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Compliance Functions in Banks

The Reserve Bank on September 11, 2020 advised the following guidelines meant to bring uniformity in the approach followed by banks, as also to align the supervisory expectations on Chief Compliance Officer (CCOs) with best practices:

i) Policy

A bank shall lay down a board-approved compliance policy clearly spelling out its compliance philosophy, expectations on compliance culture covering tone from the top, accountability, incentive structure and effective communication and challenges thereof, structure and role of the compliance function, role of CCO, processes for identifying, assessing, monitoring, managing and reporting on compliance risk throughout the bank.

ii) Tenor for appointment of CCO

The CCO shall be appointed for a minimum fixed tenure of not less than 3 years.

iii) Transfer/Removal of CCO

The CCO may be transferred / removed before completion of the tenure only in exceptional circumstances.

iv) Eligibility Criteria for appointment as CCO

The CCO shall be a senior executive of the bank, not more than 55 years, shall have an overall experience of at least 15 years in the banking or financial services, good understanding of industry and risk management, knowledge of regulations, legal framework and sensitivity to supervisors‟ expectations;

v) Selection Process

Selection of the candidate for the post of the CCO shall be done on the basis of a well-defined selection process and recommendations made by the senior executive level selection committee constituted by the Board for the purpose.

vi) Reporting Requirements

A prior intimation to the Department of Supervision, Reserve Bank of India, Central Office, Mumbai, shall be provided before appointment, premature transfer/removal of the CCO.

vii) Reporting Line

The CCO shall have direct reporting lines to the MD & CEO and/or Board/Board Committee (ACB) of the bank.

viii) Authority

The CCO and compliance function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to enable him/her to carry out entrusted responsibilities in respect of compliance issues.

ix) The duties and responsibilities of the compliance function

To apprise the Board and senior management on regulations, rules and standards and any further developments, to provide clarification on any compliance related issues, to conduct assessment of the compliance risk (at least once a year) and to develop a risk-oriented activity plan for compliance assessment. The activity plan should be submitted to the ACB for approval and be made available to the internal audit.

x) Internal Audit

The compliance function shall be subject to internal audit.

Other guidelines pertaining to dual halting, membership to committees and core elements of the mandate of CCO were also covered in the guidelines. To read more, please click here.

Long Form Audit Report

The Reserve Bank on September 05, 2020 revised the Long Form Audit Report (LFAR) formats of statutory central auditors, branch auditors, specialised branches and large/irregular/critical accounts for branch auditors. The revised LFAR formats are required to be put into operation for the period covering FY 2020-21 and onwards. To read more, please click here.

Income Recognition, Asset Classification and Provisioning Processes The Reserve Bank on September 14, 2020 advised banks to put in place/upgrade their systems to conform to the guidelines in order to ensure the completeness and integrity of the automated asset classification (classification of advances/investments as NPA/NPI and their upgradation), provisioning calculation and income recognition processes.

Positive Pay System for Cheque Truncation System

On 06.08.2020 Reserve Bank of India (RBI) had announced introduction of Positive Pay System for Cheque Truncation System (CTS).

2. The concept of Positive Pay involves a process of reconfirming key details of large value cheques. Under this process, the issuer of the cheque submits electronically, through channels like SMS, mobile app, internet banking, ATM, etc., certain minimum details of that cheque (like date, name of the beneficiary / payee, amount, etc.) to the drawee bank, details of which are cross checked with the presented cheque by CTS. Any discrepancy is flagged by CTS to the drawee bank and presenting bank, who would take redressal measures.

3. National Payments Corporation of India (NPCI) shall develop the facility of Positive Pay in CTS and make it available to participant banks. Banks, in turn, shall enable it for all account holders issuing cheques for amounts of ₹50,000 and above. While availing of this facility is at the discretion of the account holder, banks may consider making it mandatory in case of cheques for amounts of ₹5,00,000 and above.

4. Only those cheques which are compliant with above instructions will be accepted under dispute resolution mechanism at the CTS grids. Member banks may implement similar arrangements for cheques cleared / collected outside CTS as well.

5. Banks are advised to create adequate awareness among their customers on features of Positive Pay System through SMS alerts, display in branches, ATMs as well as through their web-site and internet banking.

6. Positive Pay System shall be implemented from January 01, 2021.

7. This directive is issued under Section 10 (2) read with Section 18 of Payment and Settlement Systems Act, 2007 (Act 51 of 2007).