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

A firm discovers that a fee-calculation error overcharged 2,000 clients by an average of USD 150 each over 3 years. The regulator expects redress to include interest of 4% simple per year, applied on average over half the period for a steady overcharge. Using that assumption, what is the approximate total redress?

Total redress is about USD 318,000. The principal overcharge is USD 300,000, and interest at 4% simple over an average 1.5 years, because the overcharge accrued steadily, adds USD 18,000. Using the full three years would overstate interest.

  1. AUSD 300,000
  2. BUSD 318,000Correct
  3. CUSD 336,000
  4. DUSD 372,000

Explanation

Principal = 2,000 x 150 = USD 300,000. Interest = 300,000 x 4% x 1.5 years (average outstanding period is half of 3 years) = USD 18,000. Total = USD 318,000. Applying interest for the full 3 years gives USD 336,000, which wrongly assumes all overcharges occurred on day one.

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