FRM Part II · FRM Exam Part II · Case Study: Investor Protection and Compliance Risks in Investment Activities
An investment firm's compliance officer reviews a sales process in which advisers recommend a complex structured note to elderly clients with low risk tolerance, because the product pays the firm a high commission. Which compliance risk is most directly illustrated?
The scenario illustrates mis-selling risk driven by a conflict of interest. Advisers recommend a complex product unsuited to low-risk-tolerance elderly clients because of commissions, breaching suitability and fair-treatment duties, which exposes the firm to regulatory sanctions, client compensation and reputational damage.
- ASettlement risk from delayed trade confirmation
- BMis-selling risk arising from a conflict of interest and unsuitable adviceCorrect
- CModel risk from an inaccurate pricing function
- DLiquidity risk from a mismatch of funding maturities
Explanation
Recommending a product that does not match client risk tolerance because of commission incentives is a conflict of interest producing unsuitable advice, i.e. mis-selling. Settlement, model and funding risks are not the issue described.
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