KYC obstacles hamper Mifid II preparations


Kimberley Long
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The extended deadline for Mifid II is now only six months away, and along with an increase in the amount and quality of data financial institutions (FIs) have to record, they must also reassess customer relationships.

There are high expectations that FIs will be ready for the extended Mifid II deadline in January, even if there are still some unanswered regulatory questions.


Laura Glynn,

Laura Glynn, director of regulatory compliance at client life-cycle management software solutions provider Fenergo, says: “As the deadline has been extended to January 3, 2018, it is expected that FIs should now be on the path to compliance. 

"That being said, there remains an element of uncertainty around certain key areas of the directive, like third-country access and electronic access.”

The initial issues that helped push back the deadline included FIs being concerned about the standard of data they had. The importance of having good-quality data as part of Mifid II was examined in July by Euromoney, after the announcement of the change in deadline.

Commenting at the time, Alan Samuels, vice-president and head of product strategy for reference data services at Alacra, said: "With more regulations coming into play, there needs to be both clean data and the right systems in use. 

"There is a clear regulatory need for meeting high standards. This is creating more and more challenges for operational managers to build flexible, scalable processes and systems to be able to address use cases that have not yet even been articulated."

While these problems might have been addressed in the interim, there is a worry that some FIs have not fully taken into account the new know-your-customer (KYC) expectations.

Fenergo's Glynn says the issues around KYC still need to be better understood.

“There are new KYC requirements being introduced under the banners of suitability and appropriateness, and there is an obligation to provide retail clients with copies of a suitability report," she says. "FIs will need to collect additional information to demonstrate that they understand the client’s knowledge and experience, the financial situation and investment objective.”

The stricter requirements come from the drive for greater clarity under the regulation. 

Mihir Vaidya,
base60 Consulting

Mihir Vaidya, an independent regulatory-change consultant working with base60 Consulting, says: “Transparency is one of the foundational objectives of Mifid II, which includes elements of client data to be communicated to the regulators, as well as appropriate disclosures made by FIs back to their clients, based on their classification.” 

The outcome of these changes in some cases might see FIs needing to off-board certain clients, depending on their individual stance.

Says Glynn: “Under Mifid II, local authorities and public municipalities will need to be reclassified as retail clients. They may opt up to elective professional status – provided that they satisfy the required knowledge and experience criteria – but may no longer elect to be treated as eligible counterparties.

“If a particular FI's corporate policy does not permit the provision of services to retail clients, any clients who do not choose to opt up to elective professional status will need to be off-boarded and for their accounts to be closed. 

She adds: "There will also be some considerations under third-country status. In addition, Mifid II extends some of the investor protection provisions to eligible counterparties and this will include both information and reporting requirements.”

Although a high volume of data is needed to meet these standards, it is possible that for existing clients it has already been gathered, albeit in a fractured manner. 

'Costly exercise'

Stuart McClymont, co-founder and managing director at base60 Consulting, says: “Most of the information and data required for Mifid II regulatory compliance has been gathered by institutions, but over many years of trading relationships. 

"But it was probably not stored in one place or in an electronically searchable fashion, and gathering it all again will be a very costly exercise.”

McClymont adds that collecting the information across product lines will require significant internal cooperation at FIs.

“The problem comes from not only pulling it all together, but getting cross-departmental prioritization and investment on how to tackle the issue is very difficult," he says. 

"Firms need to take an holistic end-to-end approach around how they gather, store, distribute and maintain client referential data in the future. Understanding the client life-cycle management strategy from the start of a relationship to the end of a relationship is critical.”

However, there are questions around the ability to share this information between departments, even if it has already been captured.

Stuart McClymont,
base60 Consulting

McClymont adds: “Mifid II also starts to challenge data privacy, confidentiality and protection regulations. Given that multiple departments are involved in gathering, storing and using client data, being clear on who can see what data when it all needs to be pulled together will be a challenge. 

"There is technology available that can put user level permissions on data to restrict it to certain departments. There can be rules applied over what can be created, read, updated and deleted, and by whom. But firms need to have robust rules and top-level governance around this data.”

He suggests there needs to be a standard understanding of what information is being collected and how.

Glynn agrees this gathering of information needs to begin from the start of a new client relationship.

“There should be expanded data and document requirement considerations built into the FI's on-boarding procedure and FIs will need to perform an outreach exercise to remediate their back-book of business in the context of legal entity identifiers (LEIs)

"From an operational perspective, many FIs are currently examining client data in an effort to identify clients without a valid LEI, performing an outreach programme to these clients to encourage them to apply for the LEI from their local authority units.”

To expedite the process, having better internal management of working with a client, even across product groups, might be beneficial. 

Vaidya at base60 Consulting says: “Client life-cycle management needs to be addressed more holistically across business functions in order to ensure appropriate tradability decisions are taken by financial institutions, as mandated by Mifid II, and non-compliant clients are off-boarded from trading in products or on venues, as required by the rules.”