Chapter 31: Compliance Function and Role of Chief Compliance Officer in NBFCs (CAIIB – Paper 1)
1. What is the main objective of the Compliance Function in NBFCs?
A. To increase the profitability of the NBFC
B. To manage customer relationships
C. To ensure adherence to regulatory and legal requirements
D. To handle marketing and sales strategies
The Compliance Function in NBFCs ensures that the company adheres to regulatory guidelines, legal requirements, and internal policies to mitigate operational, legal, and reputational risks.
2. Who is primarily responsible for overseeing compliance in an NBFC?
A. Chief Financial Officer (CFO)
B. Chief Risk Officer (CRO)
C. Head of Operations
D. Chief Compliance Officer (CCO)
The Chief Compliance Officer (CCO) is responsible for establishing and monitoring compliance policies, reporting to the board, and ensuring the NBFC follows all regulatory requirements.
3. What does the Scale Based Regulation (SBR) framework for NBFCs aim to do?
A. Categorize NBFCs based on size and risk profile to tailor regulatory requirements
B. Standardize all NBFCs under one uniform regulatory requirement
C. Reduce the compliance burden for banks only
D. Focus solely on customer grievance redressal
The SBR framework categorizes NBFCs into different layers (base, middle, upper) depending on their size, complexity, and risk, allowing proportional regulation and compliance.
4. Which of the following is NOT a key responsibility of the CCO in an NBFC?
A. Reporting compliance breaches to the board
B. Approving all loans and investments
C. Monitoring implementation of regulatory requirements
D. Conducting internal compliance audits
While the CCO monitors compliance and reports breaches, approving loans and investments is the responsibility of credit/operations departments, not the compliance function.
5. How does SBR help in strengthening the role of the Compliance Function in NBFCs?
A. By removing regulatory requirements for smaller NBFCs
B. By focusing only on financial reporting
C. By requiring proportionate compliance systems based on size and risk
D. By outsourcing compliance entirely to external consultants
The SBR framework ensures that NBFCs implement compliance measures proportional to their size and complexity, strengthening governance without overburdening smaller entities.
6. What is the purpose of the Transition Path in the SBR framework for NBFCs?
A. To immediately impose full compliance requirements on all NBFCs
B. To provide a phased approach for NBFCs to meet new regulatory requirements
C. To exempt smaller NBFCs permanently from compliance
D. To delay compliance reporting indefinitely
The Transition Path allows NBFCs to gradually adopt new compliance and governance requirements under SBR, providing time to strengthen internal systems and processes.
7. Which NBFCs are primarily impacted by the Transition Path under SBR?
A. Only base layer NBFCs
B. Only upper layer NBFCs
C. All NBFCs moving to a higher regulatory layer or new requirements
D. Only NBFCs with zero compliance history
The Transition Path applies to NBFCs that are moving from one regulatory layer to another or need to comply with new requirements, ensuring a smooth adjustment period.
8. How is the timeline for the Transition Path determined for NBFCs?
A. Fixed 1-year period for all NBFCs
B. Determined by the NBFC’s board discretion
C. Based on market conditions only
D. Specified by RBI based on NBFC size, complexity, and risk profile
RBI prescribes the timeline for the Transition Path depending on the size, complexity, and risk profile of the NBFC to ensure compliance is practical and effective.
9. Which of the following best describes the compliance expectation during the Transition Path?
A. Gradual implementation of compliance systems and reporting standards
B. Complete exemption from reporting obligations
C. Outsourcing all compliance functions without internal checks
D. Only internal audits are required, no board reporting
During the Transition Path, NBFCs are expected to gradually implement compliance systems, strengthen governance, and start reporting as per new regulatory standards.
10. Why is the Transition Path considered important for corporate governance in NBFCs?
A. It reduces the number of compliance officers needed
B. It ensures a structured and monitored adoption of governance and compliance standards
C. It eliminates the need for board oversight temporarily
D. It allows NBFCs to bypass RBI regulations permanently
The Transition Path helps NBFCs gradually adopt governance and compliance systems, strengthening corporate governance without disrupting business operations abruptly.
11. In NBFC-Upper Layer (NBFC-UL) and Middle Layer (NBFC-ML), who is responsible for establishing the compliance framework?
A. Chief Risk Officer only
B. Board of Directors only
C. Chief Compliance Officer in coordination with the board
D. External auditors
The CCO, in coordination with the board, is responsible for establishing and implementing the compliance framework in NBFC-UL and NBFC-ML, ensuring adherence to regulatory guidelines.
12. Which of the following is a key responsibility of the CCO in NBFC-UL & NBFC-ML?
A. Monitoring compliance with applicable laws and internal policies
B. Approving lending decisions independently
C. Handling customer grievances directly
D. Managing investment portfolios of clients
The CCO is responsible for monitoring and ensuring compliance with applicable laws, regulations, and internal policies, while reporting breaches to the board.
13. How does the compliance function differ between NBFC-UL and NBFC-ML?
A. NBFC-ML has no compliance requirements
B. NBFC-UL does not need board reporting
C. NBFC-ML can bypass risk management policies
D. NBFC-UL requires more extensive compliance systems and reporting compared to NBFC-ML
NBFC-UL, being larger and more complex, requires more robust compliance systems, detailed reporting, and board oversight, while NBFC-ML has proportionate but less intensive requirements.
14. Which of the following statements best describes the reporting structure of the CCO in NBFC-UL & NBFC-ML?
A. The CCO reports only to the CEO
B. The CCO reports directly to the Board and senior management
C. The CCO reports only to external auditors
D. The CCO reports only to the Risk Management Committee
To ensure independence and effectiveness, the CCO in NBFC-UL & NBFC-ML reports directly to the Board and senior management regarding compliance matters.
15. What is the role of the compliance function in risk management for NBFC-UL & NBFC-ML?
A. To approve high-risk loans
B. To manage the investment portfolio of clients
C. To identify, monitor, and mitigate regulatory and operational risks
D. To perform internal audits of financial statements only
The compliance function supports risk management by identifying regulatory and operational risks, monitoring adherence to laws and policies, and helping mitigate potential issues in NBFC-UL & NBFC-ML.
16. Which of the following is a key responsibility of the CCO regarding compliance reporting in NBFC-UL & NBFC-ML?
A. Preparing periodic compliance reports for the Board and senior management
B. Approving all customer loans independently
C. Conducting marketing campaigns
D. Managing treasury operations
The CCO is responsible for reporting compliance status, breaches, and mitigation measures to the Board and senior management periodically to ensure effective governance.
17. How frequently should the CCO report compliance issues to the Board in NBFC-UL?
A. Only annually
B. At regular intervals and as required by significant breaches
C. Only when requested by auditors
D. Only at the time of annual financial reporting
The CCO must report regularly and immediately escalate any significant compliance breaches to the Board to ensure timely corrective action.
18. Which of the following is a component of the compliance monitoring framework in NBFC-UL & NBFC-ML?
A. Loan approval by branch managers
B. Customer grievance redressal only
C. Compliance audits, risk assessment, and reporting
D. Marketing and promotional activities
The compliance monitoring framework includes internal audits, risk assessment, monitoring adherence to laws and internal policies, and reporting of compliance status to the board.
19. In case of a significant regulatory breach, what action is expected from the CCO of an NBFC-UL?
A. Wait for the annual audit report before taking action
B. Report the issue only internally to the department head
C. Outsource the compliance investigation
D. Immediately escalate the issue to the Board and senior management for corrective action
The CCO must promptly escalate significant breaches to the Board and senior management to ensure timely remediation and compliance with regulatory expectations.
20. How does the Board oversee the effectiveness of the compliance function in NBFC-UL & NBFC-ML?
A. By approving all transactions personally
B. By reviewing compliance reports, assessing risk mitigation, and ensuring independence of CCO
C. By conducting customer surveys directly
D. By managing day-to-day operations of branches
The Board oversees the compliance function by reviewing reports submitted by the CCO, ensuring effective risk mitigation, and maintaining the independence and authority of the compliance function.
