Transcript Capital charge for Operational Risk

RESERVE BANK OF INDIA
www.rbi.org.in
Compliance in
Indian Financial
Industry: The Way
Forward
Compliance in Indian Financial
Services Industry:
The Way Forward
Two-hundred-fifteen years ago, U.S. statesman
Benjamin Franklin wrote
“In this world nothing can be said to be certain,
except death and taxes.”
Were Franklin alive today, he no doubt would have
extended the sentence to include the word
“compliance” as well. Government regulations, and
compliance to them, constitute one of the biggest issues
facing organizations today: corporate governance.
The Old Way
Up to this point, the emphasis has been on doing
everything possible to meet compliance
requirements. Organisations have focused on
improving internal controls and addressing gaps
in processes to keep pace with the legislation.
However, as the regulatory burden increases,
several commentators observe that the cost of
controls appears to be spiraling upwards at an
exponential rate, without the corresponding
reduction in compliance breaches that might be
expected
The Old Way
In the financial services industry that
complying with laws and regulations is a
major drain on resources whether it be new
regulatory capital rules, new accounting
standards or other regulatory compliance
requirements
•
•
•
AML & KYC norms
Basle II
Clause 49 -SEBI
The Old Way
At the moment, compliance is a narrowly
defined, but massively burdensome
attempt to satisfy regulators. It can, and
should, be an integral tool for a more
effectively run business. This means
approaching the whole effort with business
goals in mind – compliance should be a
valuable side benefit that is encompassed
by this process, but it is not the be-all and
end-all. It is an integral part of day-to-day
activity.
The Old Way
At one bank, senior executives
estimate that 30% of back and middle
office management time on a day-to-day
basis is consumed by compliance
activities.
The Way Forward
Despite this, institutions can lessen
the burden or – if organisations are
more ambitious – turn their
compliance efforts into a potential
source of value for the business and
even potentially a source of
competitive advantage
The Way Forward
Addressing them innovatively could help
compliance imperative into a competitive
opportunity by using it as a catalyst to
strengthen processes and controls and by
providing a more assured and informed
platform for taking appropriate value
creating strategic decisions.
The Way Forward
Basel II has provided a catalyst for the
further integration of strategic,
operational, reputational and regulatory
risks into an overall framework for
strategic decision-making that includes
both financial and non-financial risks..
The Way Forward
Basle II- A New Paradigm of
Regulation
• Deregulation
• Sharing of Regulatory Space
• Regulation privatized
• Pillar 2– Dialogue and Consultation
The Way Forward
INTERNAL GOVERNANCE
SUPERVISORY REVIEW PROCESS
ICAAP
SREP
Assess all risks; identify material
ones; identify controls to mitigate the
risks
Identify, review and evaluate all risk
factors and control factors/ RAS
DIALOGUE
*Identify amount and quality of
internal capital in relation to risk
profile, strategies and business plan
*Assess, review and evaluate the
ICAAP
CHALLENGE
Assess, review and evaluate
compliance with minium standards
set in regulation
PRODUCE ICAAP NUMBER
AND ASSESSMENT
SREP CONCLUSIONS
*Narrow scope
supervisory review
ICAAP process/ results
fully satisfactory
CAPITAL
ICAAP process/
results not fully
satisfactory
ICAAP results
Pillar 1
minimum
regulatory
capital
Capital
allocated for
Pillar 2
Specific
own funds
requirement
Whole range of
available prudential
measures
including own funds
Supervisory
evaluation of
on-going
compliance
with
minimum
standards &
requirements
The Way Forward
Compliance is the overlapping space
where
• The public private divide will vanishcompliance officers’ conference in India
organised by RBI
• Business Groups and Risk Group and
Audit Group will share a common spaceERM
The Way Forward
A more integrated approach could help
to bring non-financial risks more firmly
onto the management radar. It could
also help to streamline the activities of
compliance, internal audit, risk
management and other support
functions responsible for managing nonfinancial risks.
The Way Forward
The Way Forward
The Way Forward
The Way Forward
As well as thinking about structure and
process, an organisation will also need
to spend time on cultural issues – this is
all about establishing a top-down risk
management framework in which
everyone’s role is clearly defined and
understood and is part of their daytoday job.
The Way Forward
Successful business outcomes are
dependent on consistently appropriate
workplace behavior and a culture that is
driven by widely shared and reinforced
perceptions, values and attitudes,
associated with risk and compliance.
The Way Forward
High-profile corporate crises and scandals
have highlighted the important role of
culture and behaviors, not to mention the
widely publicised outcomes of employee
compensation claims in cases such as
discrimination or workplace bullying
The Way Forward
Regardless of how good internal
controls are, risk management efforts
will fail unless businesses go beyond
compliance to address the supporting
culture and behaviours of the individuals
throughout the organisation
The Way Forward
People are arguably the most valuable and
frequently the most expensive resource in
any organisation. They are critical to
business success and yet, at the same
time, pose the most substantial risk to
business objectives – and the greatest
challenge to any set of regulations and
resulting controls, however robust or
rigorous they may be.
The Way Forward
Employees are motivated, talented,
bright individuals. People are your key
asset, but they are also potentially
your greatest risk. Fundamentally,
organisation is a collection of wilful,
creative, intelligent individuals and, as
a result, there is substantial risk that
is inherent in the management of
those people as a business resource.
The Way Forward
Compliance Innovation
Technology
Business Process reengineering
Organisational Restructuring
Enterprise-wide Risk Management
Risk Culture
Compliance Culture
Thank You
Pramod K Panda
Reserve Bank of India
[email protected]