Financial institutions are feeling the pain of KYC
Financial institutions are facing significant challenges when it comes to Know Your Customer (KYC) and client onboarding processes, according to our recent Thomson Reuters survey. The results – based on the responses of 772 decision makers at financial institutions
globally – show changing regulations, increasing costs, and the amount of dedicated resources required to adhere to KYC are all critical issues.
Keeping up with constant regulatory change
The volume of regulatory change is considered one of the most challenging issues, with 79% of respondents having already changed their KYC processes or considering doing so in the near future, as a direct result of the 2012 FATF Recommendations which are
being adopted and implemented worldwide.
The impact of these proposed policies is potentially even broader given the possible consequences of not meeting the requirements. Nearly seven out of ten of respondents were concerned about restrictions on business; with financial penalties, damaged reputation,
and loss of investor confidence also cited as key concerns.
KYC costs are rising
Cost pressures are mounting with 10% of financial institutions spending approximately $100m or more on KYC/CDD (client due diligence) and client onboarding and at the top end some financial institutions are spending in excess of $500million a year on these
activities. To add to the pain, our research also shows that client onboarding costs rose by 19% last year and are expected to rise another 16% this year.
People and skills shortage
The issue that came out as the most challenging is a lack of people with the right skills to undertake KYC compliance. The report cited that half of all respondents stated that the number of employees working on KYC had increased over the past year. This
acute shortage means senior management are getting more involved and are therefore distracted from other revenue related activities. Tellingly, 70% of C-level respondents said they had dedicated more time and attention to KYC over the last 12 months.
Allegations, reactions and investigations
The testing backdrop to these increasing challenges involves unexpected events such as the Panama Papers. For example, as a result of the recent Panama Papers leak, the UK’s Financial Conduct Authority gave banks seven days to respond with information about
potential relationships with structures or companies created by the law firm involved. For many organizations, providing that level of detail is a challenge as the information they have may not be up-to-date. In fact, according to the survey, some 11% of
respondents said they do not have a formal process or program to refresh due diligence of their clients.
Poor customer experience
Our research also shows implications for the clients of the financial institutions. The timelines for onboarding are increasing, with financial institutions reporting an average onboarding time of 24 days, representing an average increase of 22% over the
course of 2015, and expecting to rise a further 18% this year. A separate survey of corporate clients highlights the magnitude of the issue with 30% stating that onboarding took 2 months or longer, and 10% witnessing the process taking 4 months or longer.
Furthermore, corporates reported that on average, that they have eight different interactions with their financial institution during the process.
All of these pressures are leading to poorer onboarding and due diligence client experiences, as well as processes that are becoming unsustainable. This puts financial organizations at higher risk of potential regulatory fines and penalties. Clearly, things
need to evolve, and quickly.