Introduction
The Basel Committee on Banking Supervision (BCBS) issued it’s guidance “ Compliance and the Compliance function in banks” in April, 2005; where compliance was defined as “ an independent function that identifies, assesses, advises on, monitors and reports on the bank’s compliance risk, that is, the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities”. Hence, the compliance function has many dimensions. For example:
- Prudential and regulatory compliance: It includes complying with guidance and directives issued by regulators like RBI, SEBI, PFRDA etc.
- Integrity and Market Conduct: Compliances under this dimension ensures prevention measures against misuse of banking services for illegal purpose. Following AML/ CFT guidelines issued by FATF and other preventive measures falls under this category.
- Legal compliances ensure proper maintenance of applicable laws, rules and regulations like BNking regulation Act, 1949; RBI act,1934; Companies act,2013; NI act,1981 etc.
- Internal Compliance: All above mentioned compliances combined with institutions’ internal compliance requirements. This is fulfilled by forming bank’s own internal control framework which strictly monitors whether compliance functions are being maintained properly.
Importance of Good compliance culture
Compliance is undoubtedly an integral and highly important part of banking industry which is important tool for identifying, assessing and managing every possible risk. It is mandatory to follow compliance guideline properly to avoid any kind of credit, operational and reputational risk. In recent past banking industry has faced major evolution. Area of functionality of banks has increased rapidly and adoption of advanced technologies has made banks vulnerable to many kinds of security threats and exposure to different kind of risks has also been increased. In this scenario having a strong compliance culture is very much important failing which banks will face serious troubles.
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There are many examples in the past in the global and domestic scenario where failure of proper compliance resulted in the collapse of many financial institutions some of which also impacted economy badly. Breakdown of Lehman-Brother in 2008, unscrupulous use of “Synthetic Credit portfolio” product of J P Morgan & Co in 2012 can be taken as example.
In India also, failure of proper compliance culture and structure resulted in reputational and financial loss for several institutions. In recent past, a leading public sector bank in India, faced big loss due to non-compliance with the guidelines on the use of SWIFT, a global payment system. This incident hampered reputation and financial condition of that bank to a great extent.
In 2013, some Indian banks were penalized by RBI due to failure to comply with KYC guidelines which is very much important to avoid money laundering. Witnessing these types of failure, necessity of having a strong compliance culture in banks is realy important to recover and safeguard financial institutions from probable risks.
Compliance Culture in Indian Banks
Earlier in Indian finance industry compliance procedure was not so strong and many a times, lack of proper compliance culture and misinterpretation of guidelines was observed. However, as time progressed and sophistication in banking business increased, requirement of strong compliance structure seriously felt and several measures have been taken to form proper compliance policy and the process is still going on.
Firstly, compliance processes in Indian banks were designed based on RBI guidelines and their own internal standards. In 1992, with the recommendation of Ghosh committee some compliance guidelines came into force.
In 2007, RBI approved the first compliance policy with the objective of propagating compliance function as an integral part of banking business and risk management process. It also advised banks to set up a different dedicated department to formulate compliance policies, which will be headed by bank’s Chief Compliance Officer and will guide and assist his team to manage compliance risks efficiently.
Compliance department will decide on ways to measure risks with help of required indicators; will prepare Risk assessment report and help in risk mitigation plan. Compliance team will also ensure the consequences of compliance failure and communicate with staff member with updated policies and guidelines. Senior management officials will be responsible for maintaining, formulating and communicating with compliance policies. However, it is responsibility of every staff and individual of institution to maintain compliance procedures strictly. The compliance team should work fearlessly, independently and they should be free from any conflict of interest in order to enable proper compliance function.
Performance of Indian banks in Compliance area
RBI has put many corrective measures for creating robust compliance culture among Indian banks. In 2006, Banking Codes and Standard Boards of India (BCSBI) was established according to the Tarapore committee recommendation. BCSBI formulates codes and standards for the banks to follow with the aim of fair practice to ensure quality customer service.
RBI also issued guidelines on step by step implementation of BASEL III which is applicable to every bank functioning in India. BASEL III has been implemented with the aim of reducing probability of loss and enhance financial stability. It targets higher risk coverage and equity tier capital and hence forming a strong financial infrastructure. BASEL accord also suggests compliance methodologies which is also being followed in Indian banks to avoid money laundering and terror financing.
Every bank in India has formed own internal compliance committee in order to maintain proper compliance function. State bank of India has formed web based Risk Focused Internal Audit (RFIA) system for analytics based continuous assessment of compliance risk. Annual rating is done by BCBS to compare and assess compliance performance of individual banks. According to BCSBI Code Compliance Rating-2017; 12 banks among 51 banks functioning in India scored above 85% (rated as high performing), 29 banks including State Bank groups scored between 70-85% (rated as above average).
Though RBI has put several guidelines and banks are working hard to comply with all the legal, regulatory, financial guidelines still many gaps are being observed in compliance policies of banks.
RBI Dy. Governor M.K. Jain at a summit organized by FICCI in August, 2019 said “RBI has observed lacunae in the compliance culture of Indian banks. Some of the weaknesses and irregularities observed have been recurring in spite of the commitments by RBI.” Many banks have been penalized because of failure to comply with guidelines. However, Senior officials, regulatory bodies and banks are taking every efforts to improve policies and make a robust compliance structure.
How compliance culture can be improved
In order to improve compliance culture, Most importantly, everyone has to take the responsibility to strengthen compliance network. It’s not the duty of a single officer or department or institution; rather everyone should work honestly, loyally and effectively. A well documented compliance mechanism must ensure proper maintenance of it’s key ingredients, which are (i) Compliance Policy; (ii) Compliance Structure; (iii) Compliance Manual/ checklist; (iv) Compliance Personnel; and (v) Compliance Audit. In addition with some measures can be taken:
- Training programmes or courses dedicated on compliance should be designed to make staff aware of laws, rules, regulations and compliance policies.
- A different dedicated team with efficient and skilled person should be formed which will take care of compliance related issues.
- Advancement of technology-based scoring systems to assess risk, tracking of data and maintenance of compliance functions.
- Rewards always gives motivation for good work. Best compliance following staffs, departments and institutions can be rewarded so it gives a positive message to others.
- Imposing penalty is a good way to prevent crime and fraudulent activities. Individuals or institutions who fail to follow compliance guidelines should be penalized.
- Regular updation of policies with changing time and environment is very crucial in order to keep pace with rapidly changing global economy.
- Periodical meeting, discussions among staffs and officials are important in order to update members about new policies, challenges, probable risks and planning risk mitigation process.
- Making staffs technically skilled and aware while using electronic devices to protect cyber-crime. Maintaining secrecy about passwords and other preventive measures must be taken while using intranet and internet so that banks do not face any threat regarding cyber related issues.
- Making staffs aware to avoid personnel interest, mis selling and dishonest measures.
- Ensure product and service quality and taking proper care of USP of products.
We should keep in mind, in the present context, in order to have a good compliance culture both theoretical and practical steps are required. We should follow circulars regularly and make ourselves always prepared to adopt with new things.
Conclusion
In this rapidly changing global economy, where millions and billions transactions are taking place within a second, having a strong compliance mechanism is must. Compliance policy is receiving increasing attention as the financial world is getting larger and complexity is increasing. Moreover, compliance is also important to prevent rapidly occurring cyber-crime. Every member must be aware and prepared to adopt him or herself with changing policies over changing time in order to keep pace with rapidly changing economy. Policies, guidelines, circulars, products alone can not form a strong compliance culture, actual performance of banks depends on it’s quality service, which is ensured by skilled, efficient and honest staff personnel. Bankers should keep in mind that compliance is not just a duty rather it is a tool for value creation which helps to improve service quality and reputation of an institution. I hope with increasing concerns of respective regulatory bodies, officials and every individual banker and also customers will definitely create a robust compliance culture which will help India to be the best performing economy in global market.
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