If the KW penalty is supposed to represent fair play, then why not simply have them unable to BENEFIT from certain statuses like Flanked or Hobbled? As in, they don't get the accuracy bonus for attacking someone who is flanked but doesn't take a penalty either? Not sure on the balance of such a thing though or how it would play out in game.
EDIT: Then again, I'm not sure why KWs would be interested in fair play. Nothing about their lore indicates they only fight fairly. If anything, they are portrayed as the more passionate, ragey kind of paladins who dive in to save people at the risk of their own lives. Many of their ranks are low-born, and they travel around alot. St Ydwen's Redeemer portrays Ydwen the original paladin wielder of said sword and a Kind Wayfarer as someone who was willing to (and actually did) throw her life away to save others, nothing about fairplay there.
Yeah, the closest I've seen to any dictate for fair play among the order is the fact that they condemn Deceptive/Shady behavior. Given that the game obviously doesn't make your Watcher count as more Deceptive/Shady when you have them attack creatures while they're vulnerable to sneak attacks, that's obviously a weak link anyway.
I had assumed that rather than representing a stringent code of honor per se, the Kind Wayfarers' drawback was related more to empathic hesitation when faced with weakened targets. That's pretty nonsensical as well, of course, given that a Watcher of any other subclass can raise their Benevolence through the roof presumably without suffering from similar setbacks. It'd also make them the only subclass that forcefully embedded a specific personality trait into every character who chooses it, as opposed to merely encouraging/discouraging such traits like the Faith and Conviction and Holy Radiance class abilities do.
If it actually is supposed to be about honor, then I'd say it'd make more sense if applied to the Shieldbearers since they a) were founded by a group of knights and b) are charged with brokering peace or protecting those who would do so, perhaps indicating that they'd be the most likely to employ nonlethal means of handling threats.