The Reserve Bank of India (RBI) has prescribed a comprehensive compliance framework for Non-Banking Financial Companies (NBFCs) classified under the Upper Layer (NBFC-UL) and Middle Layer (NBFC-ML). This framework emphasizes the establishment of a dedicated Compliance Function and the appointment of a Chief Compliance Officer (CCO) to ensure regulatory adherence, effective compliance risk management, and the development of a robust compliance culture within these entities.
Implementation Timeline
NBFCs falling under the Upper Layer were required to implement the compliance framework, including the appointment of a CCO and adoption of a Board-approved compliance policy, by April 1, 2023. For NBFCs in the Middle Layer, the deadline was October 1, 2023.
Compliance Function: Scope and Staffing
The Compliance Function is responsible for ensuring the NBFC’s strict adherence to all statutory and regulatory requirements. This includes maintaining standards of market conduct, managing conflicts of interest, ensuring fair customer treatment, and verifying the suitability of services and products offered to customers.
The function must be staffed with personnel who possess not only basic qualifications and operational experience (such as in audit or inspection functions) but also demonstrated expertise in areas such as legal and regulatory frameworks, accountancy, risk management, and information technology. Institutions are also expected to establish appropriate succession planning mechanisms to mitigate future skill gaps and ensure continuity.
Appointment and Tenure of the Chief Compliance Officer (CCO)
The CCO must be appointed for a minimum fixed tenure of three years. In exceptional circumstances, the Board or a designated Board Committee may relax this requirement by up to one year, subject to the existence of a clearly defined succession plan.
Prior to the appointment, premature transfer, resignation, early retirement, or removal of the CCO, the NBFC is required to notify the Senior Supervisory Manager, Department of Supervision, RBI. Such communication must be accompanied by:
- A detailed profile of the proposed candidate,
- A ‘Fit and Proper’ certification from the Managing Director and Chief Executive Officer (MD & CEO) of the NBFC confirming that the individual satisfies the RBI’s supervisory standards,
- A justification for the proposed change, if applicable.
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