s s mundra : re - emphasizing the role of compliance function in banks keynote address by mr s s mundra, deputy governor of the reserve bank of india, at the centre for advanced financial research and learning ( cafral ) conference of chief compliance officers in rbi, mumbai, 27 august 2014. * * * assistance provided by ms ranjana sahajwala in preparation of this address is gratefully acknowledged. 1. shri g. gopalakrishna, director, cafral ; shri p. r. ravi mohan, chief general manager - in - charge, department of banking supervision, reserve bank of india ( rbi ) and the conference participants! it is a pleasure for me to deliver the keynote address at this conference of senior representatives of the compliance departments of commercial banks. across the globe, it is an accepted fact that compliance is an area that warrants considerable attention. in recent times, the emergence of compliance function as an area of greater focus is an acknowledgement of the damaging impact of non - compliance, not only on an entity ’ s own reputation but, more broadly, also on the confidence in the system. regulators, supervisors and international standard setters have become increasingly cognizant of the fact that merely enacting rules and regulations is a futile exercise unless these are complied with, both in letter and spirit, by the regulated entities. not surprisingly, on account of a bigger push from the regulators / supervisors, the compliance function has assumed massive significance within the bank ’ s internal structure and organization. in my address today, i intend to talk about the relevance of compliance function within the bank ’ s overall business strategy, operations and conduct and re - emphasize some of the key elements of the compliance framework that we would want to see in practice in our banks. background 2. it has been some time now since the global financial crisis ( gfc ) first broke in 2008, extending its impact across the globe over time. indeed, complete recovery of the financial system from the strenuous impact of the crisis is yet to be accomplished. the years since the crisis have extensively been dedicated by international standard setters and domestic authorities to both enhancing and reorienting financial sector regulations to ensure the sector ’ s resilience in the face of present and future problems. however, even while standard setters and regulators have remained engaged in plugging the regulatory loopholes, several instances of misconduct on the part of banks continue to come to light, which keep reminding us of the need to ref

bcbs ) and the financial stability board ( fsb ) have now put in place peer review mechanisms to ensure that national jurisdictions comply with international standards in right measure and spirit. these are in addition to the existing assessments of compliance of jurisdictions to international standards done by the international monetary fund ( imf ) / world bank, under the financial sector assessment programs ( fsaps ). within national jurisdictions, regulators / supervisors and financial sector entities have realized the significance of the compliance function in ensuring good conduct of business at the entity level and facilitating a safe and sound banking system at the systemic level. consequently, assessment of compliance is increasingly being focused on in supervisory oversight. is compliance a specific risk area? 8. the basel committee on banking supervision, in its guidance “ compliance and the compliance function in banks ”, issued in april 2005 states “ the compliance function is an independent function that identifies, assesses, advises on, monitors and reports on the bank ’ s compliance risk, that is, the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self - regulatory organization standards, and codes of conduct applicable to its banking activities ”. 9. what is the “ compliance risk ” referred to above? is it an independent risk that banks need to manage just as they manage credit risk, market risk or operational risk? is it a subset of another risk or is it simply a function that needs to be performed as part of banking bis central bankers ’ speeches business? in the era of traditional banking business, simple products, and intense regulation, compliance was relatively simple. banks had to comply with the provisions of the specific acts and regulations set by the regulators. compliance then could be identified simply as a function to be discharged as part of business. however, with globalization, liberalization, increased adoption and integration of it in the business processes along with the introduction of new, innovative and complex products, the compliance function has gained in stature and significance. while compliance may still not be considered an independent “ risk ” function, over the last few years, it has definitely evolved as an independent function in banks that impacts other risk / s. 10. compliance is generally considered to be a part of operational risk. under basel ii, operational risk is defined as “ the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. this definition includes legal risk, but excludes