The supervision of regulatory compliance has broadly 3 pillars of execution.
- Onsite regulatory inspection for verification of compliance standards, a traditional way of supervision.
- Compulsive establishment of internal processes system to ensure compliance with regulatory requirements coupled with internal supervisions/audit of such compliances.
- Reporting Mechanism to the Regulatory Authorities including (i) reporting to the regulator by the regulated entities and (ii) collection of evidences from the market through surveillance and other means of information collected by the regulator.
Insofar as the cost of compliance is concerned, the 1st and the 3rd are cost centers for the regulators whereas the 2nd one is a cost centre for the regulated entity.
Market Regulations are evolved out of the market eco system and stems out of the necessity of preventing abuse of marketplace. Abusive practices that could be detrimental to the market in specific and the economy in general need to be stopped and prevented. Any compliance standard that requires to be enforced initially and maintained thereafter involves cost. The higher the standards, the higher the degree of enforcement, the higher will be cost of compliance. Such costs attribute to the regulator and the regulated as well. In fact the cost factor shall not be a traded off against the standards of compliance, or the enforcement thereof. Such nearsightedness is bound to have a colossal impact on the market ecosystem.
Harmonization at multiple levels/segments of governmental reporting brings in uniformity of system and ease of compliance. For example, in the case of SEBI regulated entities there exist intermediate levels of supervision such as stock exchanges, depositories and SRO’s. MCA requires another set of reporting on all areas of corporate compliance. Interlinking of these compliance repositories, electronically, will considerably ease compliance processes at the end of the regulator and the regulated. Further, deliberate reporting of distorted data to each regulator can be obviated.
The internal compliance of regulated entities and the internal supervisions is responsibility of the Board of Directors (BOD) and the BOD shall be made collectively and the Directors individually responsible for such compliances. While the Compliance Officers are responsible for the execution of the various compliances and at a micro level, the BOD is responsible for the enforcement of systematic mechanisms, processes and internal controls. FIU India has prudently understood this concept and has called upon the regulated entities to nominate a Designated Director, making him is responsible for the compliance with AML Laws. Similarly other regulators can conceive the mechanism at the BOD level, with preferably a Promoter Director being responsible for establishment and maintenance of compliance systems within the entity. Taking a cue from the provisions of section 447 of the Companies Act 2013, the dereliction of individual responsibility by the Designated Promoter Director could be made liable with severe consequences.
Compliance Officers are, conceptually, extended arm of the regulator within the organization. However, a Compliance Officers, being a paid employee of the regulated entity, is mostly under duress from the business segment to gloss over various violations. Lost business opportunities due to compliance issues are treated as “Cost of Compliance” and the Compliance Officer is often put to blame. Blowing of the whistle subjects him to career ‘apartheid’ and results in him being ostracized. If the concept of Compliance Officer functioning as an extended arm of the regulator has to yield results, there should be a process for registration for Compliance Officers with the regulator. Only Registered Compliance Officers can be recruited by the regulated entities. He should make confidential reporting to the regulator on a periodic basis, thereby giving him the power of law. Further any exit of the Compliance Officers from the regulated entity, either voluntarily or under compulsion, shall be preceded by an exit interview with the regulator and the severance shall be subject to the approval of the regulator.
Bone of the regulators, perhaps except SEBI, vehemently and vociferously publish the penal actions against intermediaries. Such publicity may be a deterrent for the erring entities, but has huge systemic and industry impact. This could be one the reasons that RBI is more perceived to be a persuasive regulator than a punishment-hungry regulator.
The aforesaid measures will quietly strengthen the internal controls for regulatory compliance, considerably enhance the standards of compliance, usher in ease of enforcement, and above all contain the cost of compliance for the regulator and the regulated..