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

Following a fine, a firm wants a key risk indicator to monitor whether its remediation of suitability failures is working. Which indicator is most informative?

The best indicator is the percentage of independently sampled recommendations that still fail suitability tests after remediation. It measures actual outcomes of the revised controls, whereas product counts, compliance headcount or marketing spend say nothing about whether unsuitable advice has stopped.

  1. ATotal number of products on the firm's shelf
  2. BPercentage of sampled recommendations, tested independently post-remediation, that fail suitability criteriaCorrect
  3. CHeadcount of the compliance department
  4. DAnnual marketing spend on retail campaigns

Explanation

An outcome-based indicator from independent testing of actual recommendations shows whether the revised controls reduce unsuitable advice. Shelf size, headcount and marketing spend are input or unrelated measures that do not show control effectiveness.

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