Www.rbi.org.in RESERVE BANK OF INDIA. Compliance in Indian Financial Industry: The Way Forward

www.rbi.org.in

RESERVE BANK OF INDIA

Compliance in Compliance in Indian Financial Indian Financial

Industry: The Way Industry: The Way ForwardForward

Compliance in Indian Financial Compliance in Indian Financial Services Industry: Services Industry: The Way ForwardThe Way Forward

Two-hundred-fifteen years ago, U.S. statesman

Benjamin Franklin wrote

“In this world nothing can be said to be certain, except death and taxes.”

Were Franklin alive today, he no doubt would have extended the sentence to include the word “compliance” as well. Government regulations, and compliance to them, constitute one of the biggest issues facing organizations today: corporate governance.

Up to this point, the emphasis has been on doing everything possible to meet compliance requirements. Organisations have focused on improving internal controls and addressing gaps in processes to keep pace with the legislation. However, as the regulatory burden increases, several commentators observe that the cost of controls appears to be spiraling upwards at an exponential rate, without the corresponding reduction in compliance breaches that might be expected

The Old Way The Old Way

The Old WayThe Old Way

In the financial services industry that complying with laws and regulations is a major drain on resources whether it be new regulatory capital rules, new accounting standards or other regulatory compliance requirements

• AML & KYC norms

• Basle II

• Clause 49 -SEBI


At the moment, compliance is a narrowly defined, but massively burdensome attempt to satisfy regulators. It can, and should, be an integral tool for a more effectively run business. This means approaching the whole effort with business goals in mind – compliance should be a valuable side benefit that is encompassed by this process, but it is not the be-all and end-all. It is an integral part of day-to-day activity.


At one bank, senior executivesestimate that 30% of back and middleoffice management time on a day-to-daybasis is consumed by complianceactivities.

The Way ForwardThe Way Forward

Despite this, institutions can lessen the burden or – if organisations are more ambitious – turn their compliance efforts into a potential source of value for the business and even potentially a source of competitive advantage

Addressing them innovatively Addressing them innovatively could help compliance imperative could help compliance imperative into a competitive opportunity by into a competitive opportunity by using it as a catalyst to strengthen using it as a catalyst to strengthen processes and controls and by processes and controls and by providing a more assured and providing a more assured and informed platform for taking informed platform for taking appropriate value creating appropriate value creating strategic decisions.strategic decisions.



Basel II has provided a catalyst for the further integration of strategic, operational, reputational and regulatory risks into an overall framework for strategic decision-making that includes both financial and non-financial risks..


Basle II- A New Paradigm of Basle II- A New Paradigm of RegulationRegulation

•DeregulationDeregulation

•Sharing of Regulatory SpaceSharing of Regulatory Space

•Regulation privatizedRegulation privatized

•Pillar 2– Dialogue and ConsultationPillar 2– Dialogue and Consultation


ICAAP results

ICAAP process/ results not fully

satisfactory

Identify, review and evaluate all risk factors and control factors/ RAS

*Assess, review and evaluate the ICAAP

SREP

Whole range ofavailable prudential

measures including own funds

Specific own funds

requirement

Capital allocated for

Pillar 2

ICAAP

*Identify amount and quality of internal capital in relation to risk

profile, strategies and business plan

PRODUCE ICAAP NUMBERAND ASSESSMENT

Assess all risks; identify material ones; identify controls to mitigate the

risks

Assess, review and evaluatecompliance with minium standards

set in regulation

SREP CONCLUSIONS

ICAAP process/ resultsfully satisfactory

Pillar 1 minimum regulatory

capital

SUPERVISORY REVIEW PROCESS

*Narrow scope supervisory review

CAPITAL

Supervisory evaluation of

on-goingcompliance

withminimum

standards & requirements

INT

ER

NA

L G

OV

ER

NA

NC

E

DIALOGUE

CHALLENGE


Compliance is the overlapping space Compliance is the overlapping space where where

•The public private divide will vanish-The public private divide will vanish-compliance officers’ conference in compliance officers’ conference in India organised by RBIIndia organised by RBI

•Business Groups and Risk Group and Business Groups and Risk Group and Audit Group will share a common Audit Group will share a common space-ERMspace-ERM


A more integrated approach could help to bring non-financial risks more firmly onto the management radar. It could also help to streamline the activities of compliance, internal audit, risk management and other support functions responsible for managing non-financial risks.





As well as thinking about structure and process, an organisation will also need to spend time on cultural issues – this is all about establishing a top-down risk management framework in which everyone’s role is clearly defined and understood and is part of their day-today job.

Successful business outcomes are dependent on consistently appropriate workplace behavior and a culture that is driven by widely shared and reinforced perceptions, values and attitudes, associated with risk and compliance.



High-profile corporate crises and scandalshave highlighted the important role of culture and behaviors, not to mention the widely publicised outcomes of employee compensation claims in cases such as discrimination or workplace bullying


Regardless of how good internal controls are, risk management efforts will fail unless businesses go beyond compliance to address the supporting culture and behaviours of the individuals throughout the organisation

People are arguably the most valuable and frequently the most expensive resource in any organisation. They are critical to business success and yet, at the same time, pose the most substantial risk to business objectives – and the greatest challenge to any set of regulations and resulting controls, however robust or

rigorous they may be.


Employees are motivated, talented, bright individuals. People are your key asset, but they are also potentially your greatest risk. Fundamentally, organisation is a collection of wilful, creative, intelligent individuals and, as a result, there is substantial risk that is inherent in the management of those people as a business resource.


Compliance InnovationCompliance Innovation

TechnologyTechnology

Business Process reengineeringBusiness Process reengineering

Organisational RestructuringOrganisational Restructuring

Enterprise-wide Risk ManagementEnterprise-wide Risk Management

Risk CultureRisk Culture

Compliance CultureCompliance Culture


Thank YouThank You

Pramod K PandaPramod K Panda

Reserve Bank of IndiaReserve Bank of India

[email protected]

mailto:[email protected]

Documents

Www.rbi.org.in RESERVE BANK OF INDIA. Compliance in Indian Financial Industry: The Way Forward