FRM Part I · FRM Exam Part I · Operational Risk
A bank is hit by a regulatory fine and customer compensation after selling complex structured notes to retail clients who were not suitable investors. Which Basel event type applies, and what is the key feature distinguishing it from internal fraud?
The loss belongs to clients, products and business practices. This category covers unintentional or negligent failures to meet professional obligations to clients, such as unsuitable sales, and does not require intent to defraud the firm, which is what separates it from internal fraud.
- AClients, products and business practices; the failure is in obligations to clients, not necessarily intentional wrongdoing against the firmCorrect
- BInternal fraud; any breach by staff is intentional
- CEmployment practices and workplace safety; staff acted outside policy
- DDamage to physical assets; the notes were physical certificates
Explanation
Unsuitable sales, improper product design and breaches of fiduciary duty fall under clients, products and business practices. Internal fraud involves intentional acts aimed at benefiting the employee or defeating the firm's rules, which is not required here.
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