Chapter 26: Compliance Function in Banks (CAIIB – Paper 1)
1. What is the correct definition of insolvency?
A. A person’s ability to pay all debts on time
B. A legal process of declaring profits for shareholders
C. A situation where an individual or company is unable to meet its financial obligations
D. The act of repaying loans in installments
Insolvency occurs when an individual or entity cannot pay its debts as they become due, leading to potential bankruptcy proceedings.
2. What is the primary purpose of a bank’s compliance policy?
A. To maximize profits through risk-taking
B. To ensure adherence to legal and regulatory requirements
C. To reduce employee turnover
D. To evaluate customer satisfaction levels
Compliance policies are designed to ensure that banks follow all applicable laws, regulations, and internal standards to avoid legal or regulatory penalties.
3. Which of the following is a key principle of compliance in banks?
A. Focus solely on profit maximization
B. Delegating all responsibility to external auditors
C. Avoiding documentation of compliance procedures
D. Establishing clear accountability and continuous monitoring
Core compliance principles include clear accountability, continuous monitoring, risk-based approach, and promoting a culture of compliance within the bank.
4. What is the difference between insolvency and bankruptcy?
A. Insolvency is a financial state; bankruptcy is a legal declaration of that state
B. Bankruptcy happens before insolvency
C. Insolvency is voluntary; bankruptcy is always criminal
D. There is no difference; they are identical
Insolvency refers to the financial condition of being unable to pay debts, whereas bankruptcy is a formal legal process declared by a court based on insolvency.
5. Which of the following best describes the compliance function in banks?
A. A department focused on marketing and customer acquisition
B. A branch that manages investment portfolios
C. An independent function that ensures adherence to laws, regulations, and internal policies
D. The team responsible for IT security only
The compliance function is an independent unit in banks tasked with monitoring and ensuring adherence to all regulatory requirements and internal policies.
6. What is the main objective of compliance processes and procedures in banks?
A. To reduce the number of employees in compliance
B. To increase customer acquisition speed
C. To improve IT infrastructure only
D. To ensure systematic adherence to regulatory and internal requirements
Compliance processes and procedures are designed to provide a structured approach for the bank to meet regulatory requirements, mitigate risk, and ensure consistent internal policy adherence.
7. Which of the following best describes a compliance programme?
A. A software used for customer account management
B. A structured set of policies, procedures, and controls to ensure regulatory compliance
C. A marketing campaign for bank products
D. A training programme for front office staff only
A compliance programme is a structured framework including policies, procedures, controls, and training designed to ensure that the bank operates within legal and regulatory boundaries.
8. Which of the following is a key component of a bank’s compliance programme?
A. Customer onboarding without documentation
B. Ignoring regulatory changes for efficiency
C. Risk assessment, monitoring, reporting, and training
D. Only internal audit without monitoring
Effective compliance programmes include risk assessment, continuous monitoring, timely reporting of breaches, and staff training to ensure regulatory adherence.
9. Why is documentation of processes and procedures critical in compliance?
A. It provides evidence of compliance and guides consistent practices
B. It is optional and used for decoration
C. It only helps marketing teams
D. It reduces the workload of regulators
Documented processes and procedures serve as proof of regulatory compliance, help in audits, and ensure consistent implementation of compliance measures across the bank.
10. Which of the following best practices should a bank follow when implementing a compliance programme?
A. Ignore staff training and rely only on software
B. Conduct risk-based assessments, regular monitoring, and provide employee training
C. Limit compliance checks to annual audits only
D. Focus solely on customer complaints
Banks should adopt a proactive, risk-based approach in compliance programmes, including monitoring, regular reporting, and employee training to prevent regulatory breaches.
11. What is the primary scope of the compliance function in a bank?
A. Managing the bank’s investment portfolio
B. Marketing bank products to customers
C. Ensuring adherence to regulatory requirements, internal policies, and ethical standards
D. Handling customer complaints only
The compliance function’s scope includes monitoring and ensuring the bank complies with laws, regulations, internal policies, and ethical standards across all operations.
12. Which of the following activities fall within the scope of compliance function?
A. Designing bank logos and advertisements
B. Risk-based compliance monitoring, reporting breaches, training staff
C. Deciding interest rates on deposits
D. Customer relationship management only
Compliance functions include risk-based monitoring, reporting breaches to management or regulators, and conducting training to ensure staff awareness of legal and regulatory requirements.
13. How does the compliance function contribute to corporate governance?
A. By increasing branch expansion speed
B. By creating marketing campaigns
C. By managing the bank’s investment portfolio
D. By promoting transparency, accountability, and adherence to laws and policies
Compliance strengthens corporate governance by ensuring that the bank operates transparently, follows laws and regulations, and maintains accountability at all levels of management.
14. Which of the following is NOT considered part of the compliance function’s scope?
A. Approving customer loan applications independently
B. Monitoring regulatory changes
C. Training staff on regulatory updates
D. Reporting breaches to senior management
While compliance monitors and advises, it does not have authority to approve individual customer loan applications, which remains under business or credit functions.
15. Why is it important for the compliance function to have independence within a bank?
A. To manage customer relationships effectively
B. To objectively monitor adherence to regulations and internal policies without influence from business units
C. To increase sales and profits
D. To approve bank budgets independently
Independence ensures that compliance can objectively assess risks, monitor adherence, and report issues without pressure or influence from business functions.
16. Who is primarily responsible for overseeing the compliance function in a bank?
A. Branch Manager
B. Chief Risk Officer
C. Chief Compliance Officer (CCO)
D. Internal Audit Head
The Chief Compliance Officer (CCO) is responsible for managing the compliance function, ensuring adherence to laws, regulations, internal policies, and reporting to the Board and senior management.
17. Which of the following is a key responsibility of the Chief Compliance Officer?
A. Approving loan sanctions independently
B. Monitoring regulatory changes and ensuring implementation within the bank
C. Handling customer complaints exclusively
D. Managing bank’s investment portfolio
A CCO monitors regulatory developments, updates policies, ensures implementation of compliance measures, and reports compliance status to the Board and senior management.
18. How does the Chief Compliance Officer support corporate governance?
A. By managing marketing campaigns
B. By approving employee salaries
C. By handling IT security only
D. By ensuring compliance with laws and ethical standards, promoting transparency and accountability
The CCO ensures that the bank adheres to legal, regulatory, and ethical standards, which strengthens transparency, accountability, and overall corporate governance.
19. To whom does the Chief Compliance Officer typically report?
A. Branch Head only
B. Board of Directors and Senior Management
C. Only to the Internal Audit Department
D. To external auditors exclusively
The CCO reports directly to the Board and senior management to provide independent oversight of compliance risks and adherence to regulations.
20. Which of the following activities is NOT a responsibility of the Chief Compliance Officer?
A. Approving daily cash transactions at branches
B. Developing compliance policies and procedures
C. Conducting compliance risk assessments
D. Training staff on regulatory requirements
The CCO oversees compliance policies and monitoring but does not get involved in operational tasks like approving daily cash transactions at branches.
21. What is compliance risk in a banking context?
A. Risk of financial market fluctuations
B. Risk of operational failures only
C. Risk of legal or regulatory sanctions, financial loss, or reputational damage due to non-compliance
D. Risk of technology breakdowns
Compliance risk arises when a bank fails to comply with laws, regulations, or internal policies, potentially resulting in legal penalties, financial loss, or reputational harm.
22. Which of the following is a key element of compliance reporting in banks?
A. Reporting only to customers
B. Timely and accurate reporting of compliance breaches to senior management and regulators
C. Reporting marketing campaigns to regulators
D. Reporting only annual profits to compliance department
Effective compliance reporting ensures that breaches or risks are communicated promptly to senior management and regulators for corrective action.
23. Which of the following is NOT considered a compliance risk?
A. Changes in interest rates affecting loan profitability
B. Non-adherence to KYC and AML regulations
C. Breach of internal policies
D. Failure to report suspicious transactions to authorities
Changes in interest rates are financial or market risks, not compliance risks. Compliance risks relate to breaches of laws, regulations, or internal policies.
24. How should banks manage compliance reporting obligations?
A. By ignoring minor breaches
B. By reporting only yearly to regulators
C. By delegating all reporting to external auditors
D. By establishing structured reporting channels and timelines for internal and external reporting
Banks must establish clear reporting frameworks and timelines to ensure compliance breaches are promptly reported internally and to regulators.
25. Which of the following best describes the purpose of compliance risk assessment?
A. To increase loan disbursal speed
B. To identify, evaluate, and mitigate potential legal, regulatory, and policy breaches
C. To improve marketing campaigns
D. To monitor employee attendance
Compliance risk assessments help banks proactively identify areas of potential regulatory or policy breaches and take corrective measures to mitigate risk.
