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KYC policy and the path to standardization

Marisol Lopez
Marisol Lopez
EMEA & Americas Regional Head of Policy & Standards, Thomson Reuters
KYC policy and the path to standardization. Photography: Jorge Adorno
Photography: Jorge Adorno

Different approaches to KYC policy mean the financial services industry has struggled to overcome the challenges of AML regulation. Managed services are a big step towards standardization, alongside greater collaboration.

  1. A lack of harmonized guidance on the application of AML regulations has led to different approaches and interpretations of KYC policy.
  2. Managed services enable multiple FIs and their clients to access online platforms that streamline and improve operational efficiencies on KYC.
  3. This is helping to facilitate standardization of KYC policy, but it needs to be accompanied by ongoing collaboration and buy-in from all stakeholders.

The different Know Your Customer (KYC) policy approaches of banks and financial institutions (FIs) reflect a variety of jurisdictional regulatory requirements, as well as significant differences in the availability and quality of guidance.

This has led to multiple interpretations of largely similar laws and regulations.

In some jurisdictions, comprehensive KYC guidance is available. In the UK, for example, guidance from the Joint Money Laundering Steering Group is a valuable resource for financial institutions.

Where detailed guidance is lacking, FIs often err on the side of caution and raise their KYC standards beyond regulatory expectations.

Furthermore, if a bank or other FI is operating under a Deferred Prosecution Agreement or other regulatory enforcement mechanism, they may adopt a higher minimum standard for KYC due diligence.

KYC policy variations: Can we achieve industry standardisation?

This adds further complexity to the industry-wide dilemma of achieving standardization in KYC expectations and processes.

Areas of inconsistency

In Hong Kong, the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) has been amended to change the threshold defining beneficial ownership from ‘not less than 10 percent’ to ‘more than 25 percent’, in line with prevailing FATF standard and international practice.

While the amendments indicate a desire to move more in line with the rest of the world, and therefore towards a more common standard, many FIs have been slow to adapt their policies in practice.Another area of inconsistency concerns time frames to review and refresh KYC data.

While requirements stipulate that information pertaining to higher risk clients must be refreshed more frequently than that for lower risk clients, specific guidance as to how often these reviews should occur is inconsistent.

The frequency of periodic reviews should be simple and standardized across the industry, but in practice this is not the case.

Learn how to get end-to-end client identity, verification, screening and monitoring for accelerated client on-boarding, remediation and refresh with KYC as a Service

KYC policy frustrations

In 2017, a survey we conducted delved into the KYC-related challenges that are experienced by both FIs and their corporate clients, highlighting several issues that have arisen as a result of a lack of standardization in KYC policy.

A large percentage (37 percent) of corporate respondents revealed that, when asked to provide KYC documents and related information “different banks ask for different documents and information — no common standard”.

Add to this, corporates have an average of ten global banking relationships that require them to supply KYC information.

With survey results also revealing that each FI contacts their clients several times during the KYC process,the extent of the problem of lack of standardization becomes more apparent.

For FIs, this lack of standardization has added to the complexity of implementing global KYC programs, leading to additional work for compliance departments, increased headcounts and spiraling costs.

Furthermore, the severe consequences of compliance failure have drawn c-suite attention to compliance and away from their core strategic roles.

Are utilities the solution?

Industry utilities can address many of these challenges because they enable multiple FIs and their clients to access online platforms that streamline and improve operational efficiencies, whilst reducing the costs associated with obtaining and maintaining KYC data.

The utility approach also offers an improved, standardized client experience.

Both onboarding times and KYC-related contact touchpoints are reduced because clients are empowered to upload and update their KYC information on a secure utility portal.

Thereafter, authorized FIs may access this KYC data without constant recourse to the client.

Furthermore, data security is enhanced because clients’ KYC data and documentation is accessed through secure channels.

Benefits of collaboration 

Our research reveals that the financial services industry continues to grapple with a plethora of KYC-related challenges, many of them exacerbated by a lack of standardization in KYC policy.

On a positive note, there appears to be a genuine desire for a common industry policy standard.

The anticipated benefits of standardization are significant, and will improve the KYC landscape for all industry participants.

The utility model can certainly facilitate this process, but standardization can only truly be achieved through ongoing collaboration and buy-in from all stakeholders.

KYC as a Service offers end-to-end client identity, verification, screening and monitoring