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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank is fined after sales staff sold complex structured notes to retail clients for whom they were clearly unsuitable, in breach of suitability rules. Which classification is most appropriate under the Basel taxonomy?

Clients, products and business practices is correct, since Basel places suitability breaches, improper sales and fiduciary failures toward clients in this category. The loss is a conduct issue, not a processing error, and it is not fraud against the firm.

  1. AClients, products and business practicesCorrect
  2. BInternal fraud
  3. CExecution, delivery and process management
  4. DExternal fraud

Explanation

Suitability failures and improper product sales fall under clients, products and business practices. Internal fraud would require intent to defraud the firm or misappropriate property, not a conduct breach toward clients. No processing error occurred.

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