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FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities

A bank reviews 400 sampled advised sales and finds 48 had no documented suitability assessment. Of these 48, internal re-testing shows 30 were in fact unsuitable. The sampled sales represent 8,000 sales in the population, and the average remediation cost per unsuitable sale is USD 2,000. Assuming the sample is representative, what is the estimated remediation exposure for the whole population from unsuitable sales among those lacking documentation?

The estimated exposure is USD 1,200,000. Thirty unsuitable sales in a 400-sale sample scale by 20 to 600 sales across 8,000, and at USD 2,000 each that gives USD 1.2 million. Counting all 48 undocumented sales would overstate the figure.

  1. AUSD 1,200,000Correct
  2. BUSD 600,000
  3. CUSD 1,920,000
  4. DUSD 960,000

Explanation

Scale factor is 8,000/400 = 20. Unsuitable sales in the sample = 30, so the population estimate is 30 x 20 = 600 sales. At USD 2,000 each, exposure is USD 1,200,000. Using all 48 undocumented sales gives 960 x 2,000 = USD 1,920,000, wrongly assuming every undocumented sale is unsuitable.

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