FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
A wealth manager at a private bank recommends a complex structured note with embedded options to a retired client whose stated objective is capital preservation and whose questionnaire shows limited investment experience. Which compliance risk is most directly created by this recommendation?
The main exposure is mis-selling risk. Suitability rules require recommendations to fit the client's objectives, risk tolerance and experience, and a complex structured note sold to an inexperienced client seeking capital preservation breaches that standard, exposing the firm to complaints, redress and sanctions.
- AMis-selling risk arising from an unsuitable product recommendationCorrect
- BMarket abuse risk arising from use of inside information
- CSettlement risk arising from delayed delivery of securities
- DModel risk arising from an incorrect pricing methodology
Explanation
Suitability requires that recommendations match the client's objectives, risk tolerance, knowledge and experience. A complex, option-embedded product sold to a capital-preservation client with limited experience is a classic mis-selling situation. The other risks are not triggered by the facts described.
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