RegTech Intelligence

Knowing the compliant customer in 2016

JWG analysis.

Regulations like FATCA, EMIR and Dodd-Frank have asked us to collect more information on our customers than ever before – but now it’s clear that was just the start of the story.  New regulation finds regulators even hungrier for information on the firm’s relationship with its customer, together with details of how information is maintained throughout the trade lifecycle.

New requirements mean more and more documentation is required to compile the consolidated view of what your customer wants – and is allowed – to do.  Building your new customer profile means knowing all the regulatory obligations to treat your customers a certain way, at a certain time and under a certain set of circumstances.

Over the next 3 years, new rules, such as MiFID II, CRS, AMLD IV or the revisions to the UK Client Asset Sourcebook (CASS), mean that firms will need to review their customer base against new criteria about how they should be treated at all the stages of the trade lifecycle (see our coverage here).  With so much on its plate, how will the industry and its customers comply with the operational demands in time?

MiFID II is changing how suitability is assessed

Some of the major changes in the pipeline are MiFID II’s rules on suitability and appropriateness.  Currently, firms need to classify their customers according to their type, knowledge and experience to determine which of MiFID I’s conduct of business rules, best execution and client order-handling requirements need to be applied.  This will change under MiFID II.

In future, firms will need to check their customers against new standards, defining whether they are retail, professional or eligible counterparties (ECPs) – which now include both a client’s ability to bear losses and a client’s risk tolerance.  Not only that, public sector bodies, local public authorities, municipalities and private individual investors can no longer be assumed to be eligible counterparties or professional clients on the back of the suitability assessment – firms will need to obtain “express confirmation” from the prospective counterparty that it agrees to be treated as an eligible counterparty.

As result of these changes, firms will need to implement new onboarding processes and update their customer database in line with the new assessment criteria, collecting new data and new documentation to determine their classification.

Client asset management will be reworked for 2015 – and again for 2017

More areas of change are the MiFID II and CASS rules on client asset management.  Any firm that conducts investment business or holds client money, custody assets, collateral and/or mandates in relation to that investment business will be affected by new rules.  While many of the changes are designed to provide information to clients to make it clearer exactly how and when they are protected by the CASS rules, there is a huge emphasis on collecting new documentation and data to ensure clients are happy for their assets to be managed in specific ways.  Examples include:

  • Completed acknowledgement letters before client money can be placed in a new client money account
  • Signed acknowledgement letters from all third parties with whom client money is held
  • Client agreements around ‘Delivering versus Payment’ (DvP) windows
  • Auditors’ letters for non-standard client money reconciliations

And the list goes on.

Firms are already struggling with the client outreach and repapering required by this initiative.  We’ve now passed two dates for the UK implementation of the FCA’s amendments to the CASS regime under Policy Statement 14/9 from June last year, but the majority of the changes are due to be implemented in June 2015.

And then it will all need to be reworked for 2017.  The problem is that MiFID II will continue to change the client asset landscape.  New requirements mean that TTCAs cannot be concluded with retail clients, and client assets should not be used on a firm’s own account without further confirmation.

A lot of work to be done before 2017

In sum, these are huge changes and will take many months to complete.  However, there are, as yet, few industry standards to meet these requirements.  What type of information is needed to assess clients’ abilities to bear losses or risk tolerance?  And will they be willing to share that information?  What kind of documentation is needed to prove a firm’s classification?  Does this align with your existing EMIR/Dodd-Frank documentation?

These are all problems that will need to be solved before MiFID II’s 2017 implementation date – and long enough before to be able to implement those changes effectively to be compliant on the day.

In the last two CDMG workshops, we heard a cry for standard data models and ‘how to’ guides that could help overcome these challenges.

Not content with the easy part, the CDMG has pushed even further by looking at 10 other regulations’ impact on customer profile information.

Come to this month’s meeting, ‘knowing the compliant customer in 2016?’, on 26 March to discuss your pain points in more of these regulations and find out how your peers are considering rising to the challenge.

During the meeting, we will present an overview of the regulatory requirements on customer profile information, identify the problem areas and prioritise the potential approaches – including the role of a KYC clearing house.

Email  if you wish to attend, or see here for more details.

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