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

After a mis-selling incident, a firm's internal audit finds that the product-approval committee approved a complex structured note for retail clients without assessing the target market. What is the most appropriate remediation focus for the firm's product governance?

The firm should make target-market and suitability assessment a mandatory gate before launch, with periodic post-launch reviews. This fixes the root cause in product governance rather than only compensating clients or relying on disclosures.

  1. AEmbed a formal target-market and suitability assessment as a mandatory gate before product launch, with periodic post-launch reviewCorrect
  2. BDelegate product approval entirely to the sales desk for speed
  3. CRely on clients' signed risk disclosures as the sole safeguard
  4. DLimit remediation to compensating affected clients

Explanation

The root cause is a missing control in product approval. A mandatory target-market gate plus ongoing review fixes the process. Compensation addresses the symptom, and disclosures or sales-desk approval do not provide independent challenge.

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