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

A firm reviews its sales incentive scheme after finding that advisers recommend higher-commission products regardless of client risk profiles. Which governance response best reduces the underlying conflict of interest?

Redesigning compensation to reward suitability and conduct outcomes and to reduce product-specific commission best addresses the conflict, because the incentive itself drives the misconduct. Attestations only provide weak assurance, and raising all commissions or letting sales handle complaints does not fix the incentive.

  1. ARedesign compensation to include suitability and conduct outcomes, and reduce reliance on product-specific commissionCorrect
  2. BRaise commission on all products equally
  3. CRely on annual adviser attestations alone
  4. DMove complaint handling to the sales team

Explanation

The root cause is incentives rewarding product sales over client fit. Balancing remuneration with suitability and conduct measures addresses it directly. Attestations are weak detective evidence, and having sales handle complaints removes independence.

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