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January 2, 2015

KYC Remediation - Response to Burgeoning Regulatory Requirements

KYC Remediation will continue to remain in demand given the spate of emerging regulations and other changes in the financial system.

With tighter operating margins, the capital-markets industry faces a stand-off between tougher regulations for customer account and data management. The financial crisis has made the Know Your Customer (KYC) process more demanding, in areas such as investor protection, risk management and tax compliance.

The need

Financial institutions are required to maintain enough information about a client as well as to report any suspicious activities that client might indulge in.

KYC related activities arise due to 3 reasons:

  • New client on boarding
  • Ongoing KYC updation due to changes in client details
  • Newly acquired clients as a result of mergers and acquisitions or existing clients
  • However, KYC remediation is adhoc in nature and poses peculiar challenges for every financial institution.

Challenges to accomplish KYC Remediation:

  1. The Challenge of Scalability:
    Scalability - challenge to maintain large project teams for remediation purpose and re-deploy them post completion.
  2. Challenge of Standardization and Consistency: 
    Standardization and Consistency -challenge in adopting a similar processes across due to jurisdictional regulatory nuances
  3. The Challenge of "Data Integrity" & "Absence of a Golden Source of KYC Data": 
    Remediation projects depend hugely on customer reference data and documents, however in many organizations it is performed in a decentralized manner creating multiple repositories.
  4. The Challenge of Risk Rating and appropriate Due Diligence: 
    Absence of a risk assessment approach will lead to heightened risk of money laundering and terrorist funding.
  5. The Challenge of meeting stringent regulatory timelines: 
    Implementation of new regulations within the timelines agreed with regulators and failure to meet will lead fines and penalties apart from its impact on reputation.

Turning the Challenges into an opportunity

The above challenges can be addressed by adopting a 3 pronged approach for Remediation projects:

  1. Risk-based approach for ratings & client classification
    Risk ratings vary and will primarily depend on three important factors such as 'Client Type', 'Product/Nature of business' and the 'Location/Jurisdiction' from where or to the customer conducts his business activities.
  2. Effective approach for document collection and storage
    Changes in the way reference data is managed from traditional methods of mail room partners, document collection to in-house imaging solutions to leverage KYC utilities through digital document management.
  3. Offering  remediation services through a combination of technology + operations
    An experienced third party service provider (in combination of technology and operational support) enables complete visibility and control, while providing a clear and accessible audit trail. Benefits of this approach are:
    • Redeployments of their core staff without stretching their on-boarding teams
    • Technology support throughout the project
    • Scalable and dedicated work force
    • Benchmarked and SLA driven services
    • Standardized and auditable processes

KYC Remediation will continue to remain in demand given the spate of emerging regulations and other changes in the financial system. The emergence of KYC utilities will not be sufficient enough and hence a systematic approach to remediation projects through a combination of leveraging risk based rating frameworks and third party service providers will go a long way in in meeting the challenge.

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