New Thomson Reuters research into Know Your Customer (KYC) related challenges impacting financial institutions (FIs) and their corporate clients reveals that many of the issues raised by the company’s 2016 survey remain. FIs report rising onboarding costs, lengthy onboarding times and sub-par ongoing maintenance of client records. Corporates report excessive contact from FIs, inconsistent requests and security concerns.
A comprehensive, global perspective
Our 2017 survey explored the daily KYC-related pain points experienced by FIs across the globe. A total of 1023 survey respondents (up from 772 in 2016) were drawn from the UK, Germany, South Africa, the U.S.A., Australia, Hong Kong, Singapore and France (the 2016 survey did not include France).
A range of financial organizations was consulted, including global and regional investment banks, global and regional retail banks, hedge funds, asset managers, insurers and brokers/dealers in order to produce a truly holistic picture of the real-life KYC challenges that persist.
A separate, but related survey across the same countries was completed by 1122 corporate decision makers (up from 822 last year). It comprised a mix of small, medium and large organizations and, moreover, a range of different organizational roles – including treasury, risk management, compliance staff, finance directors, financial controllers, procurement professionals, corporate secretaries and general counsel as well as other financial decision-making roles – participated.
Key pain points for FIs
The survey highlighted several ongoing pain points affecting FIs:
Average annual spend on global CDD/KYC (including labor and third party costs) was reported as USD$48m. Drilling down, banks say they are spending significantly more (an average of USD$70m) than investment managers (an average of USD$23m).
The approximate annual amount spent to onboard new clients globally averages USD$40m and FIs claim that this has increased by 15% since last year’s survey (drilling down, banks reported a 20% increase and investment managers a 13% increase).
Staff and the C-suite
One aspect driving this reported increase in costs appears to be higher staff numbers, with 43% indicating an increase in CDD/KYC staff since last year (61% of banks reported an increase as opposed to 36% of investment managers). Moreover, nearly half (48%) of respondents reported that C-level executives had devoted more time and attention to CDD/KYC in the 12 months preceding the survey.
Time to onboard
Onboarding times remain lengthy, with banks reporting longer average times (30 days) than investment managers (23 days). The global average across both is 26 days (up from an average of 24 days reported a year ago) and 50% of the FIs surveyed expect the time to onboard to increase in the 12 months post-survey.
The time associated with refreshing client records is also excessive – the global average is 20 days (unchanged from last year).
Looking at refresh strategy, a quarter of FIs schedule periodic checks (for example, once a year), a paltry 12% (marginally up from 11% last year) dynamically check their records so that they are always up to date and a considerable 9% have no formal refresh process. This means that nearly 90% of FIs across the board are not ensuring that their client records are always up to date.
The FATF 2012 Recommendations
The percentage of FIs that have proactively made changes to their CDD/KYC processes as a result of the FATF 2012 Recommendations is relatively low (37%). A further 39% indicated that they are ‘considering making changes’ and a sizeable percentage (23%) indicated that they are not planning any changes.
Globally, the key challenge when conducting CDD/KYC is a lack of people resources, selected by 34% of FI survey respondents. The next biggest challenges were a lack of time available and the volume of regulatory change, both selected by 33% of respondents.
Corporate pain points
The survey also highlighted corporate KYC-related pain points, which included:
The demands of many banking relationships
Corporates tend to have several global banking relationships and each one requires them to supply KYC documents and information, but here is no global standard. The risk-based approach (RBA) allows FIs to dedicate more time and attention to their greatest perceived risks, but also leaves room for differing interpretations of regulations. This leads to different banks imposing different requirements on their clients.
Survey respondents reported an average of 10 global banking relationships (down from 11 in 2016) – each one placing varying demands on corporates, resulting in frustration, rising costs and wasted time. It is easy to see how corporate frustration levels are growing – according to the survey, many are voting with their feet, with 12% reporting that they had changed banks as a result of KYC issues.
Whilst FIs say that they contact their clients on average 4 times during the onboarding process, more excessive contact is reported by corporates across the board. This may be as a result of duplication of requests from FIs, with corporates reporting this average as 8 times (unchanged from last year).
Obligations around material changes
Corporates reported a global average of 6 material changes (for example, a change in the directors or controllers within the organization or a merger or other corporate action) per organization during the 24 month period preceding the survey. There is a reporting requirement for corporates to update their FIs when a material change occurs, but our survey reveals that many are not fulfilling this obligation, with under a third (30%) confirming that they make their FIs aware of all material changes.
A possible explanation is the sheer time involved in updating each FI with each material change (especially considering the number of banking relationships reported by corporates). According to survey respondents, the average time spent on updating FIs about material changes is 30 days a year (up from 27 days a year ago).
No consistency or common standard
Globally, the top challenges that corporates experience when asked to provide KYC documents and related information (37% each) were ‘dealt with many different people within the bank during the process’ and ‘different banks ask for different documents and information – no common standard’.
The third most frequently selected challenge (32%) was ‘had concerns about security around who was viewing my personal documents’. The nature of the information requested by FIs is often highly personal (for example, the passports of company directors) and it is therefore unsurprising that security concerns were voiced in the survey.
The drivers of KYC process change
Given this set of challenges and pain points, what exactly are the most influential issues prompting FIs to make changes to their CDD/KYC processes? According to survey respondents the key driver (cited by 72%) is a ‘change in regulation/legislation’, followed by ‘financial penalties’ (68%) and ‘damaged reputation’ (66%).
The digital solution space
The repercussions of KYC failure are all too familiar – hefty fines, often severe reputational damage and even personal liability. FIs are clearly aware of this potential fallout, given the reported increases in CDD/KYC spend, rising staff numbers and increased attention from the C-suite. Yet despite these efforts, onboarding times remain lengthy and ongoing monitoring is below par.
The digital solution space offers answers to these dilemmas in the form of end-to-end workflow solutions and we believe that automation is the key to streamlining KYC procedures, reducing headcounts and culling costs.
According to FIs surveyed, compliance costs have been rising and we expect that they will continue to rise as firms overhaul systems and digital solution spend increases, but when these investments come to fruition, we expect to see compliance costs and time reduce, and efficiency and client satisfaction increase.
Once there is KYC blockchain, the technology will be at the forefront of helping to identify those who present a greater risk of criminality, argues David Poltorak, chief technology officer at Fortytwo Data.
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