Eduzan

Eduzan / 01 Foundations of Risk Management

FRM 11: GARP Code of Conduct

Worked examples are fully visible. Check-yourself items are study aids you can reveal one at a time.

The Global Association of Risk Professionals publishes a Code of Conduct, called simply the Code, setting out principles of professional conduct for the financial risk management profession. GARP Member is a collective term with wide reach: holders of and candidates for the Financial Risk Manager (FRM) and Energy Risk Professional (ERP) certifications, holders of GARP’s other certifications and diplomas, the Board of Trustees, the Regional Directors, GARP Committee Members and GARP staff.

Ethics sits above the rules, not inside them

Obeying the letter of applicable laws and regulations is only a floor; following their intentions is better. The Code aims higher again, at “pursuing a universal ethical culture”, and some of the biggest risks a firm carries break no law at all. No single prescriptive ethical standard fits the whole world, so professional standards and generally accepted risk management practices form an evolving shared body, weighed against the culture of the global community where the practitioner works.

Figure 1: How the Code is put together

Sections I and IV frame the Code proper in the middle band.

Check yourself

Does an FRM candidate who has passed no exam come under the Code?

Yes. GARP Member covers candidates, certification and diploma holders, GARP staff, Committee Members, Regional Directors and the Board of Trustees.

Professional integrity and ethical conduct

Principle 1.1 requires members to “act with honesty, integrity, and competence”, and to uphold the reputation of the profession. It also names an abuse: “disguised contrivances” in assessments, measurements and processes, meaning technique dressed up as legitimate that buys advantage “at the expense of honesty and truthfulness”.

Conflicts of interest

Principle 1.2 begins with a duty to promote the interests of all relevant constituencies. A member will not knowingly perform risk management services involving an actual or potential conflict of interest, directly or indirectly, unless full disclosure has reached every affected party, and an apparent conflict counts too. Unavoidable conflicts are disclosed and managed.

Confidentiality

Principle 1.3 requires all reasonable precautionary measures against disclosure of confidential information, unintentional disclosure included.

Professional standards

Standard 2.1 sets fundamental responsibilities: work at the highest level of professional skill, encourage others to do likewise, keep perfecting your expertise, and accept that ethical responsibility is personal and cannot be outsourced or delegated. Standard 2.2 asks members to promote and adhere to applicable “best practice standards”, including in work under their direct supervision or management. Risk management, in the Code’s phrase, “does not exist in a vacuum”, so effects on colleagues, the community and the environment belong in the judgement. Standard 2.3 requires firm communications to be clear, suited to the circumstances and the intended audience, and consistent with applicable standards of conduct.

Check yourself

When may a member accept an engagement carrying a potential conflict of interest?

Only after full disclosure of the actual or apparent conflict to all affected parties, and an unavoidable conflict is managed as well as declared.

Group 1: professional integrity and ethical conduct

Rules 1.1 to 1.7 govern dealings with employers, clients, the public and fellow practitioners in financial services. Rule 1.2 asks for reasonable judgment alongside “independence of thought and direction”, and bars gifts, benefits, compensation or other consideration that might reasonably compromise the objectivity of the member or of another. Rule 1.3 requires reasonable precautions against a member’s services being put to improper, fraudulent or illegal use. Rules 1.4 and 1.5 forbid knowing misrepresentation of analysis or recommendations, and any dishonesty or deception reflecting badly on character, trustworthiness or the profession. Rule 1.6 rules out acts compromising the integrity of GARP, of the FRM designation, or of the examinations behind it. Rule 1.7 covers geography: be mindful of cultural differences, avoid what appears unethical locally, and where standards conflict or overlap apply “the higher standard”.

Groups 2 and 3: conflicts and confidential information

Rules 2.1 and 2.2 require fair dealing plus full and fair disclosure, of any actual or potential conflict to affected parties and of anything that might impair independence and objectivity or interfere with duties owed to an employer, clients and prospective clients. Rules 3.1 and 3.2 bar confidential information from inappropriate purposes and personal benefit, and hold confidentiality over the member’s work absent prior consent.

Example 1 · Worked

A risk manager reviewing counterparty limits learns that a bank client will soon announce a large asset sale. A broker chasing the bank’s execution business offers a seat in a corporate box, and the manager also plans to buy the client’s shares.

1. Which rules are engaged, and what should the risk manager do?

Solution. The invitation engages Rule 1.2: a benefit of that size from a party seeking business might reasonably compromise objectivity, so it should be declined, or cleared and disclosed under the employer’s policy. Buying the shares engages Rule 3.2, which forbids personal benefit from confidential information, and Rule 3.1, since no consent exists. Rule 1.5 sits behind both.

Check yourself

A custom is accepted locally but looks unethical elsewhere. What does Rule 1.7 require?

Respect the difference, avoid actions that merely appear unethical, and where standards conflict or overlap apply the higher of them.

Group 4: fundamental responsibilities

Rule 4.1 demands compliance with all applicable laws, rules and regulations, the Code included, and forbids knowingly assisting a violation. Rule 4.2 repeats that ethical responsibilities cannot be outsourced or delegated. Rule 4.3 asks members to understand the needs and complexity of the employer or client and to supply suitable advice. Rules 4.4 and 4.5 demand candour: no “overstating the accuracy or certainty” of results, and clear disclosure of the limits of the member’s knowledge and expertise on risk assessment, industry practices and applicable law.

Group 5: generally accepted risk management practices

Rule 5.1 asks for diligence and for work independent of interested parties, with risk information collected, analysed and distributed at the highest level of professional objectivity. Rule 5.2 requires familiarity with current generally accepted risk management practices and a clear statement of any departure. Departing is allowed; departing quietly is not. Rules 5.3 and 5.4 govern output: communications carry factual data and no false information, and analysis keeps fact and opinion apart.

Applicability, local law and enforcement

Local laws and regulations may impose obligations of their own, and where they conflict with the Code, “such requirements will have precedence”. Consequences follow a formal determination that a violation has occurred, not an allegation. A violation may then bring temporary suspension, or permanent removal from GARP’s membership roles, and it can also strip the violator, temporarily or permanently, of the right to use the FRM designation or any other designation GARP has granted.

Figure 2: What follows a violation

The listed outcomes are examples, not a closed list.

Example 2 · Worked

A risk analyst builds a stress scenario on a method the firm has not adopted and that departs from current industry practice. The board receives one confident figure described as conservative, with no mention of the method or its limits.

1. Identify the breaches and state the likely range of consequences.

Solution. Four rules give way. Rule 5.2, because a departure from generally accepted risk management practices has to be indicated clearly. Rule 4.4, because calling that figure conservative overstates the certainty of the result. Rule 4.5, because the limits of the method went undisclosed. Rule 5.4, because opinion was served up as fact. Consequences arrive only after a formal determination, running from temporary suspension to permanent removal.

Check yourself

Local regulation permits something the Code discourages. Which one governs?

The local requirement takes precedence where it conflicts with the Code, but only for binding obligations. Where customs or standards clash, Rule 1.7 points to the higher standard.

End of lesson.

Back to 01 Foundations of Risk Management

FRM 11: GARP Code of Conduct

What the GARP Code of Conduct is and who it applies to

Ethics sits above the rules, not inside them

GARP Code principles: integrity, conflicts of interest and confidentiality

Professional integrity and ethical conduct

Conflicts of interest

Confidentiality

Professional standards

Rules of Conduct on integrity, conflicts of interest and confidential information

Group 1: professional integrity and ethical conduct

Groups 2 and 3: conflicts and confidential information

Generally accepted practices and the consequences of violating the GARP Code of Conduct

Group 4: fundamental responsibilities

Group 5: generally accepted risk management practices

Applicability, local law and enforcement