Customer Onboarding: Weathering the storm of regulations


Customer Onboarding: Weathering the storm of regulations

Perhaps no process within transaction banking feels the brunt of regulations as severely as customer onboarding. Heavy fines and penalties levied by regulators for compliance transgressions, to the tune of $4 billion in 2012 alone, are testimony to the fact that regulations are not so much the proverbial carrot but just the stick.

A relationship manager’s role in this landscape has stayed pretty much the same over the years – get new clients and manage them effectively. What has changed is the dramatic evolution of the activities related to onboarding these new clients and the horrendous time it can take. Banks can no longer rely on knowing about their client’s background alone. They must also know about the client’s sources of income and how they link to different countries – including the client’s clients and so on.

All industry surveys show that financial institutions rank regulatory compliance as a key focus in the coming 2-3 years. Banks need sufficient oversight to adhere to the regulations, which means having a robust compliance framework in place.

As is usually the case with laws being a response to a crisis, customer onboarding regulations have become more stringent in the aftermath of the global financial crisis. Their purpose is simple - increase transparency in the financial operations and provide greater visibility of client profiles. It is the adherence to the norms and the processes that go behind it that is a challenge for the banks as the onus is completely on them to provide accurate data to the regulators on demand.

Really Knowing Your Customer

After having gone through complex drafting procedures, most of the regulations concerning customer onboarding are now ready to be implemented. The US ratified the final version of Dodd-Frank in December 2013. European Market Infrastructure Regulation (EMIR) will unveil itself in 2014. MiFID-II is still vital in Europe.

All these regulations have one thing in common – the need for transparent reporting.  This means banks must have a clear and concise view of their clients, at all times. KYC and AML regulations have become mandatory in various forms across the globe and majority of the banks have seen an increase in their AML compliance budgets.

A high level of due diligence requirements coming in from the US and UK have forced banks not just in those regions, but across the globe, to take a hard look at their compliance frameworks. A lot of countries are gearing themselves up for increased scrutiny. With a growth in payment volumes, there has been a rise in new financial products which means an increased load on screening payments for sanctions, money-laundering and anti-terrorist related exceptions.

A rapid and efficient customer onboarding process enables faster and easier KYC compliance. Digital documents are free from the vices of missing mandatory information and reprinting and are less prone to errors. Since compliance checks are automated, everything happens in real-time, effectively killing wastage of precious man-hours.

No escaping FATCA

Passed in 2010, FATCA was designed to curtail offshore tax evasion. According to the U.S. Congress estimates, offshore tax abuses result in annual losses of around $100 billion. As part of this Act, all foreign financial institutions (FFIs) need to report the overseas holdings of US citizens to the IRS. Failure to comply with this rule will mean that the financial institutions will face heavy penalties – a withholding tax of 30%. Since FATCA compliance is dependent on accurate information, FATCA checks will need to be implemented at the KYC stage itself.

A lot of debate in the industry is centered on the perception of FATCA’s impacts. Questions have been raised about whether the IRS is overstepping its boundaries by seeking information from banks in territories outside its jurisdiction, a concern that has been duly addressed by inter-governmental agreements. There is no denying the fact that FATCA creates some large overheads for banks as they seal their relationship with the IRS and setup or upgrade their infrastructure. The Act has thus caused jitters in the industry. But on a practical basis, if the corporate treasury department wants to continue doing business with US citizens, there is simply no escaping FATCA for them.

For banks outside the US, this would require local regulatory approvals. It is anticipated that many countries will sign inter-governmental agreements so that the client data is aggregated on the local level and then sent across to the IRS. A localized version of FATCA can thus be expected to evolve in countries other than the US.

Building robust storm shelters

Regulators can be expected to continue their drive for increased transparency in the financial industry through 2014 and beyond. Banks may seek shelter from the regulatory storm by reaching out to new markets, but the regulators are going to be quick to follow. The only way to avoid being a stranded victim in the storm is to take advantage of the requirements and achieve competitive advantage by implementing initiatives that meet these compliance norms, reduce risks and enhance the quality of information.

Batten down the hatches.

Date Modified: 

Monday, November 11, 2013
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