Ethics and Professionalism In Financial Services (Seminar 5) Flashcards
Define ethics and describe the elements that underlie the definition.
The term ethics is derived from the Greek word ethos meaning the custom, character or disposition that creates the goodness in people. Ethics represents the fundamental principles that guide right from wrong in human conduct. At its most basic, ethics addresses the question of how we live our lives, how we relate to members of our community and how our actions affect others. How we live and relate to others is underpinned by ethical decision-making and behaviour, and managing the balance between right and wrong. The labels of ‘good’ and ‘bad’ will often over simplify what could be complex and dynamic issues and situations. To this end, ethics refers to well-based standards of conduct that prescribe what people ought to do and how they should behave, with an emphasis on doing good and avoiding harm to others.
How does the study of behavioural ethics differ from moral reasoning and descriptive ethics?
Moral reasoning can be defined as being the process in which individuals try to determine the difference between what is right and what is wrong by using logic. People make this decision by reasoning the morality of their potential actions, and through weighing their actions against potential consequences.
Behavioral ethics is distinguished from the concept of moral reasoning by arguing that ethical behavior is primarily driven by a diverse set of intuitive processes over which individuals have little conscious control.
Much behavioral ethics research addresses the question of why good people do bad things. Specifically, behavioral ethics is the study of systematic and predictable ways in which individuals make ethical decisions and judge the ethical decisions of others that are at odds with intuition and the benefits of the broader society. By focusing on a descriptive rather than a normative approach to ethics, behavioral ethics is argued to be better suited than traditional approaches to address the increasing demand from society for a deeper understanding of what causes even good people to cross ethical boundaries.
What are some of the factors identified by behavioural ethics that may impede ethical decision making?
Research in behavioural ethics finds that people are not entirely rational when making ethical decisions. Most ethical choices are made intuitively, by feeling, not after carefully analysing a situation.
Usually, people who make unethical decisions are unconsciously influenced by internal biases, like the self-serving bias, by outside pressures, like the pressure to conform, and by situational factors, such as incentives, that they do not even notice.
Discuss the ethics of the following phrase: ‘if it’s legal it’s okay’.
Decision-making governed by legally binding rules provides three advantages:
• law provides a provides an ethical minimum
• law embodies many of society’s common beliefs and values
• the law consists of enforceable rules
However, lawful decisions are not always ethical. Laws may be outdated or silent on ethical issues, and thus out of line with contemporary values of society. Laws best to be considered as minimum acceptable standards of decision-making, and that occasionally you must go beyond the law to arrive at an ethical decision
Where do the ‘satisficing’ and ‘dilemma resolution’ decision-making approaches sit in the hierarchy of ethical decision-making, and why?
‘Satisficing’ involves making ‘adequate’ or ‘satisfactory’ decisions (decisions are characterised as less than optimal but satisfactory). Instead of rationally searching for the ‘best’ alternative, decision-makers satisfice. Thus satisficing reduces the complexity of decision-making by reducing the number of alternatives that must be considered.
‘Dilemma resolution’ recognises that ethical scenarios often do not have a single ‘right’ answer. Ethical dilemmas are recognisable by their irresolvable nature due to equally compelling arguments for each alternative. An ethical dilemma will often represent a forced choice between two or more bad alternatives, or two or more good alternatives. An ethical dilemma therefore involves a choice between equally acceptable or unsatisfactory alternatives, whereas a problem clearly defined and understood will have a clear solutions for what ought to be done.
Define professional ethics and what it means to serve the public interest.
Professional ethics takes on the additional burden of ethical responsibility concerned with acting in a professional capacity. Professional ethics is the discharge of a duty of professional care consistent with the norms of the profession in which the member practises. These written codes provide rules of conduct and standards of behaviour based on the principles of professional ethics, including objectivity, integrity, confidentiality, technical competence, due care and the public interest.
Public interest refers to the interests of the public-at-large in terms of what should be in the general interest of a civic-society if a rational, objective, long-term assessment of a situation is taken. To stay within the membership of a ‘profession’, a member must attempt not to bring the profession into disrepute.
Describe how ethical decisions are made. Why is it that decisions in business and professional settings are not always ethical?
Ethical decision-making is the ‘process of identifying a problem, generating alternatives, and choosing among them so that alternatives selected maximise the most important ethical values while achieving the intended goal’ (Guy, 1990, p. 39). In business and professional contexts, important ethical values (including integrity, openness, trust and fairness) are espoused in professional and corporate codes of ethics. These codes take on the additional burden of responsibility of prescribed behaviour to include objectivity, integrity, confidentiality, technical competence, due care and the public interest.
Members of a professional association have the responsibility of serving the public interest and adhering to general standards of public accountability. This means the responsibilities of a professional to their clients, professional association or employer are secondary to the good of society (Willmott, Cooper & Puxty, 1993). In other words, if the professional is facing a conflict between a duty to their client and doing something that may bring harm to the public, such as publicly disclosing inaccurate information, then their first priority is to the public. To knowingly release false information is unprofessional and unethical because it brings harm to those who are most reliant on this information: typically investors, employers and, ultimately, the public. There are always victims in cases involving unprofessional or unethical conduct, many of whom are innocent. Herein lies the ethical dilemma for professionals in practice: they have a fiduciary obligation to direct stakeholders such as employers and clients, but a larger responsibility to the public. A conflict of interest between these stakeholder groups arises when the interests of all stakeholders are not aligned.
What is the primary purpose of a code of ethics?
The code of professional conduct is a set of rules designed to induce a professional attitude and behaviour consistent with high ethical standards accepting of the public. Thus, the primary purpose of a code of professional conduct is to deter and prevent questionable behaviour of practitioners that may bring harm to their clients and the public.
Codes provide the moral foundation for its members by conveying principles of professional conduct, which establish the minimum standards of professional behaviour. Minimum standards of behaviour have two aims: first, they provide a reference tool for members in making ethical decisions; and second, they provide the benchmark for assessing the ethics of a member’s conduct.
What does it mean when we talk about the code of ethics as the benchmark for professional behaviour?
The appropriateness of a member’s ethical or professional conduct is judged by benchmarking that member’s actual conduct against the expected behaviours derived from the principles of professional conduct. In short, behaviours that are consistent with the principles of professional conduct are deemed professional and behaviours that are inconsistent with the principles of professional conduct are unprofessional. Consequently, a code of professional ethics serves as a benchmark of appropriate professional behaviour.
Define ‘conflict of interest’, its various elements and the potential problems arising from conflict of interest situations.
Conflicts of interest occur when the interest of the professional (the professional, firm of professionals, or a related party) conflicts with the interests of another party (client or employer). The following are considered essential elements in the definition of ‘conflicts of interest’:
• Fiduciary relationship: the professional has a primary duty to act in the best interests of the other party over their own interests, usually the client.
• Proper exercise of duty: conflict of interests interferes with the professional’s ability to discharge their fiduciary duties properly.
• Self-interest: conflicts of interest normally arise from the professional’s desire to promote his or her own interest.
• Real or imaginary conflict of interest: whether the conflicts of interest are real or imaginary, the outcomes and hindrance on performance are the same.
• Actual or potential harm: actual harm is not a necessary condition of a conflict of risk, only the potential for harm.
Conflicts of interest are problematic because professionals facing a conflict are likely to ignore their fiduciary duties and favour their self-interest ahead of the interests they are obligated to serve. The actions of professionals swayed by a conflict of interest are likely to bring harm to others.
Describe the strategies available to a professional in resolving a conflict of interest.
There are three ways in which an professional may avoid a conflict of interest:
a. An professional may remove themselves from the conflict and allow someone else to
assume their professional responsibilities.
b. An professional may resign from the position or relationship that is creating the conflict
but such an action may bring financial hardship to the professional.
c. An professional may disclose the conflict to all interested parties and allow interested parties to judge for themselves the likelihood of damage, if any, and by giving consent, the interested parties agree to bear the risk of the adverse effects from the conflict of
interest.
What is a commission? How may a commission create a conflict of interest?
Commissions (cash and non-cash items) are generated for recommending or referring a product or service, usually for the purchase or sale of a financial product supplied by a third party. For example, financial advisers may receive commissions from third parties in connection with the sale to a client of financial instruments, such as insurance products.
Accepting such commissions may give rise to a self-interest threat because sound judgment may be influenced by dependency on the commission from the product supplier. That is, a commission bias arises when advisers favour the selling of one product over another in order to earn a higher commission.
There is a general prohibition on financial advisers receiving or accepting ‘conflicted remuneration’ in relation to a financial product (FoFA, 2011)
Section 923A of the Corporations Act (2001) prohibits a person from using certain restricted words and expressions in relation to a financial services business or in the provision of a financial service.
a. Identify three restricted words for the purpose of s923A.
b. Under what circumstances may an individual use the restricted words outlined in s923A?
a. Section 923A(5)(a) specifies that the words ‘independent’, ‘impartial’, and ‘unbiased’, or any other words “of like import” are restricted words for the purposes of s923A. Use of those words as part of another word or expression is also restricted: s923A(5)(b).
Similarly, a financial service provider cannot use terms such as ‘independently owned’, ‘non-aligned’, and ‘non-institutionally owned’ if it does not satisfy the conditions in s923A
b. the person (including anyone providing a financial service on their behalf or anyone on whose behalf they are providing a financial service) does not receive:
– commissions (apart from commissions that are rebated in full);
– forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product; or
– other gifts or benefits from product issuers which may reasonably be expected to influence that person;
• the person operates free from direct or indirect restrictions relating to the financial products in respect of which they provide financial services; and
• the person is free from conflicts of interest that might arise from any relationships with product issuers and which might reasonably be expected to influence the person.
Case Study:-
Wealthinvest, a product issuer, owns a financial planner group called Lark. Lark’s advisers only advise on and sell Wealthinvest’s products. Lark does not use any of Wealthinvest’s branding or logos, but if you look closely enough on Lark’s website there is a small paragraph which says that Lark is a wholly-owned subsidiary of Wealthinvest. Lark’s financial services guide and statement of advice also say, in the fine print, that Wealthinvest owns Lark. Discuss.
The conflict here arises because clients might not realise that Lark’s services are restricted and that the advice that its advisers give is biased. Lark needs to be confident that, given the limited product range available to its advisers, it is still possible to provide advice that is appropriate and in the best interests of clients.
For disclosure to be an effective part of managing this conflict of interest, the client must understand the relationship between Lark and Wealthinvest and how that relationship affects Lark’s advisers’ product recommendations. The client should clearly understand that the adviser cannot recommend other issuer’s products and that the advice will be limited and as such the client might suffer detriment.
For each scenario, identify and describe any potential breaches of the FASEA Code of Ethics
Case Study A:-
Anna and Brian, a married couple, are seeking advice on improving the performance of their superannuation funds. The adviser (Margo) is an authorised representative of Acme Financial Planning Pty Ltd.
Margo advises Anna and Brian to roll over their superannuation benefits from their current funds (not related to Acme) to Acme funds. Margo does not attempt to compare Brian’s likely returns if he were to stay in his current fund with those from the Acme Fund. She ignores (or does not address) the increased ongoing fees that Anna will have to pay in the Acme Fund.
Margo has failed to demonstrate, realise or promote the Values of competence and diligence. She has breached:
• Standard 2—her advice was not in the best interest of either Anna or Brian;
• Standard 3—as Acme received a benefit from the implementation of her advice to switch
to Acme funds;
• Standard 10—her failure to consider relevant issues (Brian’s likely returns, and Anna’s ongoing fees) does not demonstrate competence.
