ethics represents internal system of controls, and Law refers to an external mechanism of control.
What is an example of ethical and legal? ›
Legal issues may include copyright infringement, data privacy, and employee compensation. Ethical issues may include bribery, discrimination, or deceptive business practices.
What is the difference between legal behavior and ethical behavior? ›
The legal framework establishes laws that govern behavior, while the ethical framework contains sets of standards and rules governing the behavior of individuals within groups or professions.
What is an example of something legal but not ethical? ›
According to the law, you should never go above the speed limit regardless of circ*mstances. However, not keeping up with the flow of traffic can cause accidents in which people can be maimed or killed. Therefore, doing the legal thing, in this case, is not ethical.
What are ethical standards? ›
First, ethics refers to well-founded standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues.
What is the main difference between moral ethics and law? ›
Ethics as a discipline is concerned with what is morally good and bad, and right or wrong, while morality deals with standards and rules of good conduct in society, and law, as a cognitive process, regulates social life through the promulgated rules crafted by a legitimate authority.
Does legal always mean ethical? ›
Laws are not necessarily closely tied to ethics. There might be unjust, unfair, just-plain-wrong laws, such as racist, anti-Semitic, or otherwise discriminatory laws.
What are ethical standards in the workplace? ›
Workplace ethics refers to a specific set of moral and legal guidelines that organizations may abide by. These guidelines typically influence the way employees and customers alike interact with an organization—in essence, workplace ethics guide how organizations serve their clients and how they treat their employees.
Can behavior be legal but unethical? ›
The legal system and ethics are not mutually exclusive, but they can conflict in certain situations. For example, a law may allow something that is harmful or unfair, while an ethical principle may demand the opposite.
Ethical violations by attorneys are based on California Rules of Professional Conduct. Such violations are more common than legal malpractice, in part, because though an ethical violation may form a basis for a legal malpractice, an ethical violation does not always mean there was a legal malpractice.
What is an example of unethical behavior? ›
Any unlawful conduct, such as stealing someone's stuff or assaulting colleagues, are some common examples of unethical behavior in the workplace.
What is an example of ethics in everyday life? ›
Ethics, our daily lives have ample examples of ethics. From obeying our elders to respecting decisions of our siblings and friends. To express right or wrong in a way so as to not hurt others plus not compromising your self respect.
What is an example of legal but unethical in healthcare? ›
Something can be unethical but perfectly legal. For example: if the emergency room is constantly backlogged, it's not legally required for the healthcare facility or hospital administrators to speed up their work.
What is an ethical example? ›
Examples of ethical behaviors in the workplace includes; obeying the company's rules, effective communication, taking responsibility, accountability, professionalism, trust and mutual respect for your colleagues at work. These examples of ethical behaviors ensures maximum productivity output at work.
What is the difference between ethics and the law Quizlet? ›
What is the difference between ethics and laws? Ethics are the knowledge of right and wrong. Laws are established by governments to help people live peacefully together and to ensure order and safety.
What are the similarities and differences between ethics and morality? ›
Ethics are usually based on logical reasoning and a shared set of values, while morality is often based on gut instinct or religious beliefs. Ethics tend to be more objective, while morality is often subjective. Ethics are universal, while morality is often culture-specific.
What is the difference between fairness and ethics in law? ›
Fairness is impartial and just treatment or behavior without favoritism or discrimination. Ethics is concerned with what is morally good and bad and morally right and wrong. It would be useful to know how you distinguish the fair from the just.
What is the relationship between ethics and law quizlet? ›
The relationship between ethics and laws, it is important to understand that neither laws or ethics are fixed principles that do not change over time. Ethical beliefs change as time passes; and as they do so, laws change to reflect the changing ethical beliefs of society.
