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RBI – Compliance Function in Banks And Role of Chief Compliance Officer

Following the discussion paper on Governance in Commercial Banks in India issued, in June, 2020, Reserve Bank of India (RBI) has issued new guidelines for the compliance function in banks and the role of Chief Compliance Officer (CCO). The objective is to bring uniformity in approach followed by banks, as also to align the supervisory expectations on CCOs with best practices.

The new guidelines supplement the earlier guidelines issued by RBI in 2007 and 2015. The applicability of the guidelines has been extended to Local Area Banks, Small Finance Banks and Payment Banks. Earlier they were limited to all scheduled commercial banks (excluding RRBs). The applicability of these guidelines to Local Area Banks, Small Finance Banks and Payment Banks would increase both the cost and the compliance burden on them.

It is very important to understand that more and more regulations and adopting a one-size-fits-all approach would not improve the governance in Banks. RBI should consider the size and level of operations of all banks before making such guidelines applicable to all banks.

Banks are required to appoint a Secretary to the Board (Company Secretary) and a CCO. Their inter se relationship, roles, responsibilities and reporting is not sufficiently clear.

It is not clear whether the CCO would be responsible for compliance with laws and regulations not relating to banking.

The roles of the Company Secretary and the CCO seem to be overlapping. For instance, as per the provisions of Companies Act, 2013, the functions of Company Secretary inter alia include reporting to the Board about compliance with the provisions of the Act, the rules made thereunder and other laws applicable to the company. This would include the specific provisions applicable to the Banks as well. As per the recent guidelines, duties and responsibilities of the compliance function includes apprising the Board and senior management on “regulations, rules and standards and any further development”. Is it contemplated that the Company Secretary and the CCO would be reporting to the Board regarding the laws applicable to banks?

Also, the RBI circular issued in 2007, states that the compliance policy should focus on the compliance function including regulatory compliance, statutory compliance, compliance with fair practice codes and other codes etc. This again overlaps with the role of the Company Secretary.

On the reporting front, as per the guidelines, CCO will have direct reporting to MD & CEO and/or Board/ Board Committee (ACB) of the bank, whereas as per Report of the Consultative Group of Directors of Banks / Financial Institutions (Dr. Ganguly Group) issued in June, 2002, the Compliance officer is to report to the Secretary to the Board. CCO will be a senior executive of the bank, preferably in the rank of a General Manager or an equivalent position (not below two levels from the CEO) and Secretary to the Board is a Key Managerial Personnel (one level below the Board). Given this situation, the CCO should ideally report to the Company Secretary. Such inconsistencies in the reporting structure would not only impact role clarity but also the functioning of both the Company Secretary and the CCO.

Compliance is admittedly an important function that banks should take seriously. However, in the process, the role of the Company Secretary, who is a Key Managerial Personnel should not be circumscribed.

-Prerna Mohan