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

A wealth management firm wants its board to receive early warning of mis-selling risk. Which reporting design best supports effective governance?

The best design is periodic key risk indicators, such as complaint trends and suitability exceptions or overrides, with thresholds that trigger escalation to the board. These are timely and forward-looking, whereas annual totals, loss-only data or unchallenged self-assessments arrive late or lack independence.

  1. AAnnual complaints totals only, reported after audit sign-off
  2. BPeriodic key risk indicators such as complaint trends, suitability exceptions and overrides, with thresholds that trigger escalationCorrect
  3. CReports of realized losses from litigation settlements only
  4. DFront-office self-assessments that are not reviewed independently

Explanation

Forward-looking indicators with defined thresholds and escalation paths let the board act before losses crystallize. Annual totals and loss-only reporting are lagging, and unreviewed self-assessments lack independent challenge, so they weaken governance.

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