Discuss the compliance functions and role of 'Chief Compliance Officer' in Non-Banking Financial Companies in Upper Layer and Middle Layer.

As part of robust compliance system banks are required inter-alia, to have an effective compliance culture, independent corporate compliance function and strong risk management programme at bank and group level. Such an independent compliance function is required to be headed by a designated Chief Compliance Officer through a suitable process with an appropriate fit and proper evaluation/selection criteria to manage compliance risk effectively. The Reserve Bank of India has place following guidelines on Scale Based Regulation applicable to all Non-Banking Finance Companies in Upper Layer and Middle Layer regarding Compliance Function and role of Chief Compliance Officer to align the supervisory expectations on Chief Compliance Officer with best practices. The Compliance Function is an integral part of effective governance, along with the internal control and risk management processes. The Non-Banking Finance Companies in Upper Layer and Middle Layer shall treat the prescription in the circular as set of minimum guidelines only and accordingly frame their guidelines taking into account their corporate governance framework, the scale of operations, risk profile and organizational structure, etc. Compliance risk is the risk of legal or regulatory sanctions, material financial loss or loss of reputation a Non-Banking Finance Companies (NBFCs) may suffer, as a result of its failure to comply with laws, regulations, rules and codes of conduct etc., applicable to its activities. Compliance Function shall ensure strict observance of all statutory and regulatory requirements for the Non-Banking Finance Companies, including standards of market conduct, managing conflict of interest, treating customers fairly and ensuring the suitability of customer service. The Board/Board Committee shall ensure that an appropriate Compliance Policy it put in place and implemented. Further, the Board/ Board Committee shall prescribe the periodicity for review of Compliance risk. The Senior Management shall carry out an exercise at least once a year, to identify and assess the major Compliance risk facing the Non-Banking Finance Companies and formulate plans to manage it, submit to the Board/Committee a review at prescribed periodicity and a detailed annual review of Compliance and report promptly to the Board/Committee on any material compliance failure while ensuring that appropriate remedial or disciplinary action is taken. The Chief Compliance Officer shall be the nodal point of contact between the Non-Banking Finance Companies and the regulators/supervisors and shall necessarily be participant in the structured or regular discussions held with Reserve Bank of India. Further, compliance to Reserve Bank of India necessarily through the office of the Compliance Function. In some Non-Banking Finance Companies there may be separate departments/divisions looking after compliance with different statutory and other requirement. In such cases the departments concerned shall hold the prime responsibility for their respective areas, which shall be clearly outlined Adherence to applicable statutory provisions and regulations is the responsibility of each staff member. However, the Compliance Function would need to ensure overall oversight. The Non-Banking Finance Companies shall lay down a Board-approved Compliance policy clearly selling outs Compliance philosophy, expectations on Compliance culture, structure and role of the Compliance Function, the role of Chief Compliance Officer, processes for identifying, assessing, monitoring, managing and reporting on Compliance risk. The policy shall be reviewed at least once a year. The Compliance Department shall be headed by the Chief Compliance officer meeting the requirements prescribed in this circular issued by Reserve Bank of India Non-Banking Finance Companies are free to adopt their own organizational structure for the Compliance Function. However, the function shall be independent and sufficiently resourced, its responsibilities shall be clearly specified, and its activities shall be subject to periodic and independent review.