RegTech Intelligence 
JWG analysis.
There is a war going on to ‘Know Your Customer’. As regulators continue to release new requirements for firms to collect and maintain information about their clients and counterparties, the struggle to comply has turned into trench warfare fought across many fronts, and new strategies are needed to avoid a long and uncertain conflict.
The battleground looks like this: there are continued skirmishes on the trading front as OTC rules continue to mature globally – EMIR in Europe, but also the many other regimes kicking off in Asia. More and more trading relationship documentation is required from each counterparty to define ‘who does what’ when conducting transactions (risk mitigation techniques, initial margin, collateral segregation, etc). MiFID II will be the final push, as new suitability, due diligence, marketing and identifier requirements reshape how business is done in Europe in 2017.
On the tax evasion front, the rise of the Common Reporting Standard (CRS) looks set to complete the work that FATCA started, by setting new due diligence and reporting requirements on all account holders. New identification, documentation and data management solutions will need to be patched on to the frameworks built for FATCA (assuming that the frameworks for FATCA have, indeed, been built). While, in the EU and US, new rules, in the form of the 4th Money Laundering Directive (AMLD IV) and FinCEN’s Customer Due Diligence, will force an entire reworking of firms AML and onboarding procedures.
These new rules are coming at a time when firms are already under siege for mistakes made in the last decade, so getting it wrong again is not an option. Firms will need to know far more about their clients and counterparties than ever before, and across more levels (trading, tax, AML, etc.), but with very little margin for error when proving it. However, firms, like the generals in WWI, are reacting to the new requirements by throwing bodies into no-man’s land … more analysts, more client outreach, more patches on decentralised, siloed databases.
But, with over 500 customer data attributes required by new regulation in the next 3 years, the tide is turning. Vague requirements and growing resource constraints, combined with few common standards, mean current approaches to customer data management are no longer enough – the KYC battlefield needs the invention of a tank to break the stalemate.
The use of integrated approaches, common definitions and aligned standards across these initiatives could be the silver bullet (to mix metaphors) for these problems. Easier said than done. But a centralised industry approach through the use of a ‘KYC clearing house’ could well provide the answer.
What is needed is a way for firms to collaboratively agree on what is necessary at a very granular level of detail in the context of the regulatory requirements. The problem of shifting and inconsistent definitions would be mitigated by the creation of industry defined standards but, at the moment, there are no structures in place to do so.
Enter the KYC clearing house. This house would involve firms and utility providers coming together to cross-reference regulatory interpretations – at the paragraph level – then prioritising and standard-setting in a collaborative manner – standards that will help each participant deliver KYC change, not only better and faster, but cheaper and more safely as well.
To give an example, one might identify traders or their algorithms via method A, B or C – as is required under MiFID II. These methods could involve different codes, business processes and vendors. Wouldn’t you like to have a discussion with your peers, starting with what IS possible? Wouldn’t they want to have the security of knowing that the list of options was a) fit for purpose b) complete and c) achievable? Wouldn’t you all want to know that your suppliers could deliver the solution you wanted and that the regulator would find that acceptable?
Getting this right has the potential to save the industry a lot of time, trouble and money. It’s not just operational efficiencies that can be gained from better data management but also reputational advantages, educated vendors, reduced overheads from legal fees, fewer fines from regulators and lowered costs from not continually ‘digging up the road’ are all up for grabs.
Being more or less compliant than your peers should not be an area of competition – and, regardless, it is well known that ‘staying within the herd’ is the safest way to implement regulatory change. Many man hours are already spent on finding out what the rest of the market is doing in the KYC space. If you are able to work collaboratively, you are already far safer from regulatory action than if you were isolated.
With the regulatory agenda continuing to gather pace in 2015, participating in the KYC clearing house should be on your priority list. There are already 14 firms registered for JWG’s 24 February CDMG meeting on due diligence. Why not join the pack?