FPC002B T1 v3 topic 1 PDF

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Topic 1:

Introduction to ethics, including individual cognitive bias and sources of judgment and decision bias

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Topic 1: Introduction to ethics, including individual cognitive bias and sources of judgment and decision bias

Ethics and Professionalism in Financial Advice

Contents Overview ...................................................................................................................................... 1.1 Topic learning outcomes ......................................................................................................................... 1.1 1

The ethics of decision making ............................................................................................ 1.2

1.1

What is ‘ethics’? .......................................................................................................................... 1.2

1.2

Hypotheticals .............................................................................................................................. 1.2

2

Ethical theories ................................................................................................................. 1.4

2.1

Virtue ethics ................................................................................................................................ 1.4

2.2

Deontological theory................................................................................................................... 1.4

2.3

Teleological theory...................................................................................................................... 1.5

3

Barriers to ethical decision making .................................................................................... 1.8

3.1

Partisanship ................................................................................................................................. 1.8

3.2

Rationalisation .......................................................................................................................... 1.10

3.3

Implicit bias/unconscious bias .................................................................................................. 1.12

3.4

Ethical blindness........................................................................................................................ 1.14

3.5

Ethical fading ............................................................................................................................. 1.16

3.6

Ethical scripts ............................................................................................................................ 1.16

3.7

The impact of membership of a ‘profession’ ............................................................................ 1.17

3.8

The impact of ‘organisational culture’ ...................................................................................... 1.18

4

Ethical frameworks...........................................................................................................1.21

4.1

The consequentialist framework .............................................................................................. 1.21

4.2

The duty framework.................................................................................................................. 1.21

4.3

The virtue framework ............................................................................................................... 1.22

4.4

Applying the frameworks to cases ............................................................................................ 1.23

Summary .....................................................................................................................................1.24 References ..................................................................................................................................1.25

Ethics and Professionalism in Financial Advice | FPC002B_T1_v3

© Kaplan Higher Education

1.1

Nothing is more difficult, and therefore more precious, than to be able to decide. (Napoleon Bonaparte, Maxims, 1804)

Overview The first two topics in this subject provide students with foundation knowledge in ethics and professionalism, respectively, essential to understanding and examining their obligations as financial advisers under the newly created Financial Adviser Standards and Ethics Authority Ltd (FASEA) Code of Ethics (which is addressed in Topic 3). For centuries, scholars, philosophers and professionals have struggled with the concept of ethics. In attempting to reach a simple definition, general agreement now seems to have been reached that ‘ethics’ falls within the philosophical study of morality. For the purposes of this topic, we will look at two approaches to understanding ethics: goodness (what ends we ought to pursue) and right action (the principles of right and wrong). This topic introduces the concept of ‘ethics’ and its application to financial advisers. We will explore several schools of thought on how best to conceptualise and understand ‘ethics’, as well as the many barriers that may exist in preventing people from making ethical decisions. We will do so in the context of the role of a financial adviser. We will also look at how financial advisers can apply ethical concepts to their decision making by unpacking the tension between the rules that apply to them and their own personal values. This tension can be described as the interface between role morality (the rules, legislation and employment requirements that impact advisers) and ordinary morality (the values, beliefs and norms held by the adviser as a member of the general community). In order to explore such conduct, it is first necessary to understand the differing schools of thought about how one should view the impact or outcome of ethical decision making. This topic specifically addresses the following subject learning outcomes: 1. Explain the role of ethical frameworks and professional standards within the financial planning profession. 2. Assess the impacts of cognitive, judgment and decision biases on financial advisers and their clients.

Topic learning outcomes On completing this topic , students should be able to: • explain the concept of ethics and the role of ethical frameworks within the financial planning profession • analyse barriers to ethical decision making • gauge the implications of certain types of biases upon financial advisers and their clients.

Ethics and Professionalism in Financial Advice | FPC002B_T1_v3

© Kaplan Higher Education

1.2

1

The ethics of decision making

1.1

What is ‘ethics’? It is difficult to ascribe a single definition to the word ‘ethics’ because ethics means many different things to different people. At its most basic, ‘ethics’ is, according to the Lexico Dictionary, ‘moral principles that govern a person’s behaviour or the conducting of an activity’ or ’the moral correctness of specified conduct’ (Lexico Dictionary 2019a). Ethics is therefore about deciding between good and bad, between right and wrong. Ethics falls within the school of moral philosophy. According to Thomas Hobbes, ‘Moral philosophy is nothing else but the science of what is good and evil in the conversation and society of mankind’. (Hobbes 1909–14 [par. 40]). We all like to think of ourselves as good, ethical people. Research reveals that unethical decisions are more likely to occur when: • the person making the decision fails to see the decision as involving any ethical issues, or • when a person making a decision believes that any ethical issues that can be identified can be overcome. This is because people generally believe that they view the world objectively and we ‘see ourselves as more fair, unbiased, competent, and deserving than average; and to be overconfident about our abilities and prospects’ (Robbennolt & Sternlight 2013, p. 1116).

‘Required reading 1’ in KapLearn.

1.2

Hypotheticals Throughout this subject, you will be encouraged and challenged to assess your awareness and develop your understanding of ethical decision making by examining hypothetical scenarios and case studies. These can be considered individually or are also suitable for generating discussion with peer students or colleagues. Hypotheticals presented throughout this subject cannot be seen as legal advice or a legal interpretation of compliance with the FASEA Code of Ethics (FASEA 2019). They are designed to challenge you to pose your own thoughts about what one ought to do under certain circumstances. For this reason, you might even disagree with the thoughts here or the opinions of others, which can form a great basis for an ethical discussion. It is important to remember that the FASEA Code of Ethics comes into effect from 1 January 2020 and that further guidance and clarification on the Code will be provided by FASEA. Both the Financial Planning Association of Australia (FPA) and Association of Financial Advisers (AFA) have sought further clarification on the interpretation and application of several of the Standards (particularly regarding Standards 2, 3, 5 and 6). Financ ial advisers must determine how they will meet the ethical standards and begin now to assess how their conduct, business practices, systems and processes align with the requirements of the Code. The hypotheticals in the topics are not assessable. However, in your assessments you may be presented with case studies or scenarios in the form of hypotheticals. Consequently, reviewing these hypotheticals and taking part in online forum discussions in KapLearn will provide you with valuable opportunities to apply and test your ethical understanding and thinking.

Ethics and Professionalism in Financial Advice | FPC002B_T1_v3

© Kaplan Higher Education

1.3

We acknowledge that a scenario presented in a course cannot substitute for the ethical decisions you make every day, and for the fact that those decisions will be exercised under the authority of your licensee and in the context of their systems and advice expectations, which cannot be anticipated in presenting this subject. When interacting with your client, it will be your own ethical response to the Code that will be questioned and you should apply your best ethical consideration at that time. These hypotheticals and the course materials and assessments are designed to expand the approach you might take to understand and apply your ethical duty as described in the Code, but they are not a substitute for your ‘real-life’ practice. To get you started, please review the first hypothetical below.

Hypothetical 1 A 59-year-old client wants access to funds from their superannuation to pay out debt to avoid potential bankruptcy and to purchase a house. The client is renting and, as a result of a divorce, has no assets and is in a difficult place in their life. The client informs the adviser that they intend to retire from work, withdraw preserved funds from superannuation and then go back to work a month later with the same company. This arrangement has been cleared by the client’s employer. The adviser is aware of the client’s plans and assists the client to make the withdrawals under an execution-only arrangement. The adviser then provides advice to the client on what to do with the proceeds from the superannuation withdrawal. Guiding considerations for decision making: • In acting as they have done, how is the adviser interpreting the best interest duty? • Beyond illegality, which other values or code expectations have been contravened? To which risks has the adviser exposed their client? • Reflecting more generally (than this situation), how should advisers strike a balance between a client meeting their short-term needs and adhering to a long-term strategy?

Ethics and Professionalism in Financial Advice | FPC002B_T1_v3

© Kaplan Higher Education

1.4

2

Ethical theories

2.1

Virtue ethics The difficulty we face in making ethical decisions tends not to be at the extremes of good and bad or right and wrong, but where our options are in the grey area — where the choice of action may be just a little more correct or a little more wrong. The great Greek philosopher Aristotle (384–322 BC) believed that one became a good person by making good choices. He developed a philosophy he called ‘phronesis’, or practical wisdom. Aristotle believed that the ability to choose wisely should emerge from genuine personal reflection about virtues. Aristotle’s concept of virtue suggests that one should focus on the virtuous character of the individual. In doing so, one should ask ‘what kind of person should I be in order to be a good person?’ This question is different to the question ‘what is a good action?’ Virtue ethics is therefore person-based rather than action-based. Virtue ethics looks at the virtue or moral character of the person carrying out an action rather than at ethical duties and rules, or the consequences of particular actions. Virtue ethics not only deals with the rightness or wrongness of individual actions but provides guidance as to the sort of characteristics and behaviours a good person will seek to achieve. In that way, virtue ethics is concerned with the whole of a person’s life rather than particular episodes or actions. Virtue theorists posit that there is a common set of virtues all human beings would benefit from, rather than different sets for different sorts of people, and that these virtues are natural to mature human beings — even if they are hard to acquire. These virtues are traditionally said to include the following: • prudence • justice • fortitude • temperance.

2.2

Deontological theory While virtue ethicists such as Aristotle focused on self-reflection, other ethicists have focused on actions. German philosopher Immanuel Kant (1724–1804) believed that certain types of actions (including murder, theft and lying) were absolutely prohibited, even in cases where the action would bring about more happiness than the alternative. In other words, we are morally obligated to act in accordance with a certain set of principles and rules regardless of the outcome of so acting. This school of thought is formally known as a ‘deontological’ or ‘rule-based theory’. The word ‘deontological’ comes from the Greek word deon, which means ‘duty’. Deontological theories hold that some acts are always wrong, even if the act leads to an admirable outcome. Actions in deontology are therefore always judged independently of their outcome. An act can be morally bad but may unintentionally lead to a favourable outcome. Kant’s deontological theory derives from human reason. Kant’s theory is based on his view of the human being as having the unique capacity for rationality. According to Kant, the moral worth of an action is determined by the human will, which is the only thing in the world that can be considered good without qualification. Kant believed that moral principles should be seen as laws that issue from mankind’s reason. According to Kant, these moral principles should be based in laws, codes and rules and that the moral principles should be absolute and focused on fairness.

Ethics and Professionalism in Financial Advice | FPC002B_T1_v3

© Kaplan Higher Education

1.5

Kant’s moral principles consist of a set of maxims which he called ‘categorical imperatives’. There are three formulations of the ‘categorical imperative’, as follows: Act only according to that maxim whereby you can at the same time will that it should become a universal law without contradiction. Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end but always at the same time as an end. Therefore, every rational being must so act as if he were through his maxim always a legislating member in the universal kingdom of ends. (Kant 1785 as cited in Shakil 2013) The first maxim (universality) posits that moral rules should be universal. Kant says that we should always act in such a way that we would be willing for it to become general law that everyone else should do the same in the same situation. So, if you are not willing for an ethical rule you claim to be following to be applied equally to everyone, then that rule is not a valid moral rule. The first maxim is similar to the golden rule — ‘Do not impose on others what you do not wish for yourself.’ The second maxim (human dignity) posits that moral rules must respect human beings. According to Kant, people should always be treated as valuable — as an end in themselves — and should not just be used in order to achieve something else. They should not be tricked, manipulated or bullied into doing things. The third maxim (consistency) posits that we ought to act only by maxims that harmonise with a possible kingdom of ends. In other words, we have a perfect duty not to act by maxims that create incoherent or impossible states of natural affairs when we attempt to universalise them, and we have a duty not to act by maxims that lead to unstable or greatly undesirable states of affairs for all parties involved. Kant’s ethics is not the only example of deontology; any system involving a clear set of ru...