FRM Part II · FRM Exam Part II · Risk Governance
A bank's operational risk function reports to the head of the retail banking division, who also sets its budget and evaluates its staff. The chief risk officer is concerned about governance. Which is the most direct weakness in this arrangement?
The main weakness is lack of independence. When the operational risk function reports to and is funded by the business head, it may be unable to challenge that business objectively, undermining the second line's oversight role within the governance framework.
- AThe first line is carrying out too many control self-assessments
- BInternal audit is duplicating the work of the risk function
- CThe risk appetite statement is too qualitative to be useful
- DThe risk function lacks independence from the business it is meant to challengeCorrect
Explanation
A second-line function whose reporting line, budget and appraisal are controlled by a business head faces conflicts of interest and may soften its challenge. Independence is a core requirement of effective second-line oversight. The other options are not indicated by the facts.
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