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The Reserve Bank of India (RBI) has released a circular on 11th April, 2022 defining the scope of function and role of a Chief Compliance Officer (CCO) in Non-Banking Financial Companies (NBFCs).
The fact that Compliance Function serves a critical role in the overall structure of corporate governance; the RBI has decided to introduce certain principles, procedures and standards for compliance function role of CCO in NBFC-UL and NBFC-ML in accordance with the principles of proportionality.
A Chief Compliance Officer[1] or popularly called as CCO is an official of a bank who is responsible for overseeing and managing the regulatory compliances of the bank and to check whether the employees and the management of the company are in compliance with the applicable laws or not. It assesses and monitors risk and provides compliance advice to the risk management unit.
This circular is applicable to the following NBFCs which mandates the following to have an independent compliance function and Chief Compliance Officer:
This circular, however, is not applicable to the NBFCs in the base layer (NBFC – UL) and they will continue to be governed by the existing regulations in place.
The Compliance Function along with risk management processes and internal control form an integral part of corporate governance. The guidelines given in the circular should be seen as a prescriptions and a set of minimum guidelines. The NBFC-UL and NBFC – ML have to frame their guidelines on the lines of this circular and also taking into account their scale of operations, corporate governance framework, organisational structure, risk profile etc.
According to the circular released by RBI, the NBFC-UL and NBFC – ML have been directed to put in place a board approved policy and a Compliance Function along with the appointment of a CCO based on the following framework:
Risk of Compliance
When an NBFC fails to comply with the laws, regulations, rules, Code of Conduct etc. applicable to its activities, such non-compliance invites the risk of regulatory sanctions, loss of reputation and material financial loss to the NBFC.
Coverage and Scope of Compliance Function
The Compliance Function ensures that all the regulatory and statutory requirements applicable to the NBFCs are being strictly observed. The scope of the Compliance Function is extends to observance with the standards of market conduct, treating customers fairly, ensuring the suitability of customer service and managing conflict of interest.
Responsibilities of the Senior Management and the Board
The primary responsibility of the Board or the Board Committee is to ensure that a proper Compliance Policy has been put in place and implemented. The Board also needs to prescribe the periodicity for review of Compliance risk.
The role of the senior management includes the following:
Responsibilities of the Compliance Function
Compliance Framework in NBFCs
A CCO in NBFC shall head the Compliance department after meeting the requirements prescribed in the circular. NBFCs have been given the freedom to adopt their own organisational structure for the Compliance Function. It must be kept in mind that the Compliance Function should be independent and should be sufficiently resourced, his responsibilities should be clearly defined and its activities are subject to independent and periodic review.
An annual risk Compliance risk assessment shall be carried out by the NBFC on an annual basis in order to identify and assess the major compliance risks and faced by the NBFC and accordingly design a plan to manage such risks. The annual review carried by the senior management must cover the at least the following aspects:
The CCO and Compliance Function will have the authority to communicate with any of the staff members and gain access to any files and records which are necessary for him/ her to carry out the entrusted responsibilities in respect of the compliance issues. The source of such authority lies in the Company Policy of the NBFC.
Just like the staff should be having basic qualifications and practical experiences in business lines/ audit inspection functions, the Compliance Function shall also have adequate staff members having knowledge in statutory/ regulatory guidelines, laws, accountancy, risk management and information technology. Appropriate skill planning should also be done to avoid any future skill gap.
The compliance function shall be subject o regular internal audit and the risk assessment framework of the Internal Audit Function shall include Compliance Risk. The audit findings related to Compliance audit must be shared with the CCO so that the findings serve as a feedback mechanism to assess other areas of Compliance failures.
Tenure and Appointment of CCO
The Circular has to be placed in the next meeting of the Board of Directors to inform the board and initiate the process of devising an implementation strategy under the Board’s supervision and that too in a time-bound manner for the mandatory appointment of CCO in NBFCs and their scope and functioning.
Read Our Article:Compliance functions in banks and Role of Chief Compliance Officer
Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.
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