Insights for Organisations

Navigating the New Era of KYC

John Smith

Financial crime is constantly evolving, so it’s vital for financial institutions to be at the top of their game. The continuous evolution of financial crime regulations provides many challenges for financial institutions, which requires organisations to implement additional measures to remain compliant. Failure to implement an effective financial crime mitigation solution can result in hefty fines imposed by regulators.

In 2021 alone, UK financial institutions were fined a collective $672 million for non-compliance with KYC and AML regulations. Regulators are increasingly prioritising financial crime compliance, imposing more regulatory reviews on financial institutions. However, the effectiveness and efficiency of KYC standards come into question, as operations remain reliant on outdated models. Financial institutions struggle to meet their KYC compliance obligations due to increasing costs, inefficient operations and complex technology that is not fit for purpose, resulting in compliance risks and regulatory fines.

At FDM, we recognise the significance of the challenges financial institutions face when implementing KYC compliance. We are committed to transforming the KYC industry through our dedicated AML-KYC PODs solution. Let’s take a look at the new era of KYC in more detail…

What’s in this article?

What is Know Your Customer (KYC)?

KYC standards are implemented in response to financial crime, protecting financial institutions and potential victims from being complicit in funding various crimes, such as terrorism. The legislation itself can be traced back to the American Patriot Act of 2001 and was fully implemented in all US banks in 2003, with most countries following suit thereafter. In 2013, the Financial Conduct Authority (FCA) was introduced to regulate the conduct of financial services in the UK to ensure customer confidence. The National Crime Agency (NCA) was founded in the same year to enforce the laws against money laundering and terrorist financing.

In 2022, the EU announced support for a dedicated Anti-Money Laundering Authority (AMLA). Observing the cross-border nature of AML and KYC crime, the new authority is expected to make a significant impact on KYC compliance, significantly reducing money laundering and the funding of organised crime.

One core aspect of its remit will be the harmonisation of KYC standards between the financial and non-financial sectors, in addition to coordinating financial intelligence units globally. The European Council’s support will grant the AMLA powers to directly supervise certain types of credit and financial institutions, most notably crypto asset service providers (based on a risk analysis).

What challenges does KYC compliance entail?

KYC compliance can present a number of challenges to financial institutions and has been broadly criticised as placing a heavy burden on smaller institutions. This is due to the ambiguity of legislation, often relying on businesses to self-audit and come up with an appropriate action plan – a simple task for large organisations with legal teams, but a costly and fraught process for smaller companies. For all firms, even beyond the financial sector, an ever-growing body of recommendations, guidance and regulation, associated with watchful enforcement, cost and quality remain a stringent constraint.

Top 5 challenges for KYC compliance

  1. Regulatory changes
  2. Operational agility
  3. Resourcing and high attrition rates
  4. Digital skills gap
  5. Innovations within financial crime

1. Regulatory changes

C-suite executives face many challenges in their day-to-day roles, and the ever-changing regulatory standards surrounding KYC are complicated and require specialist knowledge. Regulatory changes in KYC struggle to remain abreast of the rise and variety of financial criminality, with compliance requiring dedicated skills and attention. It can prove difficult to identify which elements of legislation apply to a specific financial institution, further complicating the field and preventing C-suite executives from fulfilling their senior management responsibilities.

The impact of changing KYC regulations was assessed in a study by Thomson Reuters in 2022. It assessed the significant challenges facing UK financial institutions in trying to comply with guidance and the impact this has on their reputation, and ultimately their profitability. Evolving regulations make compliance more difficult and justify the constant need for KYC experts to assess business practices and recommend adjustments. The study concluded that financial institutions should place more emphasis on determining the true identity and suitability of their customers to avoid the costly fines and bad publicity associated with non-compliance.

2. Operational agility

KYC compliance poses a significant challenge to unprepared organisations to establish and maintain operational agility. The speed at which KYC regulations change requires organisations to respond in a timely manner to mitigate the risk of non-compliance. This requires a high level of operational preparedness and responsiveness as new processes need to be created, refined and shipped within a short timeframe to maintain legal compliance.

Larger financial organisations, in particular, can often struggle to adapt swiftly, leaving them open to a number of risks, such as fraud and regulatory breaches. Building and maintaining the operational structure to react quickly to KYC changes can be challenging and costly. It can entail employing a team of highly trained specialists, or risk hiring contractors who are often more costly and inexperienced, with no company loyalty to motivate a high quality of work.

3. Resourcing and high attrition rates

A study by Microsoft found that over 60% of hiring managers reported difficulties hiring qualified talent. This challenge in replacing and hiring within KYC compounds all other issues by adding significant friction to many available solutions. Knowledge gaps remain unsolved, operational agility is significantly compromised, and regulatory changes can go unnoticed without trained individuals in the right place to acknowledge and action them.

The high attrition rate within KYC further complicates these resourcing issues, with continuous regulatory changes alienating those who work in the sector. Staff in this sector find it difficult to go the distance, tolerate low STP levels and confusing policies, suffer from repetitive task assignments and slow benefits of automation projects plagued with data quality and package functionality gaps. This significantly limits job loyalty and increases the likelihood of a high turnover, as tech workers look towards more stable fields or just the next pay rise. Together, the high attrition rate combined with the ongoing hiring challenges within tech creates an unstable environment for companies to operate within.

4. Digital skills gap

Unprepared financial institutions can often suffer from a significant knowledge gap due to the pace of change in KYC and the associated changes within best practices. A survey conducted by AND Digital suggests that more than 1 in 4 people currently feel that they lack sufficient digital skills for their current roles. The risks associated with KYC are substantial and failure to comply with legislation due to poor employee training can impact profitability, alongside risking huge reputational damage as a result of data breaches. This field is at the forefront of Big Data and AI, areas not traditionally associated with risk, regulatory and compliance training and development skill sets.

5. Innovations in financial crime

Financial crime is a fast-moving area with white-hat and black-hat hackers competing in a conflict that causes almost daily updates to KYC practices around the world. Criminals often have the advantage in this area, with a single exploit able to inflict significant damage on a massive scale. An example of this is the Zeus computer virus – a financial theft tool that infected 88% of all Fortune 500 companies, spanning over 195 countries.

Criminals leverage cryptocurrencies, information security gaps, widespread personal data availability, paperwork proliferation and savvy impersonation techniques facilitated by Artificial Intelligence and public gullibility to misdirect and redirect financial flows. Takedowns of major criminal communication networks by internationally cooperating law enforcement agencies reveal the magnitude of the problem.

In 2023, it is predicted that deepfake technology will fuel a rise in identity fraud. KYC standards will need to protect customers from this new danger, while ensuring customer experience remains a priority. Innovation within financial crime will always pose a challenge to organisations, and will require them to adapt existing practices, leverage new technologies and employ white-hat hackers to ensure their customer’s safety.

How are firms impacted by remediation?

Remediation processes occur after financial institutions are found to be in violation of existing KYC guidance. For example, the FCA imposed a £264.8 million fine on a large UK bank in 2021 for failures in its Anti-Money Laundering (AML) policy. While these fines alone are prohibitive, the wider impact of fines on the reputation of financial institutions is far more significant. According to research from the University of Oxford, the average financial institution suffers a market value loss of around 9 times the fine imposed, which they attribute to reputational damage.

One key consideration for institutions is the predicted increase in remediation processes over the next few years, mostly as a result of greater regulatory scrutiny following the newly formed AMLA. In 2021, AML fines totalled a staggering $672 million with a YoY increase of over 226%, which is set to increase in line with the rise in remediations. These issues stress the affordability challenges associated with remediation for financial institutions.

When it comes to the remediation process, one of the main challenges is how best to resource the activities. A dedicated team with specialist knowledge is required to ensure a smooth transition to new KYC practices. With remediations set to rise, this issue will only worsen as the demand for KYC specialists will increase. Contractors often lack the drive to complete the remediation process to a high standard and do not provide any lasting value to the business.

KYC compliance isn’t just a simple process, completed by a third party one area at a time. Instead, it is a holistic approach that involves a rigorous analysis of existing KYC processes and policies.

Navigating the social responsibility of KYC

KYC is a marathon, not a sprint. As such, it’s important for the industry to adapt to achieve sustainable growth. Current industry standards, over-relying on contractors and viewing KYC as a single issue to ‘fix’ will only exacerbate these trends, causing a significant risk to customers’ financial data whilst risking money laundering.

According to Yves Laffont, Head of Risk, Regulation and Compliance at FDM: “In 2021, the global cost of financial crime exceeded $274 billion. To put this into perspective, if financial crime was a country it would have a higher GDP than Finland and would be among the 50 richest countries in the world.”

The longer-term impact of KYC negligence is even worse, with existing skill gaps only widening with the lack of interest in working in KYC shown by younger generations. Taking a stand to change the narrative on KYC, to engage younger people in the prospect of a career and engage in sustainable business practices is no longer optional – it is a crucial step for all financial institutions.

Effective KYC needs constant refinement to ensure quality outputs. Viewing KYC as a marathon will give your organisation a significant advantage in the long run, refining outputs and eliminating the risk of costly fines and remediation processes. Minimising attrition rate by engaging with the team proactively and ensuring up-to-date compliance with all upcoming updates to KYC regulations are vital to ensure business continuity.

What is FDM’s KYC PODs solution?

At FDM, we are set on changing the face of KYC and transforming the narrative of negativity and tediousness into an exciting career path in a rewarding career. We are committed to delivering long-term value to businesses and nurturing our consultants’ commitment to KYC.

With 7 years of experience, including 15 remediation projects, our KYC PODs promote a collaborative and cohesive working environment, engaging FDM consultants in constant on-the-job learning. The benefits of FDM’s KYC PODs include:

The overarching expected results our clients are looking to achieve is ‘sustainable growth’. Our KYC PODs provide the combined benefits of staff augmentation and in-built solutions without any of the aforementioned drawbacks. We prioritise quality outputs and resource retention to ensure a sustainable KYC solution that meets your organisation’s requirements.

Ultimately, this provides our clients with a whole host of benefits, which we call the 4 S’s:

In addition, our KYC PODs solution offers an adaptive service to ensure that the work we deliver always fits into the client’s new reality. If your organisation is looking to achieve sustainable growth in KYC, book your free KYC POD demo today!

Transforming the KYC industry with FDM

Financial crime mitigation has been a major challenge for the financial industry and will continue to prove taxing for as long as financial institutions employ unsustainable KYC solutions. The team at FDM have developed the KYC PODs alternative to provide organisations with the help they need to improve their KYC compliance or assist with the remediation process.

We are committed to fighting financial crime and it’s our social responsibility to help make the KYC industry more sustainable. Nurturing younger generations in this space is vital to addressing the  volatility in this sector and closing the skills gap. Our KYC PODs combine theoretical learning with an immersive environment to ensure our consultants have the ability to adapt to your specific needs and meet new challenges head-on.

To keep up with changing KYC regulations, you will require a dedicated team to support you with the challenges it can entail. For more information get in touch to find out how we can help you with our specialist KYC PODs.