One identity, one KYC

Nilanjan Dey makes out a case for a uniform KYC for all financial dealings

If you are an average investor dabbling in various kinds of assets across markets in India, you will be subject to an array of norms set by different regulatory agencies, each of which will require you to comply with its own KYC (know your customer) standards. That is a simple fact of life for all investors, big and small.

Indeed, the entire chain of financial intermediation in this country – from banks and brokers to deposit-takers and asset managers – is marked by a variety of KYC requisites. The trouble, however, lies in the fact there is little scope for inter-usability of KYC data across the financial landscape.

A uniform and standardised KYC, therefore, is a need that is almost crying out for recognition – a reality that is well appreciated by the authorities. They must now create the right legal framework in order to ensure the implementation of universal KYC for all saving and investment products.

In India, whether you are opening a bank account or buying a mutual fund, the presence of multiple compliance standards will be a bother. Your submissions will need to stay updated in order to stay in tune with regulatory amendments.

Consider, for instance, a very recent change in the world of mutual funds. This has been initiated by the Association of Mutual Funds in India (AMFI), the trade body established by asset management companies.

Under the new rule, a fund house will not accept purchase transactions (new or additional subscriptions and even switches) pertaining to “KYC-on hold” cases, unless the investor concerned gets his missing information updated in the KYC system.

In other words, only those transactions that are “KYC-registered” or “KYC – Under Process” will be acceptable for new investments.

The same will apply also to fresh Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) registrations.

KYC – developments and innovations

Some sections of the market are already responding to emerging trends with innovations of their own. Benign policies, supported by the spread of technology-driven mechanisms, are likely to add to investors’ convenience.

In the asset management space, for example, some players are increasingly propagating their own innovations.

The concept of “e-KYC” is one such move. In short, this is an online facility to allow investors, especially first-timers, to complete formalities. Details, including documents, can now be furnished digitally from remote locations. There is no reason to physically visit for submission of papers.

Similar and more meaningful proposals may well emerge from other quarters, including those concerned with deposits, loans and sundry other financing products.

Is there a case for common KYC compliance for companies within a specific financial services group? Yes, I think, and my reasons are not far too seek. To begin with, there are a number of large houses where clients can benefit from such an innovation.

Think of a group that has bank, insurance, asset management, retail finance, securities broking and so on within its fold.

Can a bank account holder (who has complied with KYC norms) be automatically eligible for the group’s mutual fund without repeating the KYC exercise? This is not feasible because of current legislations, but can’t technology be harnessed to achieve such an objective?

A jumbo-sized financial services group has a vast client base. That will include a sizeable number of common clients. The winning triumvirate – bank account-demat account-securities broking account – is a major example. Many more can be served if the logic is extended further.

Improved KYC benchmarks, in fact, are the need of the hour, given the selective introduction of new-generation regulations such as the one related to FATCA or Foreign Account Tax Compliance Act. The latter, for those who are yet to know, will ensure that US citizens with assets outside the USA pay taxes as per US norms. FATCA is a big reality in today’s market.

Points to remember

The financial landscape is changing, thanks to greater inclusion, rising levels of awareness, increase in allocations and improved digitisation. A larger number of customers are joining the formal financial system with every passing year. In this scenario, it makes sense for universalisation of KYC norms.

Remember, under the proposed system, details furnished by an investor for the first time for one regulator should be enough and adequate for other regulatory organisations determining consumer behaviour in various corners of the financial services sector.

There will be no need for providing supporting documentary evidence at every level. Information will be shared among regulators or KYC registration agencies (KRAs).