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Operational risk management

Innovation in KYC: The rise of jurisdictional managed services

Kate Jones Troy  Global Head of Policy and Standards, Risk Managed Services

Neil Jeans  Financial Crime Compliance & Risk Consultant

Kate Jones Troy  Global Head of Policy and Standards, Risk Managed Services

Neil Jeans  Financial Crime Compliance & Risk Consultant

The importance of innovation in the Know Your Customer (KYC) space cannot be overemphasized. Inefficient processes continue to significantly impact the global annual KYC spend of financial institutions. Furthermore, lengthy delays in gathering required KYC information negatively impact the end-client experience.

In response, regulators, financial institutions (FIs) and their end-clients, and other industry participants continue to seek advances in technology and ways to source and gather data to enhance and expedite compliance with KYC requirements.

Where will this search take us in 2017 and beyond, and will KYC managed services provide the answer?

A complex regulatory backdrop

The regulatory backdrop against which banks, other FIs and regulated entities must conduct their KYC activities is characterized by complexity. Disparate regulations around the globe, no recognized standards to which organizations can work and increasing regulatory pressure are converging to create an environment where KYC is becoming more costly and time-consuming.

Institutions are using different data sets with different levels of sophistication to execute their KYC obligations. This is, at least in part, due to differing individual risk profiles. While regulators are loath to be too prescriptive in what is required, taking into consideration the risk-based approach recommended for Anti-Money Laundering (AML) programs, a consequence of this is inconsistency in how FIs interpret requirements.

The industry would benefit significantly from standardization of regulations and processes to execute against them. For example, the Financial Action Task Force (FATF) Recommendations, globally recognized as the international standard for AML programs to combat money laundering and terrorist financing, as well as the FATF Mutual Evaluations, which “assess global AML and countering the financing of terrorism compliance and identify jurisdictions that are not compliant or deficient in attaining FATF standards,” are driving a degree of standardization.

Fostering innovation

Is this complex and constantly evolving regulatory backdrop conducive to fostering innovation? It is evident that some of the big banks that have been the subject of regulatory action are now more cautious and conservative in their approach to KYC. Others, who have escaped regulatory action, are more innovative and are looking for creative ways to streamline their processes, manage regulatory expectations, enhance end-client experience and reduce costs without impacting effective management of risks.

Working together: The regulator and the industry

Many global regulators are already looking at ways to revise regulations in order to make them clearer and consistent with global regulatory themes so that it is easier for organizations to comply with the plethora of rules that govern them. The first step is to establish frameworks to provide guidance for compliance without being overly prescriptive, and the second is to improve the regulatory environment so that digital innovation can flourish.

For example, regulators in Singapore and Australia  are working on “frameworks” as a means to provide the necessary guidance. These efforts are consistent with FATF’s recommended risk-based approach.

Turning to the industry, a major challenge for banks and FIs is to collate and manage the data that is available to maximize and leverage the full value it has to offer. In the digital age, availability of data is no longer a constraint, but effectively harnessing the power of this data is a significant challenge. A key determinant in FIs’ collective ability to embrace digital innovation in KYC is likely to be how willing regulators are to engage with the industry.

Data challenges

Digitalization has meant that there is no shortage of data in the modern world. The availability of data is a given in many areas – for example, names of senior managers for public companies or regulated entities as well as their registered and operating addresses. Significantly though, data is not consistently available in certain key areas for KYC including the important area of ultimate beneficial ownership.

But data’s growing availability does not mean that data does not present challenges. Such challenges include determining whether the data is reliable, how to collate it, how to ensure it is up to date and how to transform it into something ready for use that provides valuable insight. Separately, failure to access and utilize available relevant data could  potentially result  in regulatory action.

An evolving solution space: KYC

A recent Thomson Reuters global survey reveals striking inefficiencies in how financial institutions currently conduct their KYC. The survey revealed that banks are taking an average of 48 days to on-board a new customer, spending in excess of $60 million per annum on KYC and client on-boarding. FIs often prefer to contact clients as the initial source of information, rather than using available data sources to build a KYC profile of the client.

In talking about the survey, Dominic Mac, Thomson Reuters Risk Managed Services, explains, “Jurisdictional managed services centralize operational processes on behalf of subscribing banks. By opening up regional data sources in a more scalable and technology-driven manner, there is an opportunity to create a better client experience by creating fewer low-value touch points with the FIs, and by leveraging data rather than documentation.”

This applies equally to all types of FIs and other regulated entities. By managing the client identity verification process, a managed service enables internal staff at FIs to concentrate on risks identified, KYC process and, separately, focus on their core businesses. Further – and significant – benefits are lower end: client on-boarding costs and time savings for end-clients who do not have to give the same information to multiple FIs or other regulated entities.

What’s next?

The current regulatory environment does not yet fully support digital innovation around KYC and there is an onus on the regulators to address this. Furthermore, there will need to be widespread adoption of innovative solutions by banks, FIs and other regulated entities to continue progress on meaningful solutions in the KYC area.

As ever, the best solution is for global regulators and regulated industry participants to work together to improve the effectiveness and efficiency of AML programs including the critical KYC component of these programs. The foundations of any solution must ensure that regulated entities can confidently and expeditiously execute their KYC obligations, whilst keeping a favorable end-client experience at the forefront of efforts in this area.

As innovation within this space continues to gather momentum in 2017 and into 2018, jurisdictional managed services for KYC are likely to take center stage as the solution that seeks to harness the power of digital innovation to the benefit of all stakeholders.

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