Skip to content

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

A firm's three lines of defense model is being reviewed after a mis-selling event in its wealth unit. Which arrangement is most consistent with sound governance of compliance risk?

The business line owns compliance risk, an independent compliance function monitors and challenges it, and internal audit independently assures the whole framework. This separation preserves independence. Compliance reporting to sales, or audit designing the controls it later tests, undermines objectivity.

  1. ABusiness unit heads own and manage compliance risk, with an independent compliance function monitoring and internal audit providing independent assuranceCorrect
  2. BCompliance officers report to the head of sales so they understand the business better
  3. CInternal audit designs the product suitability controls and also tests them
  4. DThe risk function approves sales incentive schemes without compliance input

Explanation

In the three lines model the first line owns risk, the second line (compliance and risk) oversees and challenges, and the third line (internal audit) provides independent assurance. Reporting to sales or having audit design and test controls compromises independence.

Did you get it right without looking?

One question tells you little. A timed set on Case Study: Investor Protection and Compliance Risks in Investment Activities shows your real accuracy, how long you take and where you lose marks.

Practise Case Study: Investor Protection and Compliance Risks in Investment ActivitiesFree diagnostic mock

More Case Study: Investor Protection and Compliance Risks in Investment Activities questions