Framework For Compliance Function
The Reserve Bank of India, on April 11th 2022, released the Framework for Compliance Function and Role of Chief Compliance Officer in Non-Banking Financial Companies in Upper Layer and Middle Layer (NBFC-UL & NBFC-ML).
The Compliance Function is a vital part of efficient governance, along with the internal control and risk management processes. The NBFCs in Upper Layer and Middle Layer shall treat the prescriptions in the circular as a set of minimum guidelines only and frame their guidelines by taking into account their corporate governance framework, the scale of operations, risk profile and organizational structure accordingly.
- Scope and Coverage of Compliance Function
The compliance function shall ensure strict observance of all statutory and regulatory requirements for the NBFCs, including standards of market conduct, managing conflicts of interest, treating customers fairly and ensuring the suitability of customer service.
- Responsibility of the Board and Senior Management
The Board/Board Committee3 shall ensure that an appropriate Compliance Policy is put in place and implemented. Further, the Board/Board Committee shall prescribe the periodicity for review of Compliance risk.
The Senior Management shall carry out an exercise, at least once a year, to identify and assess the major compliance risks facing the NBFC and formulate plans to manage it; submit to the Board/Board Committee a review at the prescribed periodicity and a detailed annual review of compliance risks, and report promptly to the Board/Board Committee on any material compliance failures while ensuring that appropriate remedial or disciplinary action is taken.
- Responsibilities of Compliance Function
Compliance Function shall be responsible for undertaking the following activities at the minimum:
- Assist the Board and the Senior Management in overseeing the implementation of Compliance Policy, including policies and procedures, prescriptions in Compliance Manuals, internal codes of conduct, etc.
- Play a central role in identifying the level of compliance risks in the organisation. The risks in existing/new products and processes shall be analysed and appropriate risk mitigants put in place. The Chief Compliance Officer (CCO) shall be a member of the 'new product' committee/s. All new products shall be subjected to intensive monitoring for at least the first six months of introduction to ensure that the indicative parameters of compliance risk are adequately monitored.
- Compliance Function shall monitor and test Compliance by performing sufficient and representative Compliance testing, and the results of such Compliance testing shall be reported to the Senior Management. It shall periodically circulate the instances of compliance failures among staff, along with the required preventive instructions. Staff accountability shall be examined for major compliance failures.
- Unsatisfactory compliance with RMP/MAP may invite penal action from RBI.
- Discomfort conveyed to the NBFC on any issue by other regulators, and action taken by any other authorities/law enforcement agencies shall be brought to the notice of RBI.
- The Compliance Department may also serve as a reference point for the staff from operational departments for seeking clarifications/ the interpretation of various regulatory and statutory guidelines.
The CCO shall be the nodal point of contact between the NBFC and the regulators/supervisors and shall necessarily be a participant in the structured or other regular discussions held with RBI.
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