FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A relationship manager is paid higher commission on in-house funds and recommends them to clients without stating the commission or considering cheaper comparable alternatives. Which control would most effectively address this conflict of interest?
The best control is aligning remuneration with client outcomes, disclosing commissions and inducements, and reviewing recommendations against suitable alternatives. This addresses the conflict at its source, whereas higher commissions, less reporting or relocation would not remove the incentive to favour in-house funds.
- AIncreasing the commission on in-house funds to improve staff retention
- BAligning incentives to client outcomes, requiring disclosure of inducements, and reviewing recommendations against a suitable range of alternativesCorrect
- CLimiting client reporting to annual statements
- DMoving the manager to a different branch
Explanation
Conflicts from incentives are managed through remuneration design that does not reward biased advice, disclosure of fees and inducements, and monitoring that recommendations reflect client interest. Higher commission worsens the conflict, and reducing reporting or relocating staff does not address it.
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