RBI’S enforcement dept to develop rule-based approach

Move aimed at better identification of actionable violations

THE RESERVE Bank of India (RBI) will kick off operations of a new department for enforcement on April 1 in line with the central bank’s broader plan to develop a rule-based approach to deal with breaches of law, rules and directions and to make the enforcement process stringent and consistent.

The department, will ensure separation, within the RBI, of those who oversee the possible rule breaches and those who decide on the punitive actions, according to sources. According to them, the creation of this department is expected to enable better identification of actionable violations pointed out through surveillance reports and verified market intelligence leads through a broad and consistent policy for enforcement by the RBI. “This will also lead to RBI having a structured framework for enforcement based on prevalence and severity of violations,” they said.

In its sixth bi-monthly monetary policy, the RBI had announceditsintentionofsettingup a separate enforcement department, thus rolling out a major internal institutional reform. Regulation and Surveillance (also calledassupervision)aretwocritical areas of the RBI, among a host of central banking functions that the RBI is entrusted with.

The sources said that regulations are continuously reviewed and followed up by rigorous surveillance of the regulated entities to ensure compliance. In cases where the Reserve Bank identifies a breach in regulation by the banks it has, among other enforcement actions, the powers to impose penalties under the Banking Regulation Act, 1949. Similarly, as the regulator, the RBI also has powers to impose penalty under the RBI Act, the Payment and Settlement Systems Act, 2007 and SARFAESI Act, 2002.

Currently, the penalty powers are spread across various departments within the RBI, which regulate and supervise the regulated entities. Among the regulated entities, commercial banks in particular are systemically more important institutions and violations of instructions relating to credit discipline, regulatory reporting, anti-money laundering processes and procedures, misselling and unfair treatment to customers by these entities can have serious systemic implications. “Therefore, contravention of the instructions need to trigger enforcement actions, penal or otherwise, from RBI, which is critical to ensure discipline in the system,” the sources said.

In the US, the Federal Reserve can take informal and formal enforcement actions against entities it supervises and individuals affiliated with such entities, for violations of laws, rules or regulations, unsafe or unsound practices, breaches of fiduciary duty, and violations of written commitments. Formal actions include cease and desist orders, written agreements, PCA directives, removal and prohibition orders and orders assessing civil money penalties. Informal enforcement actions are used when circumstances warrant a less severe form of action than a formal action. Examples of informal actions include commitments, board resolutions, and memoranda of understanding.

In the UK, the Bank of England’s Prudential Regulation Authority (PRA) is required to maintain a number of policies governing the conduct of enforcement investigations, including policies on decision-making, the imposition of penalties, including the calculation of financial penalties and interviews and investigations at the request of overseas regulators. While the PRA may choose to carry out investigations using its own investigation teams, it may instead (or additionally) outsource the conduct of those investigations (including the gathering and analysis of evidence and interviews of individuals) to third parties.