KYC utilities embrace standardization

By:
Kimberley Long
Published on:

Know your customer (KYC) utilities are addressing the challenge of divergent regulatory standards while the legal entity identifier (LEI) initiative could further shake-up the compliance industry – for the better.

The case in favour of the KYC utility model is clear: it removes the need for the same documents to be provided multiple times and therefore reduces operational costs for banks and clients’ workload.

However, there are a number of utilities in the market that all seem to be jostling for a piece of the same market segment.

Jon May-160x186
Jon May, Markit
Markit operates the KYC.com utility with Genpact. Although there are a number of competing utilities, Jon May, ‎CEO of the joint venture, indicates a consolidation in the market is unlikely.

"The utilities are different," he says. " Swift has its own niche and we don’t look to compete in their space."

May argues the benefit of adopting a utility for a bank is the opportunity to work within a fresh regulatory climate.

"In the utility databases, there is no burden of legacy," he says. "There is not the situation of having different groups of data that don’t talk to each other. By centralizing the data, it becomes an asset."

However, collated information requires cross-border regulatory trust, a harmonization of rules and an agreement on market best-practice.

Mahesh Muthu-160x186
Mahesh Muthu, eClerx

Mahesh Muthu, associate principal, client engagement, financial services, with KYC platform provider eClerx, says: "What we are seeing is the rise of standards across the globe.

"It used to be perceived that the US was driving the change, but we are seeing higher standards now across the board. In some Asian countries, there is greater stringency around the submission of original documents."

Muthu says that for the utility model to work most effectively, it requires all of the constituent parties to be fully involved. Even when complete, the due diligence to assess the risk of working with the counterparty will remain with the bank.

"Singapore is asking for locally certified copies of documents whereas in the past electronic copies were accepted," adds Muthu. "We are seeing these changes globally and it is making it harder for utilities. Asking for original documents won’t create too many issues, but will make more work."

Markit’s May thinks the issue is manageable, saying: "If you look at Hong Kong and Singapore, for example, these are two jurisdictions where it is often industry practice to require a certified true copy for certain client types. 

"With kyc.com, we work with our customers to receive documents, which have been certified by a notary or legal department. Our team attests to the origins of the documentation and uploads the information to kyc.com."

End-user benefits

Matt Stauffer, CEO at KYC utility provider Clarient, explaining the benefits of using the utility for end-users, says: "Currently, original physical documents are not included in the Clarient solution.

"However, Clarient can receive certified copies of original documents and validate them through their internal processes for the end-consumer."

Another shake-up could come through the greater use of the LEI. The LEIs allow for easy recognition of a company and its divisions under a single recognizable code.

As yet, they are not mandated for use outside of derivatives transactions, but the forecast is that they will expand across a broad array of securities and geographies, even in the absence of a coordinated regulatory push.

Alan Samuels-160x186
Alan Samuels, Alacra

Alan Samuels, vice-president, reference data solutions at compliance solutions provider Alacra, says the LEI system will help streamline the process of obtaining multiple information about related entities.

"The greater use of the LEI will help with the KYC challenges," he says. "It will identify if the company named is the same entity, or even if it has been replicated elsewhere."

Muthu explains its inherent identification characteristics: "The LEI contains several core attributes such as the legal name and address of the entity.

"The bank has to locate the record in the registry, validate the information is correct, record the identifier within their own system, and match the legal documents when the customers are onboarded."

At present, there are concerns some of the companies with LEIs might not need them, while others that could benefit are yet to subscribe, as it is not a regulatory requirement.

Alacra’s Samuels says: "The most prominent entities are the ones that need to have an LEI. The rated and listed companies need to have it.

"There are six million entities that could be using it, and 400,000 now have LEIs. It is still only getting started and needs further change to impact how we do business."

Matt_Stauffer-160x186
Matt Stauffer, Clarient

Clarient’s Stauffer says the integration with Depository Trust & Clearing Corporation’s Global Markets Entity Identifier Utility brought with it 200,000 LEIs issued over 184 jurisdictions. 

He says: "Clarient includes all LEIs issued globally. Having a consistent identifier, such as an LEI, to support the client lifecycle from pre-trade account set up, including KYC, through post-trade processing certainly helps with the compiling of accurate entity data."

May concludes: "LEIs will continue to increase. Through kyc.com, we procure LEIs for every existing entity. We retrieve the LEI information, update the database and reflect that information back to the banks.

"The more LEIs that are in place, the easier it will be to update each entity."