RBI ushers in fresh set of principles for mid and large layer NBFCs
Mid and large-layer non-banking finance companies (NBFCs) operating in the country have been directed by the central bank to adhere to a set of new principles, standards and procedures. By revising the regulatory framework for NBFCs, which was earlier in effect after having been issued back in October 2021, the Reserve Bank of India has advised that these non-banking finance companies that fall in the Upper Layer (NBFC-UL) and Middle Layer (NBFC-ML) would need to have an independent Compliance Function and a Chief Compliance Officer (CCO).
The revised regulatory norms come as part of the RBI’s move towards putting in place an overall structure for corporate governance, compliance function serves a critical role. Going by a report that quoted from a central bank circular, it has been decided to introduce certain principles, standards and procedures for compliance function in NBFC-UL and NBFC-ML, keeping in view the principles of proportionality.
Regulatory requirements for NBFCs to be followed
This would mean that the NBFCs falling under the upper layer and middle layer categories will have to treat the norms as specified in the circular as a set of minimum guidelines only, and accordingly formulate their guidelines by taking into account their corporate governance framework, the scale of operations, risk profile and organizational structure, among other factors, the RBI circular has said.
Besides, the central bank has also said that, with regard to scope and coverage, the compliance function will have to make sure that all statutory and regulatory requirements for the NBFCs will have to be strictly followed. The requirements include standards of market conduct, managing conflict of interest, treating customers fairly and ensuring the suitability of customer service.
NBFC board or board committee will also have to make sure that an appropriate compliance policy is deployed in the company and implemented fully. Also, the board or board committee of these NBFCs should prescribe the periodicity for review of compliance risk, according to the report quoting the circular.
Appointment of Chief Compliance Officer
It has also been pointed out that NBFCs should put into play a compliance policy approved by the respective boards. The policy will need to elaborate on the compliance philosophy, expectations on compliance culture, structure and role of the compliance function, and the role of CCO, among others, it added.
A Chief Compliance Officer will be expected to appointed by the NBFC for a minimum fixed tenure of not less than 3 years. The RBI, however, added that in exceptional cases, the board ore board committee may exercise the power to relax the minimum tenure by one year, if it can assure that apt planning on succession is undertaken. Also, the company can transfer or remove the Chief Compliance Officer prior to end of the tenure only in exceptional circumstances, if the board or board committee accords prior approval.
The norm also stipulates that the CCO would have to be chosen from among the senior executives of the NBFC and the person picked should be occupying a position not below two levels from the CEO.
While the middle layer NBFCs means deposit-taking companies irrespective of asset size, those asset size of Rs 1,000 crore and above and those undertaking certain type of activities, the upper layer would include NBFCs that are specifically identified by RBI as warranting enhanced regulatory requirement. These non-banking finance companies should ensure that a board-approved policy and compliance function, including the appointment of a CCO, based on the framework is in place by April 1, 2023 and October 1, 2023, it stipulated.