Strong global enforcement culture set to continue in 2016

Looking ahead to 2016, it’s clear there are going to be new KYC rules drafted or implemented around the world. These new rules will require banks and investment managers to challenge the way they conduct client on-boarding and due diligence – these organizations will need to embed processes that ensure they literally know their clients 24 hours a day, 7 days a week.

This change is being kicked off by the implementation of the Financial Action Task Force (FATF) 2012 guidelines. Banks and investment managers will need to understand how these guidelines are being implemented in various jurisdictions in which they operate. Each jurisdiction will have its own version of these guidelines enacted, so there will be small – or large – differences from place to place. 

Then, the FATF 2012 guidelines will require a sea change in the way client on-boarding and due diligence is conducted. One big change is a need to have the right processes in place to detect changes to client profiles over time – not reviewed periodically or as the result of a trigger. Another big change is that client companies need to update their financial services firms about all of their material changes. This could include a change in the management board, a delisting, or a change in the executive leadership, for example.

Yet, financial services organizations need to ensure their records are up-to-date whether or not their clients confirm a material change to them – particularly around negative changes, where adverse media monitoring can really help. Client records that are not up to date could lead to penalties, regardless. For investment management firms, another big change is the need to know who all their investors are.

All financial services organizations also need to be aware that the strong global enforcement culture is set to continue, with significant fines and other penalties expected in 2016. So banks and investment management organizations need to begin to consider the best practices they should be implementing for in their client due diligence process in 2016.

As a first step, organizations need to ensure that the documents and information they are collecting are compliant with these new rules – as the rules change from jurisdiction to jurisdiction. This is a significant undertaking – while the requirements are broadly the same, individual jurisdictions will have tweaked their own implementation of them to suit their domestic circumstances. So small details can mean a lot.

Next, organizations are going to have to transition from a process where client records are updated periodically or as the result of a specific trigger to a process where client records are updated dynamically. To be compliant with the FATF 2012 guidelines, this “constant compliance” will require an entirely new approach to KYC data management and engagement with clients.

Lastly, financial services firms will have to work very closely with their clients to ensure they are aware of the new rules around material changes – and the requirements that these new rules put on their relationship. They will have to monitor their clients’ compliance with these new rules.  To ensure their own compliance, financial services organizations will also need to monitor news, public filings and other sources to keep on top of material changes to their clients separate and apart from the client notifying them.

So, in light of all of this regulatory change, could having a good client on-boarding process – as well as a due diligence process – be a competitive differentiator for a bank or an investment management organization? Absolutely.

To begin with, having a robust, compliant approach to KYC will help organizations avoid reputational risk and compliance risk – as well as the fines and penalties that generate negative headlines.

Beyond this, organizations able to on-board and perform due diligence on clients in a way that provides a good customer experience will benefit from that. Clients will be happier because they have to spend less time and resources on the compliance requests of their financial services providers. As well, financial services organizations that are able to remove operational hurdles and bottlenecks from their KYC processes will benefit from being able to do better business faster – lower costs, better deployed resources, and the security of knowing they are compliant wherever they do business.