CAIIB ABM Module D UNIT 31 MCQ – Compliance Function and Role of Chief Compliance Officer in NBFCs

Question 1: What is considered an integral part of effective governance in conjunction with internal control and risk management processes?

A. Financial planning
B. Marketing strategy
C. Compliance Function
D. Human resource management

Show Explanation

Correct Answer: C. Compliance Function. The Compliance Function is a key component of effective governance, working alongside internal control and risk management.

Question 2: For NBFCs in the Upper Layer and Middle Layer, how should the prescriptions in the Circular regarding the Compliance Function be treated?

A. As exhaustive guidelines
B. As minimum guidelines
C. As optional suggestions
D. As best practices only

Show Explanation

Correct Answer: B. As minimum guidelines. NBFCs in the Upper Layer and Middle Layer should consider the circular’s prescriptions as a set of minimum guidelines.

Question 3: What factors should NBFCs consider when framing their guidelines based on the minimum prescriptions for the Compliance Function?

A. Competitor practices and market trends
B. Their corporate governance framework, scale of operations, risk profile, and organisational structure
C. Global economic conditions and political stability
D. Shareholder expectations and dividend policy

Show Explanation

Correct Answer: B. Their corporate governance framework, scale of operations, risk profile, and organisational structure. NBFCs should tailor their guidelines based on these internal factors.

Question 4: What is defined as ‘the risk of legal or regulatory sanctions, material financial loss or loss of reputation an NBFC may suffer, as a result of its failure to comply with laws, regulations, rules and codes of conduct, etc., applicable to its activities’?

A. Market risk
B. Credit risk
C. Operational risk
D. Compliance risk

Show Explanation

Correct Answer: D. Compliance risk. This is the definition provided for Compliance risk.

Question 5: Which aspect of an NBFC’s operations does Compliance Function specifically ensure strict observance of?

A. Investment portfolio allocation
B. All statutory and regulatory requirements
C. Employee recruitment procedures
D. Infrastructure development plans

Show Explanation

Correct Answer: B. All statutory and regulatory requirements. The Compliance Function is responsible for ensuring strict observance of these requirements.

Question 6: Besides statutory and regulatory requirements, what else does the Compliance Function ensure strict observance of?

A. Employee dress code policies
B. Standards of market conduct, managing conflict of interest, treating customers fairly and ensuring suitability of customer service
C. Vendor payment terms
D. Office administration procedures

Show Explanation

Correct Answer: B. Standards of market conduct, managing conflict of interest, treating customers fairly and ensuring suitability of customer service. These are also under the purview of the Compliance Function.

Question 7: Who is responsible for ensuring that an appropriate Compliance Policy is put in place and implemented in an NBFC?

A. The Chief Executive Officer
B. The Internal Audit Department
C. The Board / Board Committee
D. The Shareholders

Show Explanation

Correct Answer: C. The Board / Board Committee. The Board or a designated Board Committee holds this responsibility.

Question 8: What action shall the Board / Board Committee prescribe regarding the review of Compliance risk?

A. The personnel responsible for the review
B. The format of the review report
C. The periodicity for review
D. The software to be used for review

Show Explanation

Correct Answer: C. The periodicity for review. The Board or Board Committee sets how often the Compliance risk should be reviewed.

Question 9: At what minimum frequency shall the Senior Management carry out an exercise to identify and assess the major Compliance risk facing the NBFC?

A. Once every two years
B. Once every three months
C. Once a year
D. Once every six months

Show Explanation

Correct Answer: C. Once a year. This annual exercise is a minimum requirement for Senior Management.

Question 10: What should the Senior Management formulate based on the identification and assessment of major Compliance risks?

A. Business expansion plans
B. Employee training modules
C. Plans to manage the identified risks
D. Customer relationship strategies

Show Explanation

Correct Answer: C. Plans to manage the identified risks. Formulating plans to manage risks is the follow-up action after assessment.

Question 11: To whom shall the Senior Management submit a review at the prescribed periodicity and a detailed annual review of Compliance?

A. The external auditors
B. The regulators/supervisors
C. The Board / Board Committee
D. The operational departments

Show Explanation

Correct Answer: C. The Board / Board Committee. Regular and annual Compliance reviews are submitted to the Board or its Committee.

Question 12: What action should the Senior Management take promptly in case of any material Compliance failure?

A. Issue a press release
B. Report to the Board/Board Committee and ensure appropriate remedial or disciplinary action is taken
C. Conduct an internal staff meeting
D. Ignore the failure if it is not significant

Show Explanation

Correct Answer: B. Report to the Board/Board Committee and ensure appropriate remedial or disciplinary action is taken. Prompt reporting and action are crucial.

Question 13: Which function is responsible for assisting the Board and the Senior Management in overseeing the implementation of Compliance Policy?

A. The Finance Function
B. The Human Resources Function
C. The Compliance Function
D. The Marketing Function

Show Explanation

Correct Answer: C. The Compliance Function. Assisting in the implementation of the Compliance Policy is a key responsibility of this function.

Question 14: What documents, among others, are included under the scope of the Compliance Policy implementation that the Compliance Function assists with overseeing?

A. Customer feedback forms
B. Policies and procedures, prescriptions in Compliance Manuals, internal codes of conduct
C. Annual budget documents
D. IT system user manuals

Show Explanation

Correct Answer: B. Policies and procedures, prescriptions in Compliance Manuals, internal codes of conduct. These are integral parts of the Compliance Policy implementation.

Question 15: What central role does the Compliance Function play within the organisation?

A. Managing the investment portfolio
B. Identifying the level of Compliance risk
C. Developing new financial products
D. Handling customer complaints directly

Show Explanation

Correct Answer: B. Identifying the level of Compliance risk. This is a primary role of the Compliance Function.

Question 16: What action shall be taken by the Compliance Function regarding the Compliance risks in existing/new products and processes?

A. They shall be ignored if deemed low
B. They shall be analysed and appropriate risk mitigants put in place
C. They shall be outsourced to a third party
D. They shall be reported only to the operational departments

Show Explanation

Correct Answer: B. They shall be analysed and appropriate risk mitigants put in place. Analysis and mitigation are necessary steps for managing product-related Compliance risks.

Question 17: Who shall be a member of the ‘new product committee/s’?

A. The Chief Financial Officer
B. The Chief Compliance Officer (CCO)
C. The Head of Marketing
D. A representative from the IT department

Show Explanation

Correct Answer: B. The Chief Compliance Officer (CCO). The CCO’s membership in new product committees is specified.

Question 18: For how long shall all new products be subjected to intensive monitoring to ensure adequate monitoring of indicative parameters of Compliance risk?

A. At least the first three months
B. At least the first year
C. At least the first six months of introduction
D. For a period determined by the marketing department

Show Explanation

Correct Answer: C. At least the first six months of introduction. Intensive monitoring is required for this period.

Question 19: How does the Compliance Function monitor and test Compliance?

A. By conducting random employee interviews
B. By performing sufficient and representative Compliance testing
C. By relying solely on self-assessments by other departments
D. By reviewing external audit reports only

Show Explanation

Correct Answer: B. By performing sufficient and representative Compliance testing. This is the method for monitoring and testing Compliance.

Question 20: To whom shall the results of Compliance testing be reported?

A. The external auditors
B. The Senior Management
C. The new product committee
D. The shareholders

Show Explanation

Correct Answer: B. The Senior Management. The results of Compliance testing are reported to the Senior Management.

Question 21: What shall the Compliance Function periodically circulate among staff along with required preventive instructions?

A. Performance appraisal results
B. Market analysis reports
C. Instances of compliance failures
D. New product launch details

Show Explanation

Correct Answer: C. Instances of compliance failures. Sharing these instances helps in preventing recurrence.

Question 22: What shall be examined for major Compliance failures?

A. Market impact
B. Staff accountability
C. Financial implications only
D. Customer feedback

Show Explanation

Correct Answer: B. Staff accountability. Accountability is examined for major Compliance failures.

Question 23: What does the Compliance Function ensure compliance of regulatory/supervisory directions from RBI in?

A. Only the letter of the directions
B. Only the spirit of the directions
C. Both letter and spirit in a time-bound and sustainable manner
D. A manner determined by market conditions

Show Explanation

Correct Answer: C. Both letter and spirit in a time-bound and sustainable manner. Compliance should adhere to both aspects effectively.

Question 24: What does RBI continue to expect regarding Compliance Program?

A. A program that focuses only on reporting
B. An effective Compliance Program where all Risk Mitigation Plan (RMP) / Monitorable Action Plan (MAP) points are complied with within timelines
C. A program that is reviewed only annually
D. A program that is developed by an external consultant

Show Explanation

Correct Answer: B. An effective Compliance Program where all Risk Mitigation Plan (RMP) / Monitorable Action Plan (MAP) points are complied with within timelines. This is a specific expectation from RBI.

Question 25: What may unsatisfactory compliance with RMP/MAP invite from RBI?

A. A letter of appreciation
B. A formal warning
C. Penal action
D. An extension of timelines

Show Explanation

Correct Answer: C. Penal action. Non-compliance with RMP/MAP may lead to penal action.

Question 26: In cases where the NBFC’s activities are regulated by authorities other than RBI, what does the Compliance Function attend to?

A. Compliance with directions from RBI only
B. Compliance with directions from other regulators
C. Compliance with internal policies only
D. Compliance with international standards

Show Explanation

Correct Answer: B. Compliance with directions from other regulators. The Compliance Function addresses compliance with directions from other relevant regulators.

Question 27: What should be brought to the notice of RBI by the Compliance Function regarding other regulators/authorities?

A. Positive feedback received from other regulators
B. Discomfort conveyed to the NBFC on any issue by other regulators, and action taken by any other authorities’/law enforcement agencies
C. Minor operational issues reported to other regulators
D. Changes in leadership of other regulatory bodies

Show Explanation

Correct Answer: B. Discomfort conveyed to the NBFC on any issue by other regulators, and action taken by any other authorities’/law enforcement agencies. Such matters need to be reported to RBI.

Question 28: Which department may serve as a reference point for staff from operational departments seeking clarifications/interpretation of various regulatory and statutory guidelines?

A. The Human Resources Department
B. The Marketing Department
C. The Compliance Department
D. The Finance Department

Show Explanation

Correct Answer: C. The Compliance Department. The Compliance Department can provide guidance on regulatory matters.

Question 29: Who shall be the nodal point of contact between the NBFC and the regulators/supervisors?

A. The Chief Financial Officer
B. The Chief Compliance Officer (CCO)
C. The Head of Internal Audit
D. The Chairman of the Board

Show Explanation

Correct Answer: B. The Chief Compliance Officer (CCO). The CCO serves as the primary contact point.

Question 30: Who shall necessarily be a participant in the structured or other regular discussions held with RBI?

A. A representative from the legal department
B. The Chief Compliance Officer (CCO)
C. A member of the operational staff
D. The head of the IT department

Show Explanation

Correct Answer: B. The Chief Compliance Officer (CCO). The CCO’s participation in discussions with RBI is mandatory.

Question 31: How shall compliance to RBI inspection reports be communicated to RBI?

A. Directly by the operational department
B. Through the office of the Chief Executive Officer
C. Necessarily through the office of the Compliance Function
D. By the external auditors

Show Explanation

Correct Answer: C. Necessarily through the office of the Compliance Function. The Compliance Function is the channel for this communication.

Question 32: In NBFCs with separate departments/divisions for compliance with different requirements, who holds the prime responsibility for their respective areas?

A. The Compliance Function collectively
B. The departments concerned
C. The Senior Management
D. The Board

Show Explanation

Correct Answer: B. The departments concerned. The individual departments are primarily responsible for their specific compliance areas.

Question 33: How should the responsibilities of departments/divisions looking after compliance with different requirements be outlined?

A. Verbally during staff meetings
B. Clearly outlined
C. As flexible guidelines
D. In an informal memo

Show Explanation

Correct Answer: B. Clearly outlined. The responsibilities need to be distinctly defined.

Question 34: Who is responsible for adherence to applicable statutory provisions and regulations?

A. Only the Compliance Function
B. Only the Senior Management
C. Each staff member
D. Only the Board

Show Explanation

Correct Answer: C. Each staff member. Compliance is a responsibility of every staff member.

Question 35: Despite individual staff member responsibility, who needs to ensure overall oversight of compliance?

A. The Human Resources Department
B. The Finance Department
C. The Compliance Function
D. The Legal Department

Show Explanation

Correct Answer: C. The Compliance Function. The Compliance Function provides overall oversight.

Question 36: What kind of policy shall the NBFC lay down regarding Compliance?

A. A draft Compliance Policy
B. A basic Compliance guideline
C. A Board-approved Compliance Policy
D. An optional Compliance framework

Show Explanation

Correct Answer: C. A Board-approved Compliance Policy. The policy must be approved by the Board.

Question 37: What should the Board-approved Compliance Policy clearly spell out regarding Compliance philosophy?

A. Market competition analysis
B. The NBFC’s Compliance philosophy
C. Employee benefits
D. Product development timelines

Show Explanation

Correct Answer: B. The NBFC’s Compliance philosophy. The policy should define the NBFC’s approach to Compliance.

Question 38: What expectations should the Board-approved Compliance Policy clearly spell out regarding Compliance culture?

A. Expectations on profit margins
B. Expectations on Compliance culture
C. Expectations on customer acquisition
D. Expectations on technological advancements

Show Explanation

Correct Answer: B. Expectations on Compliance culture. The policy should articulate the desired Compliance culture within the organisation.

Question 39: What should the Board-approved Compliance Policy clearly spell out regarding the structure and role of the Compliance function?

A. The marketing structure and role
B. The IT structure and role
C. The structure and role of the Compliance function
D. The sales structure and role

Show Explanation

Correct Answer: C. The structure and role of the Compliance function. The policy should define how the Compliance function is structured and what its responsibilities are.

Question 40: The framework for Compliance Function and Role of Chief Compliance Officer is applicable to which categories of Non-Banking Financial Companies?

A. NBFC-BL only
B. NBFC-UL & NBFC-ML
C. All NBFCs irrespective of layer
D. NBFC-TL only

Show Explanation

Correct Answer: B. NBFC-UL & NBFC-ML. The framework specifically applies to these two layers.

Question 41: The introduction section of the relevant framework highlights the importance of the Compliance Function as part of what broader concept?

A. Business development
B. Effective governance
C. Risk assessment only
D. Operational efficiency

Show Explanation

Correct Answer: B. Effective governance. The Compliance Function is presented as integral to effective governance.

Question 42: The Circular’s prescriptions for the Compliance Function in Upper and Middle Layer NBFCs are intended to be a base level of guidance. What should NBFCs do with these guidelines?

A. Follow them exactly without any changes.
B. Treat them as maximum requirements that cannot be exceeded.
C. Frame their own guidelines taking into account their specific characteristics, using the circular as minimum guidelines.
D. Ignore them if they have their own internal policies.

Show Explanation

Correct Answer: C. Frame their own guidelines taking into account their specific characteristics, using the circular as minimum guidelines. NBFCs should build upon the minimum guidelines provided.

Question 43: What is the potential consequence of failure to comply with applicable laws, regulations, rules, and codes of conduct for an NBFC, according to the definition of Compliance risk?

A. Increased profitability
B. Legal or regulatory sanctions, material financial loss or loss of reputation
C. Improved customer satisfaction
D. Smoother operational processes

Show Explanation

Correct Answer: B. Legal or regulatory sanctions, material financial loss or loss of reputation. These are the potential negative outcomes of non-compliance.

Question 44: Ensuring the suitability of customer service is a part of strict observance of what by the Compliance Function?

A. Internal HR policies
B. Marketing strategies
C. Standards of market conduct
D. IT security protocols

Show Explanation

Correct Answer: C. Standards of market conduct. Ensuring suitable customer service falls under market conduct standards.

Question 45: Who is responsible for prescribing the frequency at which Compliance risk should be reviewed in an NBFC?

A. The Chief Compliance Officer
B. The Senior Management
C. The Board / Board Committee
D. The Internal Audit Department

Show Explanation

Correct Answer: C. The Board / Board Committee. This is a responsibility of the Board or its Committee.

Question 46: What must the Senior Management do at least annually regarding Compliance risk?

A. Develop new marketing campaigns
B. Identify and assess major Compliance risk
C. Recruit new Compliance staff
D. Conduct customer satisfaction surveys

Show Explanation

Correct Answer: B. Identify and assess major Compliance risk. This annual exercise is required for Senior Management.

Question 47: When the Senior Management reports a material Compliance failure to the Board/Board Committee, what else must they ensure?

A. That the failure is kept confidential
B. That appropriate remedial or disciplinary action is taken
C. That blame is assigned immediately
D. That external consultants are hired to handle the issue

Show Explanation

Correct Answer: B. That appropriate remedial or disciplinary action is taken. Reporting is coupled with ensuring corrective actions.

Question 48: Assisting the Board and Senior Management in overseeing the implementation of which policy is a responsibility of the Compliance Function?

A. Investment Policy
B. Compliance Policy
C. Dividend Policy
D. Lending Policy

Show Explanation

Correct Answer: B. Compliance Policy. The Compliance Function assists in the implementation of the Compliance Policy.

Question 49: Analysing Compliance risks in new products and processes and putting in place appropriate risk mitigants is a responsibility of which function?

A. The Sales Function
B. The Compliance Function
C. The Finance Function
D. The Product Development Function

Show Explanation

Correct Answer: B. The Compliance Function. This function is responsible for managing Compliance risks associated with products and processes.

Question 50: Who is the nodal point of contact between the NBFC and the regulators/supervisors?

A. The Chief Financial Officer
B. The Chief Executive Officer
C. The Head of Operations
D. The Chief Compliance Officer (CCO)

Show Explanation

Correct Answer: D. The Chief Compliance Officer (CCO). The CCO serves as this crucial point of contact.

Question 1: What is considered an integral part of effective governance in conjunction with internal control and risk management processes?

Question 2: For NBFCs in the Upper Layer and Middle Layer, how should the prescriptions in the Circular regarding the Compliance Function be treated?

Question 3: What factors should NBFCs consider when framing their guidelines based on the minimum prescriptions for the Compliance Function?

Question 4: What is defined as ‘the risk of legal or regulatory sanctions, material financial loss or loss of reputation an NBFC may suffer, as a result of its failure to comply with laws, regulations, rules and codes of conduct, etc., applicable to its activities’?

Question 5: Which aspect of an NBFC’s operations does Compliance Function specifically ensure strict observance of?

Question 6: Besides statutory and regulatory requirements, what else does the Compliance Function ensure strict observance of?

Question 7: Who is responsible for ensuring that an appropriate Compliance Policy is put in place and implemented in an NBFC?

Question 8: What action shall the Board / Board Committee prescribe regarding the review of Compliance risk?

Question 9: At what minimum frequency shall the Senior Management carry out an exercise to identify and assess the major Compliance risk facing the NBFC?

Question 10: What should the Senior Management formulate based on the identification and assessment of major Compliance risks?

Question 11: To whom shall the Senior Management submit a review at the prescribed periodicity and a detailed annual review of Compliance?

Question 12: What action should the Senior Management take promptly in case of any material Compliance failure?

Question 13: Which function is responsible for assisting the Board and the Senior Management in overseeing the implementation of Compliance Policy?

Question 14: What documents, among others, are included under the scope of the Compliance Policy implementation that the Compliance Function assists with overseeing?

Question 15: What central role does the Compliance Function play within the organisation?

Question 16: What action shall be taken by the Compliance Function regarding the Compliance risks in existing/new products and processes?

Question 17: Who shall be a member of the ‘new product committee/s’?

Question 18: For how long shall all new products be subjected to intensive monitoring to ensure adequate monitoring of indicative parameters of Compliance risk?

Question 19: How does the Compliance Function monitor and test Compliance?

Question 20: To whom shall the results of Compliance testing be reported?

Question 21: What shall the Compliance Function periodically circulate among staff along with required preventive instructions?

Question 22: What shall be examined for major Compliance failures?

Question 23: What does the Compliance Function ensure compliance of regulatory/supervisory directions from RBI in?

Question 24: What does RBI continue to expect regarding Compliance Program?

Question 25: What may unsatisfactory compliance with RMP/MAP invite from RBI?

Question 26: In cases where the NBFC’s activities are regulated by authorities other than RBI, what does the Compliance Function attend to?

Question 27: What should be brought to the notice of RBI by the Compliance Function regarding other regulators/authorities?

Question 28: Which department may serve as a reference point for staff from operational departments seeking clarifications/interpretation of various regulatory and statutory guidelines?

Question 29: Who shall be the nodal point of contact between the NBFC and the regulators/supervisors?

Question 30: Who shall necessarily be a participant in the structured or other regular discussions held with RBI?

Question 31: How shall compliance to RBI inspection reports be communicated to RBI?

Question 32: In NBFCs with separate departments/divisions for compliance with different requirements, who holds the prime responsibility for their respective areas?

Question 33: How should the responsibilities of departments/divisions looking after compliance with different requirements be outlined?

Question 34: Who is responsible for adherence to applicable statutory provisions and regulations?

Question 35: Despite individual staff member responsibility, who needs to ensure overall oversight of compliance?

Question 36: What kind of policy shall the NBFC lay down regarding Compliance?

Question 37: What should the Board-approved Compliance Policy clearly spell out regarding Compliance philosophy?

Question 38: What expectations should the Board-approved Compliance Policy clearly spell out regarding Compliance culture?

Question 39: What should the Board-approved Compliance Policy clearly spell out regarding the structure and role of the Compliance function?

Question 40: The framework for Compliance Function and Role of Chief Compliance Officer is applicable to which categories of Non-Banking Financial Companies?

Question 41: The introduction section of the relevant framework highlights the importance of the Compliance Function as part of what broader concept?

Question 42: The Circular’s prescriptions for the Compliance Function in Upper and Middle Layer NBFCs are intended to be a base level of guidance. What should NBFCs do with these guidelines?

Question 43: What is the potential consequence of failure to comply with applicable laws, regulations, rules, and codes of conduct for an NBFC, according to the definition of Compliance risk?

Question 44: Ensuring the suitability of customer service is a part of strict observance of what by the Compliance Function?

Question 45: Who is responsible for prescribing the frequency at which Compliance risk should be reviewed in an NBFC?

Question 46: What must the Senior Management do at least annually regarding Compliance risk?

Question 47: When the Senior Management reports a material Compliance failure to the Board/Board Committee, what else must they ensure?

Question 48: Assisting the Board and Senior Management in overseeing the implementation of which policy is a responsibility of the Compliance Function?

Question 49: Analysing Compliance risks in new products and processes and putting in place appropriate risk mitigants is a responsibility of which function?

Question 50: Who is the nodal point of contact between the NBFC and the regulators/supervisors?

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