FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience
A bank sold a complex structured note to retail clients without assessing suitability, and a regulator imposed a fine plus client restitution. A risk analyst must record the event in the loss database. Which classification is most appropriate, and why?
The event belongs in clients, products and business practices. Selling complex products without a suitability assessment is a failure to meet obligations to clients, and Basel places suitability, disclosure and product flaws in this category. There is no evidence of intentional fraud or a processing error.
- AClients, products and business practices, because the loss stems from product suitability failures towards clientsCorrect
- BExternal fraud, because clients were harmed by a third party
- CExecution, delivery and process management, because the sale involved a transaction
- DInternal fraud, because the bank's staff made the sale
Explanation
Basel's clients, products and business practices category covers unintentional or negligent failure to meet professional obligations to clients, including suitability and product flaws. No intent to defraud is described, so internal fraud is wrong. The harm was caused by the bank's own sales practices, not an outside party, so it is not external fraud.
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