Compliance and Compliance Function in a Bank

By Raghunath Pradhan

Meaning

The literal meaning of compliance is obedience to a rule or command. It is adherence to the rules. These can be law, policy, procedure and/or standards. Compliance protects from reputational risk. It improves company’s vision and value as well as prevents and detects violation of rules. Non compliance of the set standards lead  to fine thereby damage the reputation of the company and in some extreme cases imprisonment as well to the erring officials.    

Compliance  should  be a part of organization culture., it is not just the responsibility of compliance staff.

Regulatory Compliance vs. corporate compliance

There are two main types of compliance – Regulatory Compliance and Corporate Compliance. Regulatory compliance (external forces) implies observance of all Government and regulatory rules, regulations and acts which are applicable to a particular company. All guiding and parenting Act under which the company is registered and other rules and regulations that govern the business and operation of the company needs to be complied with by a company. In case of a banking institution in Nepal the governing acts, rules and regulations includes Bank and Financial Institution Act, Nepal Rastra Bank Act, NRB directives, Company Act, Income Tax Act etc. Provision made on such act, rules and regulations are binding to the banking institution of Nepal and needs to comply.

Corporate compliance implies all rules and procedures and practices which has been placed by the corporation itself with the approval of competent authority of the corporation for its smooth operation. But such rules and procedure should not be contravened to external rules and regulation applicable to the corporation.

It will be the duty of all staff members of the corporation to comply with all regulatory compliance as well as corporate compliance otherwise the concerned staff and the corporation as a whole may face a problem.

Compliance Function

The main role and responsibility of the compliance function is to assist the senior management for managing the compliance risk effectively. Compliance risk is the risk of legal or regulatory sanction, material financial loss or loss to reputation that a bank may suffer as a result of its failure to comply with laws, regulations, rules, related to self regulatory organization standards and codes of conduct applicable to its banking activities. So, the basic function of a compliance department it to ensure that the organization is adhering all external and internal acts, rules, regulations, guidelines and procedures and so on.

The compliance function identify, record and assess compliance risk associated with the banks operations including new products and practices, proposed establishment of new types of business, customer relations and material changes in nature of such relations. It covers the fields such as lending, operations, deposits etc.

Some of the basic principles of the compliance function are:

The Board of Directors oversees the compliance risk of the bank obtaining periodic reports from the management. It needs to approve the compliance policy of the bank and review and update it at least once in a year or as per requirement.

Senior management needs to formulate compliance policy and place with due approval from the Board. It is the responsibility of the senior management  to implement the approved policy and place periodic report to the board.

Compliance function must be independent from the part of operation side. So, it should not compromise with the business of the bank.

The Compliance function must be given formal status defining its authority and position in the hierarchical structure of the bank through the policy approved by the Board.

The head of compliance shall be responsible for the day to day management of the activities of the compliance function. He needs to identify, assess and monitor the compliance risk faced by the bank and advise and report to the Board through senior management. He should be aware with the regulatory environment, implement compliance tools, hold compliance audit, review compliance regulation regularly and train employees to adhere the compliance policy of the bank and to be acquainted with the change rules and regulations.

Staff exercising compliance function must have necessary qualifications, experience and professional and personal qualities to discharge their duties smoothly and effectively.

As per regulatory guidelines there should be a separate compliance department to discharge compliance function. The department shall be responsible for ensuring that the bank is adhering/complying with all applicable rules and regulations domestically and globally wherever applicable and avoid misdeed that could result in heavy fines, legal complications and reputation damage. The head of Compliance department shall be the member of Assets Laundering Prevention Committee and the secretary of the committee shall be Compliance Officer.