Maximising utility

Maximising utility

  • Export:

Since the advent of know your customer (KYC) requirements many of the most highest profile financial institutions in the world have been hit with painful fines for dealing with clients in countries covered by sanctions or exercising insufficient controls around money laundering.

In 2014, the corporate banking division of Standard Bank was fined £7.6m by the Financial Conduct Authority (FCA) for failing to comply with anti-money laundering regulations, while earlier this year the US Department of the Treasury’s Office of Foreign Assets Control fined Barclays $2.5m in relation to apparent violations of Zimbabwe sanctions regulations.

Outsourced solutions appeared around three years ago but the search for an effective and cost-efficient industry utility is now gathering pace.

The extent to which top-tier banks are open to the adoption of the shared-service model to drive down costs and increase efficiency in back office and compliance functions was highlighted in research published by Finextra in February. 

Three main areas were noted as ripe for growth: regulatory and compliance-related reporting market; reference data management; and reconciliation and exception management.

Approximately two-thirds of those surveyed agreed compliance was a significant driver for the uptake of utilities. Almost three quarters (73%) of respondents were prepared to use a utility model for data management, while 61% saw it as a driver for straight through processing in reconciliation and exception management. Only half, however, were working towards implementation of such a model

There are also more prosaic reasons for embracing know your customer (KYC) utilities. According to data released by Thomson Reuters in May, 89% of corporate customers have had a less than positive KYC experience and 13% have changed bank as a result.

A KYC utility should provide the security needed to protect critical entity data. It should also provide mechanisms for data permissioning, accurate data validation and the ability to source and leverage content from both the public domain and directly from clients. 

It should also minimise the operational burden and costs for all users by reducing duplication, inconsistency and time in the client onboarding, entity data collection and document management processes.

Interoperability vital

Utilities promote transparency and accuracy of data. However, as data is not made available publically and vendors are promoting their unique offerings banks are left with several potential data sources rather than a single definitive one, according to Nina Kerkez, senior product manager at Accuity.

“Interoperability could mean additional costs to ensure the right information is loaded and refreshed,” says Kerkexz. “But, in the longer term, can utilities deliver on their promises without it? 

In addition, without a common standard – which can only be achieved by cooperation – each utility may offer a different level of data and completeness, meaning institutions may have to use them all to complete/validate counterparty information.”

Brinda Murty, vice president and head of Genpact's client lifecycle management business says the industry utility market is still highly competitive, which means that while most of the key players speak to each other and even maintain discreet partnerships, the interoperability that will facilitate data sharing is not a major trend.

“Market forces – for example, buy-side demand – will eventually drive utilities to pull data from each other, but at the moment they simply do not hold enough data to make this viable,” she says.

Thomson Reuters Risk Managed Services global managing director, Steve Pulley, says his business shares KYC records only with those counterparties that the entity wishes to share them with. “We allow end clients to attest that the information collected by us is current and correct prior to sharing that information with their various counterparties.”

David Miller, senior analyst JWG Group, suggests that the term ‘utility’ is slightly misleading given that entities are operating to different data standards, geographic coverage and commercial arrangements. “To consider them utilities, they would really need to have implemented agreed – and ideally open – industry standards allowing their customers to ‘plug and play’ with a high degree of certainty.”

He says he doesn’t perceive much sharing of information. “There is very little collaboration even on common challenges such as the interpretation of regulatory requirements, which should be non-competitive.”

On the question of whether the differing customer information requirements of FATCA and the OECD Common Reporting Standard (CRS) lend themselves to the shared service model, Murty suggests the latter is particularly suitable for a utility and common platform approach as the high cost of implementation can be split across the industry.

Although the regulations resulting from CRS may be similar, they are ultimately local versions published by different regulators, explains Kerkez. “This becomes a challenge for global institutions, with branches in different jurisdictions, as they have to make sure that they adhere to all the relevant local regulations. As new regulations emerge, typically there are new pieces of information that become a requirement for the KYC process.”

In light of FATCA, CRS and other regulatory requirements, collecting, managing and refreshing information has never been more important, adds May, CEO of kyc.com, a joint venture powered by Markit and Genpact.“There is a need for connected due diligence across KYC, AML, regulatory requirements, tax and credit and legal agreements. If you take FATCA, for example, you will need to produce Form W-8, which can also be used for proof of identity for AML and KYC checks.”

Miller suggests that the key to consolidation lies in identifying the interdependencies between regulations such as CRS, FATCA and AMLD IV and then setting definitions and standards. He says these should be established through industry collaboration as well as regulators standardising the processes and documentation used in KYC. Once these elements are achieved, he says, conversations about meeting new regulatory obligations will become far easier.

With changing regulatory reporting needs and differing customer requirements, an added bespoke service layer would definitely be attractive, adds TABB senior analyst Dayle Scher.

Regulation technology, or regtech, that enables more efficient and effective regulatory compliance is vital to the evolution of the utility market, according to Miller.

“Leading regulators recognise that collaboration across public and private sectors will be needed,” he says. “To make regtech a reality, experts agree that we need to digitise the regulatory texts to classify and route granular requirements to our own SMEs in the front, middle and back offices and to the suppliers we rely on. Distributed ledgers, semantic models, open data and artificial intelligence can all help us, but only if we point them in the right direction.”

Reference data

It remains to be seen whether a new reference data utility will gain traction. Reference data management has always been one of the biggest expenses for the financial services industry, with each firm having to devote huge amounts of money to the function as well as to cleaning up the errors caused by bad data.

Scher notes that SmartStream is spearheading an initiative made up of Morgan Stanley, Goldman Sachs and JPMorgan that will provide a reference data normalisation and validation service to its members. “The vision is that this utility model will not only reduce costs and increase efficiencies, but will also send a strong message to the market that opportunities exist for the mutualisation of shared services in other areas of the trade lifecycle.”

Clarient CEO Matt Stauffer suggests that a single entry point to a digitised, comprehensive view of a client or legal entity will be the next big thing in the utility space. This goes well beyond KYC and will require direct access to data available in the public domain as well the content provided directly by the entity or their advisors and administrators.

While utilities are currently focused on removing inefficiencies from the market, in the future we are likely to see utilities introducing technologies such as machine learning and robotic process automation to drive insight from digital information and add value and profit to banks, suggests Murty.

There is potential for consolidation ahead as customers discern which utilities and managed services can deliver operationally and those that cannot, concludes Pulley. “We are at a point now, two or three years on from when KYC industry utilities launched, that real measurable evidence of their performance can be seen.”


  • Export:

Related Articles