KNOW YOUR CUSTOMER: Background checks

As asset managers face further pressure to carry out checks that used to be left to banks, Know-your-customer processes are industrialising. By Fiona Rintoul.

Partly in response to regulatory requirements, know-your-customer (KYC) has become an important part of client management for asset managers.

Stemming partly from an international clampdown on money laundering and tax evasion, and partly from the investor protection aims of the new Markets in Financial Instruments Directive (MiFID II), firms must compile an unholy mix of personal data and information related to a client’s investment goals.

“The primary driver in recent years has clearly been the increasing focus by regulators and legislators on asset management overall, and specifically looking at controls, such as client suitability, and monitoring of anti-money laundering,” says Neil Curham, executive director at wealth and asset management consultancy Alpha FMC. 

Historically, anti-money laundering provisions have been aimed at banks, and with good reason, as banks were always the primary gateway for cash travelling towards investment funds.

“You don’t rock up at an asset manager with €50,000 in cash and say you want to buy a fund. Asset managers derived comfort from the fact that money was coming out of banks,” says Robert Dedman, senior director in Navigant’s global investigations and compliance practice.

Increasingly, however, asset managers must do their own checks – or at least outsource them – and collect information about a customer’s financial situation and investment objectives. And regardless of whether a country has tightened its detection of tax evasion, it is important for asset managers to be seen to be doing the right thing. Already there is a slight smell around the industry, which might not be deserved, but is down to the industry’s use of low-tax or no-tax jurisdictions to domicile funds.

“It’s a challenge for the asset management industry,” says Stuart Campbell, director at consulting firm Protiviti. “Can they continue with that tax structure?” Collectively, supporting these information requirements can mean only one thing: systems.

Industrialising relationships
In an industry that has tended to be a little tech-phobic, it comes as no surprise to learn that asset managers’ processes for collecting and storing client information have historically been on the hand-knitted side. Until about five years ago, the majority did not have a central customer relationship management (CRM) system, says Curham. Spreadsheets and emails were normal. “KYC has been a catalyst to industrialising this approach, and we see industrialisation continuing at a pace,” he says.

This industrialisation happens within a situation that is more complicated than in the banking world. It is not typical for asset managers to meet their customers or undertake the KYC themselves. Except perhaps for large segregated mandates, KYC is usually outsourced to a third-party specialist, such as a transfer agent.

The question is about the level of scrutiny and monitoring the asset manager must undertake to show they are on top of their KYC duties. KYC is no longer a matter of jotting down a few rudimentary details about a new client. Knowing your customer means knowing how they and their circumstances change over time.

“There are increasing obligations in terms of keeping information current,” says Guy Harrison, managing director, regulatory and compliance services at IHS Markit. The firm runs a system called that standardises KYC processes and centralises operations around client onboarding and account management. A recent partnership with Dow Jones, Exiger and Regulatory DataCorp has allowed IHS Markit to integrate compliance, onboarding, sanctions, screening, negative media searches and client risk assessment on one platform. It can also help asset managers with consistency, which can be a particular issue when there is legacy infrastructure to deal with.

As KYC requirements increase, standardisation is the name of the game.

Bloomberg Entity Exchange is another platform that promises to provide “a centralised, secure platform to enable trading counterparties to manage and share client data and documents with confidence”.

“It’s like an institutional version of LinkedIn,” says Dan Matthies, head of Bloomberg Entity Exchange. “It enables asset managers to act as a community.” This is important, he says, in an industry where clients move their money around. “There’s a flow of assets every year. Eight per cent goes into the new things in favour, so another 8% must come out of the old things.”

On the private equity fund side, specialist administrator Ipes is approaching the problem from a slightly different angle. It has created the ID Register, a platform that allows individuals to create one complete KYC profile and share it securely with their lawyers and fund managers. It goes beyond KYC by combining KYC with the US’s Foreign Account Tax Compliance Act (Fatca) and the Common Reporting Standard. To date, the platform has 18,000 investors on it out of a potential pool of 100,000. Tim Andrews, director at Ipes, sees it as part of a broader narrative in the private fund industry of increasing professionalisation and scale.

“Fatca and CRS forced fund managers to standardise the information they have on each of their clients and at least consider automation,” he says. “In three years, the industry has gone from a largely cottage industry to something more in line with the Ucits world.”

Ideally, of course, KYC would not just be an administrative burden dumped on asset managers by regulators; it would also create an opportunity to sell to clients more effectively. The better you know, the better able you are to market to them in a targeted way – but there is some way to go yet.

“We are on mile one of the marathon,” says Harrison at IHS Markit. “A lot of institutions have tightened up on onboarding, but there’s a long way to go in terms of keeping that information current. Risks are being managed in silos and there’s a long way to go to bring them together.”

But when the dawn comes, it will be beautiful. An integrated CRM, portfolio management and fund accounting system is now achievable. As well as providing a complete picture of the client, their mandate and investments, that is the perfect framework for the ongoing monitoring and management of client relationships at the centre of regulatory initiatives such as MIFID II.

Such systems can be used to drive new business. 

“It is just as important for firms that investment in this framework provides the basis for a better client experience,” says Curham at Alpha FMC. “Improved client experience should drive asset inflows through brand and reputation and asset retention through a higher-quality service that generates greater trust in the long-term operational and investment processes of a firm.”

©2017 funds europe



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