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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

In the three lines of defense model commonly used in risk governance, which arrangement is most consistent with the model?

In the three lines of defense model, business units own and manage risk, the independent risk and compliance function oversees and challenges them, and internal audit independently assures the board. The other arrangements mix up roles and weaken independence between taking risk and monitoring it.

  1. ABusiness units own and manage risk; an independent risk management function oversees and challenges; internal audit provides independent assurance to the boardCorrect
  2. BInternal audit sets risk limits and business units verify compliance with them
  3. CThe risk management function takes risk positions and the business units monitor them
  4. DThe board manages daily risk and delegates assurance to the front office

Explanation

In the three lines model, the first line (business) owns and manages risk, the second line (risk management and compliance) sets frameworks and challenges, and the third line (internal audit) gives independent assurance. The other options reverse or blur these roles, undermining independence.

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