2013 has been a busy year for KYC professionals as they respond to a number of different regulatory requirements. Regulatory demands have raised the bar on not only existing data requirements but also have introduced a number of new ones. In response to this, there are now many different conversations going on in parallel about how a utility could be the answer. Will they be?
John Owen, RBS’s Chief Executive for International Banking, told a London conference earlier in the year: “We’re essentially transacting with the same entities around the world and yet we are all building [databases] at very great costs… It would make an enormous amount of sense for the industry to try and find some central utility function around that particular area.” This has been a well-known fact for a number of years. So why hasn’t one been realised?
The problem is that the new set of regulatory data (demanding new documentation, checks and screening) must be grafted into the complex estate of existing obligations, systems, processes and databases. This is the same estate that cost billions of dollars in settlements for firms such as HSBC, Standard Chartered and ING in 2012. These are no longer isolated incidents; Tier 2 firms are increasingly being targeted in a regulatory regime where supervisors are keenly watching for failings in this space.
To solve this problem would surely mean fixing the foundational KYC issues in concert with establishing a new superstructure fit for maintaining the increasing volume, complexity and speed of the information required for regulatory purposes. After years of inaction in this space, the market finally seems to be listening.
As mentioned, in the last couple of months there has been a flurry of activity in the KYC and reference data utility space. A variety of technology providers, consultancies and data providers (more than 10 of them at the last count) have announced (or have been rumoured to have formed) partnerships of some form. The basic premise appears to be that, by developing standardised processes and data formats, client on-boarding can be streamlined and better controlled. Is there a market appetite for this many new utilities in the space?
The answer is unclear; KYC is such a broad term, used differently to cover many similar but different concepts. There are many factors to consider in building out such a utility, including:
Geographic scope: Which jurisdictions will such a utility be looking to serve? The greater the number, the greater the size of the data collection effort.
Client data to be collected: Not all client data that is required by regulation is publically available. Client classification for EMIR (FC/NFC/NFC+) is not something that can be sourced by a 3rd party.
Data purpose: Is the data for pre-trade KYC, counterparty exposure assessment, anti-money laundering, financial reporting, or is it purely a client documentation repository? Entity data fit for pre-trade will not necessarily be fit for AML.
Data protection: In the EU and elsewhere there is a number of restrictions on what kind of personal data can be stored by 3rd parties, especially when transmitted across borders.
These are teething problems for this type of utility. The current, unilateral approach to solving KYC problems is fast becoming out of date. Huge numbers of additional KYC staff and off-shore client documentation processing centres may no longer be fit for purpose.
Ultimately, while this industry is still in its infancy, and there are many problems to be solved, it is not beyond the wit of man to solve each of them. We look forward to seeing many exciting new developments in how KYC is managed as a result.