Skip to content
Thomson Reuters
Regulatory Risk

Financial institutions are feeling the pain of KYC

Steve Pulley

11 May 2016

A woman walks into a subway in the central business district of Beijing April 16, 2007. China's economy probably gathered pace in the first quarter, partly on the back of resurgent loan growth and underscoring the need for Beijing to take further tightening steps in the months ahead. The median forecast of 12 economists polled by Reuters was for gross domestic product to have grown by 11.0 percent from a year earlier in the January-March period. REUTERS/Claro Cortes IV (CHINA) - RTR1OOZ4
REUTERS/Claro Cortes IV

As regulatory change creates longer and ever more complex Know Your Customer (KYC) processes — financial institutions are facing higher costs and more strain on resources.

Thomson Reuters survey of 772 decision-makers from financial institutions worldwide identified changing regulations, increasing costs and the level of resources required to adhere to KYC as critical issues.

Download the latest KYC survey report 

Given the high level of corporates who are reporting that they have not had a good KYC experience, it is clear that the situation on both sides of the onboarding and due diligence process is in need of review.

Regulatory change

The volume of regulatory change is considered one of the most challenging issues for financial institutions.

In the survey, 79% of respondents said they had changed their KYC processes or were considering doing so in the near future as a direct result of the 2012 FATF Recommendations which are being adopted and implemented worldwide.

The impact of these proposed policies is potentially even broader given the possible consequences of not meeting the requirements. Nearly 7 out of 10 respondents were concerned about restrictions on business, with financial penalties, damaged reputation and loss of investor confidence also cited as key concerns.

feeling-the-pain-of-kyc-video-preview

Rising KYC costs

Cost pressures are mounting with 10% of financial institutions spending approximately U.S. $100 million or more on KYC/client due diligence and client onboarding. At the top end, some financial institutions are spending in excess of $500 million a year on these activities.

To add to the pain, our research shows that average client onboarding costs rose by 19% last year and are expected to increase another 16% this year.

Skills shortage

The issue that came out as the most challenging is a lack of people with the right skills to undertake KYC compliance.

Half of all respondents stated that the number of employees working on KYC had increased over the past year. This acute shortage means senior management are getting more involved and are therefore distracted from other revenue-related activities.

Tellingly, 70% of C-suite respondents said they had dedicated more time and attention to KYC over the last year.

Unexpected demands

The testing backdrop to these increasing challenges includes unexpected events such as the Panama Papers.

As a result of the #PanamaPapers leak, the UK’s Financial Conduct Authority gave banks seven days to respond with information about potential relationships with structures or companies created by the law firm involved.

For many organizations, providing that level of detail is a challenge as the information they have may not be up to date. In fact, according to the survey, some 11% of respondents said they did not have a formal process or program to refresh due diligence of their clients.

Poor client experience

Our research also shows implications for the clients of the financial institutions.

The timelines for onboarding are increasing, with financial institutions reporting an average onboarding time of 24 days, representing an average increase of 22% over the course of 2015, and expecting to rise a further 18% this year.

A separate survey of corporate clients highlights the magnitude of the issue, with 30% stating that onboarding took 2 months or more and 10% reporting that it took more than four months.

Furthermore, corporates reported that on average they had 8 different interactions with their financial institution during the process.

All of these pressures are leading to poorer onboarding and due diligence client experiences, as well as processes that are becoming unsustainable. This puts financial organizations at higher risk of potential regulatory fines and penalties. Clearly, things need to evolve, and quickly.

feeling-the-pain-of-kyc-infographic

Download the latest KYC survey report 

How Thomson Reuters can help

There is a way for financial institutions to reduce their KYC burden.

  • Thomson Reuters KYC Managed Service is a global solution developed for banks, investment managers and corporates to simplify and streamline customer counterparty due diligence and the ongoing maintenance of KYC records — through collecting, classifying and verifying a client’s identity — in line with ever-changing regulatory demands.
  • Thomson Reuters Client Onboarding automates the onboarding of new clients and ongoing refresh cycles through a centralized, scalable and cost effective solution, to facilitate compliance with regulatory demands. The solution combines data, document, rule, hierarchy, and workflow offerings in one platform.

Thomson Reuters Risk Management Solutions bring together trusted regulatory, customer data, intuitive software and expert insight and services so professionals and enterprises can confidently anticipate and act on risks to make smarter decisions that accelerate business performance.

cta-find-out-more-banner

Staying on top of shareholding disclosures Innovative KYC compliance sculpted in Africa Regulatory reform is no barrier for Asia firms MiFID II countdown: Will markets be ready? How can RegTech ease the risk management burden? Is audit management technology fit for the rapidly changing times? Big Data and RegTech team up in the fight against financial crime What corporate treasurers need to know about MiFID II How to stop your KYC data going stale Are buy-side firms ready for MiFID II?