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Question 1 (20 marks | Word limit: 400 words)
LO1: Explain the role of ethical frameworks and professional standards within the financial planning profession. LO2: Assess the impacts of cognitive, judgment and decision biases on financial advisers and their clients. Unethical decisions are more likely to occur when the person making the decision either fails to see the decision as involving any ethical issues or believes that any ethical issues they have identified can be overcome.
Define and discuss, with a brief example of how a financial adviser’s ethical decision making in dealings with a retail client could be adversely affected by:
(a) virtue ethics (10 marks)
http://www.bbc.co.uk/ethics/introduction/virtue.shtml Virtue ethics centres around the virtues and moral character of the person carrying out the action, instead of focusing on the consequences of particular actions or the ethical duties and rules they should adhere to. It is often referred to as person-based or character-based ethics and maintains that a right act is the action a virtuous person would do in the same circumstances (bbc ethics). As such, virtue ethics looks at traits of character and is predicated on the belief that one can become a good person by making good choices. Its intent is to provide guidance in terms of the type of behaviours and characteristics to strive towards in the quest to be a ‘good person.’ Traditionally, these virtues include, but are not limited to, the following: - Prudence - Justice - Fortitude - Temperance A financial adviser could find themselves adversely affected by virtue ethics because it often doesn’t provide clear guidelines on what to do in moral dilemmas, and as a result there may be two opposing actions that are deemed ethical. An example of this could be if a financial adviser has a client that recently gifted a large sum to his daughter to enable her to purchase a home for herself and her children after a nasty divorce. He is 70, has recently lost his job, and finds himself needing to apply for the age pension. If the gifting is reported he will not be eligible for the pension. Noting that the client’s situation was a result of a selfless action the adviser might conclude that a virtuous person would show compassion and as such it would be ethical to not report the gifting so the client could claim the pension. Conversely, the adviser could decide a virtuous person would tell the truth and advise his client to report it even if it meant he would find himself in financial hardship. The subjective nature of determining how a virtuous person would act lends itself to many courses of action being potentially deemed ethical even though they may not necessarily abide by the either the code of ethics financial advisers are required to follow, or be permissible by law.
An agency relationship is one which exists between an adviser (the agent) and their client (the principal), where the agent is authorised to act on behalf of the principal and should set aside their own interests in favour of the principal – Investopedia. It is classed as a fiduciary relationship which means that special trust and confidence is placed on the agent to act for the benefit of the principle in all matters. An agency relationship may lend itself to an implicit bias where an individual may be more willing to make unethical decisions on behalf of, or through others.
A financial adviser could fall foul of this bias if they were seeking to maximise a client’s investment returns at any cost. Trying to win at any cost, even if it is with the ultimate good intention of doing something positive for the client, can lead to many unethical or illegal decisions, an example of which would be insider trading. Question 2 (20 marks | Word limit: 250 words) (a) Define deontological theory and examine how Adam’s conduct would be viewed according to deontological theory. (10 marks)
Deontological theory can be said to be a rule-based or duty-based system of ethics. It maintains that actions are not justified by their consequences, and as such, factors other than a good outcome determine right actions from wrong. Deontology acknowledges that actions and their outcomes are independent things that are judged separately. It places emphasis on the acts themselves, noting that we are morally obligated to act in accordance with a set of principles and rules regardless of the outcome produced, or in other words, we have a duty to do the right thing, even if it produces a bad result. Conversely, an action cannot be justified simply by proving that it produced a good outcome.
According to deontological theory Adam’s conduct would be deemed to be morally wrong. He has allowed Graham and Betty to continue misrepresenting their income while being aware that they are unlikely to be eligible for the benefits they are receiving. The outcome of this action could be seen to be good as Graham and Betty by all accounts are good, hard working people, and Adam’s conduct has allowed them to retain their family support benefits. However, deontological theory is not concerned with the consequence of the action but the action itself, and in this case Adam is complicit in their lie and has turned a blind eye to fraud which would constitute a morally reprehensible act, regardless of the good it may be seen to produce.
(b) Define teleological theory and examine how Adam’s conduct would be viewed according to teleological theory. (10 marks)
https://www.britannica.com/topic/teleological-ethics http://faculty.msj.edu/whiter/moraltheories.htm https://plato.stanford.edu/entries/consequentialism/ Encyclopedia Britannica defines teleological theory as a ‘theory of morality that derives duty or moral obligation from what is good or desirable as an end to be achieved.’ It is essentially a consequentialist or goal-based theory that judges whether something is right by what its consequences are and is epitomised by the notion that the ends justify the means. Teleological theory is often referred to as utilitarianism which is founded on the concept that an action is morally right only if it produces at least as much good for all involved as any other alternative action could. Centred around the moral concepts of please and pain, happiness and unhappiness, teleological theory is hedonistic at its core.
According to teleological theory Adam’s conduct would be viewed as morally right because the consequence of his choice has enabled Graham and Betty to retain their family benefits support and as such, has produced more good for Betty and Graham than any other action Adam could have chosen. It has also produced more good for Adam than if he had chosen to raise the issue because the relationship with his friends is not jeopardised. Question 3 (10 marks | Word limit: 200 words) Based on your analysis of the financial adviser’s conduct in Question 2(a) and (b):
(a) Provide your judgment and rationale as to whether the financial adviser conduct was ethical in his dealings with these clients. Support your argument with reference to ethical theory or frameworks and the case study facts. (8 marks) I don’t believe Adam’s conduct was ethical in his dealings with Graham and Betty. If we look at Adam’s conduct from a deontological perspective, we can conclude that he has definitely not acted in accordance with a set of principles and rules regardless of the outcome. He has instead put the desired outcome of not jeopardising his relationship with Betty and Graham at the forefront and allowed that to dictate his actions, which in this case go against the rules and duties set by his profession as well as the law itself, and also represents a conflict with the duty framework. This posits that duty can arise from both law and morality – Adam’s conduct would be in breach of both the Corporations Act and the FASEA code of ethics
If we look at the consequentialist framework which looks at future effects of possible courses of action we could initially consider Adam’s conduct to be ethical as his friends will get to retain the benefits they are receiving. However, there could also be severe penalties for their actions in the future including possible fines for underreporting income or a debt for overpayment of benefits. This framework focuses on the ‘best interest’ of the client and Adam has not acted in accordance with their best interest.
(b) Discuss one (1) alternative action that this adviser could have taken. (2 marks)
Adam could have chosen to raise the issue with Graham and Betty. As their adviser it is his duty to inform them that their actions are unlawful and could have severe consequences in the future. He could have explained what those consequences are and also explored legal avenues based on their actual financial position that could be of benefit to them without breaking the law. Graham and Betty may or may not have been aware that their conduct was wrong but they trust Adam as their adviser to advise on the best course of action. By not raising the issue they may have concluded that what they were doing could not be that bad as Adam hadn’t raised it, and in the process he has robbed them of their right to all of the facts to make an informed decision. Question 4 (30 marks | Word limit: 350 words) Bazerman and Tenbrunsel (2011) discussed five key blind spots that lead to unethical behaviour.
(a) Define ‘motivated blindness’, then discuss how it may have influenced the financial adviser’s ethical decision making and how this blind spot could have been avoided. (15 marks) Motivated blindness is one of the key blind spots within ethical blindness and can be defined the act of overlooking the unethical behaviour of others when it is in their best interest to remain ignorant – Kaplan. In other words, we have a tendency to see what we want to see and can often overlook contradictory information when it is in our best interest not to notice. Adam’s conduct and actions, or lack thereof, in the case study clearly exhibits this behaviour. It is not in his best interest to draw attention to the fact that Graham and Betty are not declaring all of their income and are likely to be ineligible for the benefits that they are receiving as this could result in the loss of these benefits and jeopardise a longstanding friendship. As a result Adam has overlooked their unethical behaviour to avoid a potentially detrimental outcome. The most effective way to avoid this blind spot is to root out conflicts of interest. Ethical blindness prevents us from even seeing the moral components of behaviour and as stated by the Harvard Business Review ‘awareness of them doesn’t necessarily reduce their untoward impact on decision making. Nor will integrity alone prevent them from spurring unethical behaviour, because honest people can suffer from motivated blindness.’ Having identified the conflict, Adam could have removed himself as their adviser knowing that he may not be able to provide impartial advice. Alternatively, with Graham and Betty’s consent, he could have brought in another impartial adviser to corroborate the advice was in the clients’ best interest.
(b) Define ‘overvaluing outcomes’ and discuss how this may have influenced the client’s ethical decision making as well as how this blind spot could have been avoided. (15 marks)
Overvaluing outcomes can be described as the inclination to judge actions based on outcomes rather than behaviour – compliance building. This blind spot often arises when there is too much emphasis placed on results rather than high quality decisions and may lead us to excuse or overlook unethical behaviour as long as the outcomes is good. This blind spot is clearly evidenced in Adam’s behaviour as he has elected to excuse Graham and Betty’s unethical act of not declaring income as it has produced the good outcome of allowing them to retain their family support benefits and continue paying their children’s schooling and other expenses. This blind spot could have been avoided by Adam analysing the moral components of the decision itself, rather than just deeming it a good choice simply because it produced a favourable outcome. By examining both the good and bad ethical implications of a decision and focusing on the process of decision making, he can ensure that he is making quality decisions and not just chasing results. Question 5 (15 marks | Word limit: 300 words) LO1: Explain the role of ethical frameworks and professional standards within the financial planning profession.
(a) Explain the concept of a ‘profession’ and discuss what distinguishes a profession from an occupational group. (7.5 marks) https://www.psc.gov.au/what-is-a-profession - professional standards council
a. A profession is essentially an indicator of trust and expertise. At the core of the concept lies a moral or ethical foundation within the practice of a specific and established expertise. Although the meaning of the word has evolved with time, the historical notion of providing a service to the community holds true with contemporary definitions capturing the public service attitude and the Australian Council of Profession defining the term as ‘a disciplined group of individuals who adhere to ethical standards.’ The council posits that these groups should not only be possessed of special knowledge and skills in a widely recognised body of learning derived from research, education and training at a high level, and be recognised as such by the public, but they should also be prepared to apply these in the interest of others. A code of ethics governs the activities of each profession defining and demanding high standards of behaviour and is enforced by the profession and acknowledged and accepted by the community. In addition, the Professional Councils maintain that a profession must exhibit the elements of: - Education - Ethics - Experience - Examination - Entity
An occupational group may possess many of the same traits as a profession however the fundamental difference is quantitative and these traits will be evident to a lesser degree than for professions. An occupational body can seek to transition to a profession through the undertaking of a ‘professional project’ with a goal of controlling the dissemination of the esoteric knowledge they possess so they can dominate and control the supply of that esoteric knowledge to the market. Achievement of this outcome is evidenced by ‘monopoly of competence legitimised by officially sanctioned ‘expertise’, and a monopoly of credibility with the public’ Larson 2013.
(b) Discuss the changes to minimum education standards for new and existing financial advisers under the FASEA regulatory regime. (7.5 marks) https://www.fasea.gov.au/education-requirements/
https://asic.gov.au/for-finance-professionals/afs-licensees/professional-standards-for-financial- advisers/timeline-for-the-reforms/ b. The royal commission into banking and financial services has served to highlight necessary changes to the industry from both a structural and cultural standpoint and has triggered an overhaul to the minimum education standards required for new entrants and existing financial advisers. As of 1 January 2019 the Financial Advisers Standards and Ethics Authority (FASEA) will be implementing and overseeing new education standards that will apply to financial advisers as part of the professional standards for financial advisers.
In terms of qualifications and training, existing advisers will be required to bring their qualifications up to an approved bachelor degree (AQF level 7) or above or equivalent level in order to comply with the new education requirements. The deadline for this is currently legislated for 1 January 2024 with the Government confirming it intends to extend to 1 January 2026, pending legislation. The minimum education requirement for new financial advisers is an approved bachelor’s degree (AQF7 level) comprising 24 subjects, or above or equivalent. New and existing advisers must also pass the FASEA exam by no later than 1 January 2021 under current legislation, with an extension to 1 January 2022 subject to legislative change. From 1 January 2019 new entrants will also need to complete a professional year before being fully qualified. Under the new FASEA Standards financial advisers must complete 40 hours of CPD each year, of which 70% must be approved by their AFS licensee.
