Anti-money laundering (AML) and know-your-customer (KYC) regulations require financial institutions to carry out due diligence on their customers. Verifying the identity of these customers is a crucial step in this process and screening names against AML watchlists helps ensure that potential customers have not been associated with financial crimes.
Banks and other institutions don’t want to make the onboarding process too onerous, but relying on manual processes leaves them exposed to data entry errors. Client classification and appropriateness rules have also become more stringent – one of the most telling observations made when the FX derivatives mis-selling claims came to light was that brokers were often completely unaware of the distinction between retail and wholesale customers.
Remonda Kirketerp-Moller, Muinmos
Complex leveraged instruments such as forwards and options used for hedging have in the past been abused by sales teams chasing higher commission margins without necessarily putting the client first in terms of product suitability or risk appetite, notes Remonda Kirketerp-Moller, founder and CEO of Muinmos, which specializes in automated regulatory compliance.
“Corporate SME clients have been onboarded as professional when they should have been classified as retail, and therefore only appropriate for less-complex product solutions,” she explains. “It is therefore highly important that each client passes through a logical and transparent onboarding process, ensuring that they are fully understood in terms of knowledge and experience, financial situation and investment objective – including their risk appetite.”
Systems that chart financial institutions’ licences and permissions across all the jurisdictions in which they operate help create an accurate digital map of local or regional regulations and enable cross-border business to be done reliably and quickly.
“These systems remove the risk of manual errors such as missing updates and interpretation errors,” adds Kirketerp-Moller. “Aligning this with a user-friendly workflow creates an accurate audit trail for sales teams, clients and compliance teams to follow, all of which makes for a faster and better user experience.”
Automating the onboarding process should mean legal and compliance teams can be assured that they are up to date with all relevant rules and regulations, which removes a lot of risk as well as extensive research and implementation time. This would allow staff to spend more time focusing on complex compliance issues.
Owen Hall, Heliocor
“By using client onboarding technology, internal compliance and legal teams can manage regulatory compliance more easily, speeding up their client onboarding and therefore time to revenue,” says regulatory software company Heliocor’s chief executive, Owen Hall. “They will also be able to access trusted data on their customers.”
Regtech clearly has the potential to release compliance and legal teams from painstaking manual work. In 2019, ING Bank and Commonwealth Bank of Australia collaborated with Ascent RegTech to undertake an assessment of their regulatory obligations and requirements under the EU's second Markets in Financial Instruments Directive (Mifid II) and Markets in Financial Instruments Regulation (Mifir) in a project overseen by the Financial Conduct Authority.
The technology completed the review in two-and-a-half minutes – a process that would have taken 1,800 hours (equivalent to a full working year for a compliance specialist) to complete manually.
Philip Creed, FSCom
The potential rewards for vendors are considerable. A report published by Grand View Research in August 2019 predicted that the global regtech market will be worth more than $55 billion by 2025, driven by growth in fraudulent customer activity and increased demand for risk and compliance management.
However, many banks and trading firms are still working on legacy systems that do not allow for easy customization. In addition, the process of banks onboarding other financial institutions is considered high-risk and therefore enhanced due diligence typically applies, which can be a difficult process to persuade banks to automate.
Philip Creed is a director of compliance specialist FSCom, which works with a number of banks to help them make an annual assessment of the financial crime risk on their book of FX clients in order to demonstrate good oversight.
He accepts that too many compliance teams are focused less on the risk than on the process, which is slow and expensive because these are typically well-qualified and experienced people.
“The issue is whether the technology is appropriate for the problem the bank needs to resolve and whether it can leverage the technology without significant changes to underlying systems,” concludes Creed.