Feb 5, 2016

Know Your Customer (KYC) utilities are part of an industry-wide effort to solve the KYC challenge faced by banks and buy-side firms. The benefits offered by these utilities and managed services are indisputable. Subscribing to a KYC utility helps banks to reduce costs associated with setting-up and refreshing client information, by automating manually intensive processes, whilst improving their clients’ experience during the entire on-boarding process. Meanwhile, the buy-side firms who contribute data to the third-party KYC utilities experience a lighter burden during the initial set up and periodic refresh processes of their legal entities by delivering their KYC information once – to the KYC utility rather than to each bank. Although KYC utilities offer many time and cost saving benefits for all parties involved, they still do not resolve the fundamental issue of standards.

Currently, each bank maintains its own standard for the KYC information required for their clients. There is no consistent standard across the industry, and many banks take a different approach on what they deem necessary to collect, requesting more or less information and documentation depending on which regulatory regimes or requirements they need to comply with. Consequently buy-side firms, on the receiving end of these requests, are inundated with duplicative and inconsistent requests from counterparties they wish to trade with.

In order to create a standard, banks’ compliance departments have been collaborating with their peers to design the new standard that would comply with their various internal KYC policies. The emergence of industry KYC utilities has provided a platform for the major banking institutions to agree and collect KYC information based on a common agreed set of standards. Clients now can provide information and documentation once to a central KYC utility and point their trading counterparties to this platform to collect the information and documentation to meet their KYC requirements.

However, following a number of bank led consortiums and market infrastructure provider investments, there are multiple industry KYC utilities to choose from. Each has been developed in isolation driven by different design partners’ policies and requirements. Therein lies the problem and why the fundamental issue of standards has still not been solved. There a re a number of KYC utilities on the market for example the Depository Trust and Clearing Corporations’ Clarient Entity Hub; the Markit|Genpact KYC Service; the SWIFT KYC Registry; the KYC Exchange Net AG; and Thomson Reuters’ Accelus Org ID KYC Managed Service to name but a few, all of which have been designed independently of one another.

All five of these KYC utilities claim to meet the requirements of the various KYC AML regulations but how do the buy side know they all support one consistent standard. Given the five have been operating in the start up and launch phases over the last couple of years, they have not been overly transparent with one another, understandably to avoid losing any competitive edge. Moreover, in the past year, FinCEN and the EU’s Anti-Money Laundering Directive IV (AMLD IV) each proposed more stringent AML rules which must be incorporated into banks’ global AML policies – have these requirements been included to create one industry collection standard?

Where does this leave the industry? At least we have five standards now as opposed to the buy side having to meet every individual bank requirement. So we are definitely on the path towards standards. However, which standard does the buy side choose, in other words which industry KYC utility should they choose to use? Given the adoption rates by industry participants to use any of the five KYC utilities mentioned above has been to date very low, it appears they do not know. Alternatively the buy side could be waiting for convergence or consolidation across the KYC utility landscape that would then result in a single collection standard. What is clear, industry adoption is critical for the success of any market infrastructure utility. Lack of adoption may inevitably lead to consolidation for any of the KYC utilities to remain commercially viable, only time will tell.