Donna Milrod, DTCC Managing Director, Head of DTCC Solutions
Policymakers have prioritized the need to mitigate systemic risk and enhance market stability by bringing greater transparency to global financial markets.
A sizeable portion of these efforts has focused on strengthening anti-money laundering (AML) and ‘know your customer’ (KYC) regulations, with new mandates put in place to help prevent identity theft, fraud, money laundering and terrorist financing.
While the regulatory regime in Australia dates back to the Anti-Money Laundering and Counter-Terrorism Act 2006 (AML/CTF Act), the Australian Transaction Reports and Analysis Centre (AUSTRAC) are planning to step up enforcement of non-compliance, with new penalties slated to begin in January 2016.
The AUSTRAC move follows a recent Financial Action Task Force (FATF) review, which urged improvements in AUSTRAC’s compliance and enforcement and the strengthening of its “risk picture” of supervised entities.
According to a recent survey by Aite Group and sponsored by The Depository Trust & Clearing Corporation (DTCC), C-level executives at financial institutions are concerned with the recent increase in financial penalties for non-compliance with sanctions and KYC requirements, with recent record-breaking fines being levied against firms.
Indeed, AUSTRAC’s move to upscale enforcement measures is consistent with policies set by regulatory regimes around the world that target AML breaches.
The International Monetary Fund estimates incidents involving money laundering, compliance violations of KYC regulations and other client-related breaches that continue across the industry to cost around two to five per cent of the world’s gross domestic product.
As market participants look more closely at their client data management operations to ensure compliance, it has become clear that gaps persist, and new checks and data classifications need to be applied to legal entity data to ensure AML, KYC and other related regulations are met.
Australian firms with US-based clients are also subject to the U.S. Foreign Account Tax Compliance Act (FATCA), which requires them to report certain information to the US Internal Revenue Service (IRS).
This mandate, coupled with local requirements and a general lack of standardization across regulations globally, has resulted in duplicative, inconsistent and time-consuming KYC and AML processes across the industry, with different nuances in support of each market.
As a result, in addition to higher compliance costs at both a global and local scale, we see greater operational complexity for firms in managing their client documentation and reference data.
Along these lines, the Aite survey also found 69 per cent of firms indicated that data quality and governance are the greatest legal entity data challenges, while 56 per cent put siloed, legacy client data architecture as the second greatest challenge.
Many firms do not currently have a single location that provides all of their counterparties with the requisite legal entity data and documentation needed throughout the life cycle of a trade. This data includes, but is not limited to, KYC/AML documents, third-party forms, account agreements, trade documents, regulatory forms and tax forms.
As a result, firms are taking a more strategic approach to managing client data in order to meet current and pending regulatory and risk management requirements.
Firms are looking at the impact of regulations on their organization holistically when preparing business cases for client data management.
Their recommendations often span on-boarding through to trading and settlement, with perspectives around the collection and monitoring of information on clients’ background and transactions.
At the same time, there is also a growing recognition among firms that client on-boarding and client reference data are no longer strategic differentiators.
Each firm has requirements, criteria and fields that need to be fulfilled as part of the on-boarding process, including regulation-specific documentation.
While there is some variation at a firm level, the majority of the core client and legal entity data across firms is largely the same.
If the industry can standardize this client data and documentation requirements across firms, we can reduce the costs and risks associated with meeting the industry’s data management challenges and compliance burdens.
Creating a data management utility
The best way to achieve this is through an integrated, global client data management utility that streamlines interactions between market participants and their clients, and allows this critical data to be digitized and dynamic.
A utility enables the delivery of the highest level of control, standardization, accuracy and data privacy for client data and documents, including on-boarding, KYC and data required throughout the client life cycle.
Furthermore, it provides a single interface to improve efficiency, allowing users to contribute their data and documentation into one portal for both on-boarding and ongoing client data maintenance, enabling firms to move to a data-driven strategy across all client touch points. It also minimizes the number of times an underlying client needs to submit their information, since they can permission multiple sell-side firms to access their data and documents from a central location.
Not only does this approach improve internal efficiencies and facilitate regulatory compliance, it also improves the overall client on-boarding and reference data maintenance experience. A utility solution also provides clients with greater transparency into exactly where they are in the workflow of the on-boarding process, how their documents are used, why they are needed and how they are stored.
By bringing greater efficiency to these processes, firms can improve satisfaction and business relationships, speeding up a client’s ability to trade and helping to facilitate regulatory compliance.
An industry-owned and governed client reference data and documentation utility can help participants worldwide manage evolving risk management and regulatory requirements while consolidating critical information and sharing that information with peers and clients from one location.
The industry’s need for a centralized client reference data and documentation solution with uniform data standards is what led DTCC and six major global banks to form Clarient Global LLC last year.
With the Clarient Entity Hub utility, firms are able to leverage a solution offered by trusted technology partners and leading financial institutions, while at the same time taking advantage of the world-class support and governance structure that the service provides.
Market participants in Australia face the threat of growing oversight and penalties in this space, so now is the time for market participants to move towards a centralized approach to client data and documentation by leveraging a utility, such as Clarient.
This article first appeared in InvestorDaily on September 1, 2015.