Key takeaways: Moving from periodic review to Perpetual KYC

I recently co-hosted an industry workshop with Arachnys, a KYC and AML data specialist, exploring the potential benefits and challenges associated with adopting Perpetual KYC. Limited to just 20 participants, we were joined by representatives from several leading banks and asset managers including, Goldman Sachs, Investec, HSBC, Morgan Stanley and Citi bank along with other leading city institutions who are at various stages of their Perpetual KYC implementation.

Over the past 18 months we have seen a growing interest in adopting continuous refresh processes and transitioning away from the more traditional Periodic Review. This was certainly reflected in the results of a poll held during the workshop which indicated that 73% of the audience were engaged in planning or working towards the delivery of Perpetual KYC and 36% were experiencing implementation challenges.

These results highlight that while the potential benefits of perpetual KYC are considerable, there are a number of obstacles to overcome. As discussed in the workshop, before embarking on a plan of action, it is critical to develop a clear vision for the end state and understand what successful implementation will involve.

Shared learnings

Here are some of the insights discussed during the workshop, which should be of interest to other financial institutions who are considering the transformational journey to perpetual KYC.

A need for a clear definition of Perpetual KYC

It is important to understand the full scope and breadth of Perpetual KYC. We define this approach as ‘the continual monitoring of a Baseline client profile against internal and external data to identify changes in client data or unexpected client behaviour and trigger reviews for material changes and automated updates for non-material change.’

The breadth of this statement aims to demonstrate that the successful implementation of Perpetual KYC requires the design, delivery and integration of several new capabilities within an organisation.

Periodic review provides the case for transition

The critical deficiencies within the traditional periodic review are well documented. Managing the process can be very challenging and complex, with huge case volumes requiring global coordination, costs can be very high and the manual nature of the updates often generates a poor customer experience.

Perpetual KYC offers several key benefits

By continually gathering up-to-date client information, it is possible to create improved risk profiling which allows organisations to focus only on those clients where data or circumstances are changing. Where small non-material change occurs, automated processes will update records directly. This increased focus on a small number of clients with material data changes, reduces the manual case load and therefore reduce costs overall.

A key step is delivering a single view of the client

In most organisations, the creation of a single profile for each client will involve data remediation and harmonisation. This process will no doubt be challenging, data silos will need to be integrated and decisions made to resolve data discrepancies. However, the benefits of having a single representation of client data can be significant, removing the need for multiple parallel data sets and preventing errors and duplication, remediation and the ongoing cost that are inherent in multi-database architectures.

The data challenge must be addressed

Managing increased data volumes to support Perpetual KYC is a foundational component of the transition to Perpetual KYC. David Buxton, CEO and Founder of Arachnys, highlighted the need to breakdown the challenge into three core capabilities:

Search – identify the most relevant data for your client population and develop automatic data resolution across multiple data sets to ensure that you are applying the most recent information.

Retrieve – apply regulatory rules to ensure that you obtain relevant documentation to support your client data and that this data is sourced from the right documents or repositories

Consume – ensure unstructured data can be managed by converting this to structured formats to enable easy consumption into your systems.

Key Challenges

Ultimately implementation of a fully functioning Perpetual KYC system will involve overcoming a number of challenges including gaining stakeholder buy-in for the investment required, managing vendors to obtain valuable third party data, creation of client baselines and the refinement of policy alongside the capability to measure and react to significant change.

At our workshop, 50% of the attendees felt that the management and control of data will be the most significant barrier to implementing Perpetual KYC in their organisations. Policy was also felt to be a critical area of concern, with 33% of the audience stating refining and digitising policy would present a considerable obstacle.

While these challenges are very real and may even seem a little overwhelming, it is important to remember that the ability to react to change presents a significant opportunity. This is not just about risk, changing circumstances can highlight when clients are expanding their business, opening up new markets or working with new suppliers.

Engaging the client when significant events take place presents a genuine opportunity to support them with new products, expand your business relationship and improve their experience of working with your institution. The enhanced ability to proactively engage your clients highlights both the revenue generating potential of the onboarding function and the opportunity that arises from the data that the onboarding teams collect in the normal run of business.

Implementation

In most organisations, delivering Perpetual KYC will not be achieved overnight. It is better to see this as a transformational journey, rather than a specific programme of work to be accomplished within the short term. While there are a number of different aspects which must be considered, there are three  fundamental stages to the transition which deliver key benefits to the process: 

1. Build baselines

• Deliver the single view of the client, enabling the sharing of information across an institution.
• Reduce the cost of maintaining multiple data sets.
• Allow the coordination of reach out activity, better client management and the centralisation of review teams de-duplicating activity.

2. Develop monitoring capability

• Create the ability to monitor and react to changes in client data and behaviour to drive efficiency.
• Work with the regulator to prove that the new automated processes are effective, this will allow the movement of headcount away from the manual review of clients.
• Manage Non-material changes using straight through processing, reducing the need for manual touch.  
• This step should result is a general reduction in FTE required to support client refresh which can be realised as efficiency or re-deployment of resource on to business critical, value added tasks.

3. Observe results, react to reality and refine the solution

• As Perpetual KYC becomes integrated across systems, you will be able to observe change taking place in the client population and access data enabling in-depth analysis of client risk and business opportunity.
• At this stage it will be possible to understand, control and support clients in ways that are simply not possible today.
• You can then begin to continually refine the approach to maximise benefits on an ongoing basis and critically promote the positive contribution of the onboarding function both in terms of risk management and the identification of revenue opportunities .

If you are considering embarking on the transformational journey towards Perpetual KYC, I genuinely hope that you find the insights and guidance from our workshop helpful. If you would like further information on this topic, please contact me directly.