FIN705 (1)

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FNU FIJINATIONAL UNIVERSITY College of Business, Hospitality and Tourism Studies School of Economics, Banking and Finance Department of Banking and Finance Fin 705 — Ethics in Financial Services Final Examination: Trimester III, 2019 Question Paper This examination constitutes 50% of total assessment of this course and students must score 40/100 in this examination in order to pass this course. Instructions: 1. Time Allowed: 3 HOURS with additional 10 MINUTES reading time. 2. All answers are to be written in the Answer Booklet provided. 3. Write your ID Number on ALL pages of your Answer Booklet and any extra sheets that you use. 4. This is a closed book examination. You are not permitted to access any books, notes or other forms of written or electronic materials. 5. Attach the extra sheets securely at appropriate place before handing-in the Answer Booklet to the supervisor Sections Question Marks Section A : Short Answer Questions | 13 Questions. All are compulsory. 40 Section B: Discussion Questions 5 Discussion Questions. All are compulsory. 30 Section C: Case Studies 1 Case Study. 15 Section D: Essay Writing 2 Questions. Answer any 1. 15 TOTAL/WEIGHT 100/50% FIN705 Trimester III, 2019 Page 1 of 7

SECTION A SHORT ANSWER QUESTIONS (40 MARKS) There are 13 questions in this section worth. All are compulsory. 1. How can conflicts of interest make financial markets less efficient? (2 marks) 2. What advantages can investor derive from efficient markets? Discuss any two. (3 marks) 3. Evaluate two reasons why market timing is seen as unethical. (3 marks) 4. What is the relationship between intrinsic value of a security and its market price? (3 marks) 5. Evaluate an argument in favor of and an argument against banning personal trading by “access persons”. (3 marks) 6. Discuss the welfare enhancing feature of market exchanges. (3 marks) 7. Discuss any two ways in which market timing opportunities can be reduced. (4 marks) 8. Critically evaluate the ethical basis of bankruptcy. (3 marks) 9. Analyse the role of Relationship Investing in improving corporate governance. (3 marks) 10. Critically evaluate one arguments for and one argument against socially responsible investing. (3 marks) 11. Describe the benefits of a self-regulating profession. (3 Marks) 12. Identify and evaluate any two unethical business practices in the insurance industry. (3 marks) 13. Critically evaluate any two ethical concerns related to the banking industry. (4 Marks) FIN705 Trimester 111, 2019 Page 2 of 7

SECTION B DISCUSSION QUESTIONS (30 MARKS) There are six discussion questions in this section. All are compulsory. QUESTION 1 Caleb Smith, an investment adviser, has two clients: Larry Robertson, 60 years old, and Gabriel Lanai, 40 years old. Both clients earn roughly the same salary, but Robertson has a much higher risk tolerance because he has a large asset base. Robertson is willing to invest part of his assets very aggressively; Lanai wants only to achieve a steady rate of return with low volatility to pay for his children’s education. Smith recommends investing 20% of both portfolios in zero-yield, small-cap, and high-technology equity issues. Discuss Smith’s actions from ethical perspective. (5 marks) QUESTION 2 Kontiki is appointed as the lead manager of an initial public offering (IPO) of shares by Borland Ltd. Soon after Kontiki’s appointment, its research staff issue positive research on Borland. Discuss the ethical issue arising in this case and recommend a way in which the issue can be rectified or managed. (5 marks) QUESTION 3 A highly rated research analyst who works for Quail Equities Limited plans to issue a research report on Pheasant Enterprises Limited, a top 50 company, changing a long-standing recommendation from ‘accumulate’ to ‘sell’. Before the research report is issued, Quail advises a select group of Quail’s clients to sell their holdings immediately. Is this ethical? Discuss. (5 marks) QUESTION 4 A bank manager, who was having extensive renovations carried out on his house by a company, allowed that company to run up a large overdraft in his bank. The company got into financial trouble, became insolvent and was wound up. The company complained that the bank manager ought not to have allowed it to run up such a level of debt and felt that it had been treated in a vindictive manner by the manager. The bank argued that the manager had engaged the company in a private capacity and not as a bank manager. i. Has the bank manager acted ethically in allowing the company to run up a larger bank overdraft? Why or why not? (2 marks) ii. Would the corporate/professional Code of Ethics allow for such actions by bank employees? (3 marks) FIN705 Trimester II1, 2019 Page 3 of 7

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QUESTION 5 Let’s assume that you’re dealing with a serious issue, you’ve assembled the facts, they’re accurate to the best of your knowledge, you’ve asked your peers or your manager for advice, and there’s a law or company policy about to be violated, or one of the other triggers discussed earlier indicates a serious problem. Discuss two circumstances in which it is ethical and two circumstances in which it is it is unethical to blow the whistle. (5 marks) QUESTION 6 You are financial director of a large multinational organisation and have been privy to information about a takeover bid to acquire a rival firm. A family friend is considering selling shares in this rival organisation and has asked you, as an expert in the industry, for advice on this matter. What would you do? Identify and describe two ethical principles affected in this case and how. (5 marks) FIN705 Trimester III, 2019 Page 4 of 7

SECTION C CASE STUDIES (15 MARKS) Case Study 1 Corporate watchdog ASIC to sue ANZ over alleged transfer fee rip-off. The corporate regulator is to launch legal action against ANZ over an alleged fee rip-off that could result in the bank being forced to pay a penalty running into the hundreds of millions of dollars. An Australian Securities and Investments Commission (ASIC) spokesman said on Thursday the regulator was “intending to issue proceedings in the federal court against ANZ today” over the alleged misconduct, which relates to the bank charging fees to customers who moved money between their own accounts. ANZ told the stock exchange it understood that “ASIC will seek pecuniary penalties in respect of 1.3m occasions where the fees were applied”. It is believed ASIC will accuse the bank of breaches of the law including misleading and deceptive conduct, unconscionable conduct and making false or misleading representations to customers. These breaches attract maximum penalties of between $1.7m and $2.1m per contravention, implying a total penalty for the bank of in excess of $2 trillion if ASIC succeeds. However, a court is unlikely to apply the maximum possible penalty, meaning a total running into the tens or hundreds of millions is far more likely. ASIC is also expected to accuse ANZ of breaching its core obligations under its financial services licenses to deal with customers “efficiently, honestly and fairly”. However, it will be unable to ask the court for a fine to be imposed for this alleged breach because the fees were charged before changes to the law in February that beefed up penalties. “While ANZ is still considering the matters raised by ASIC, ANZ categorically denies any deliberate wrongdoing and intends to vigorously defend any such allegation,” the bank told the ASX. Before February 2016, ANZ charged customers a fee to set up regular payments from one of their accounts to another. It also charged customers a dishonour fee when there was not enough money in their account to make the scheduled payment Required: i. What kind of ethical issue is this? (1 mark) ii. Evaluate an element of ethics that has been violated by the bank. (2 marks) iii. What exact type of market failure allowed the bank to carry on this unethical activity for so long? Discuss. (2 marks) FIN705 Trimester III, 2019 Page 5 of 7

iv. Evaluate the bank’s action(s) in accordance with the theory of ethical egoism. (2 marks) v. Refer to the second last paragraph of the case study and evaluate it in context of good corporate governance. (2 marks) vi. Is there any force or fraud involved in this case? Discuss. (2 marks) vii. Were the bank’s customers wrongfully harmed? What step(s), if any, the customers could have taken to avoid such a loss? (2 marks) viii. ~ We rarely hear of such news regarding the banking industry in Fiji. Does this mean that the banking industry in Fiji is more ethical than the banking industry in Australia? Discuss. (2 marks) FIN705 Trimester III, 2019 Page 6 of 7

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Section D Essay Writing (15 Marks) Write an essay of 350 to 400 words to answer any one of the two questions provided below. Question 1 Although microfinance as a practice is probably very old, the term itself is very recent. It started to be used in the 60’s and 70’s, when organisations such as ACCION International, Opportunity International and Grameen Bank started to grant small loans (less than 100 dollars) to micro- entrepreneurs, mostly women, backed by a group guarantee, thus overcoming the lack of collateral that was the main reason for the lack of attention paid by commercial banking to the low-income segments of the population. (Argandona, 2009) Critically evaluate the social responsibility of microfinance, importance of microfinance sustainability in its objective of fighting poverty. Question 2 Several academics, including Milton Friedman, have argued that insider trading ought to be legal. Several other commentators have renewed that argument in articles over the past year, often citing the Rajaratnam case. (sevenpillarsinstitute.org) Examine the arguments for and against insider trading. THE END FIN705 Trimester I11, 2019 Page 7 of 7

FIN705 (1)

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