KYC: Eight threats and opportunities every asset manager must now confront

By Robert Mellor 

PwC’s Asset Management Tax conference, held in London on 9 May, discussed the burgeoning responsibilities asset managers now face under the know-your-customer (KYC) rules and related regulation.

Almost 25 years after the first anti money laundering (AML) regulation introduced financial services companies to the idea they must ‘know your customer’ – the KYC bar has never been higher, both in the UK and globally. Today’s regulators are no longer satisfied with just collecting identity data; financial institutions, including asset managers, are also expected to consider product suitability against the clients’ risk and savings appetite, requiring them to build detailed profiles of their clients, including their financial position, their family relationships and their tax status.

The range of regulation is wide-ranging and extensive – and increasingly focused on the global agenda to tackle tax evasion and avoidance. Alongside duties to combat financial crime through AML and KYC procedures, financial institutions also have to monitor anti-bribery, anti-sanction busting and politically exposed persons; beyond this they are also required to support tax authorities through supra-national tax regulation such as the common reporting standard (CRS) and individual country initiatives such as the US’s FATCA. In addition, the asset management industry faces country specific investor tax reporting challenges with tax regimes such as the UK’s reporting funds status (RFS) and the US’s K1 requirements.

For asset managers, these mounting responsibilities have important consequences. Above all, they must learn to manage their data more effectively, collecting the right information in the first place, executing good judgement that goes beyond the tick-box mentality, and reporting key information to the authorities where necessary. Then there are the technical challenges – collecting and storing data efficiently and securely, even where legacy systems and functional silos often make it difficult to create a single reliable and usable data 'lake', and where different jurisdictions or reporting regimes require different data or different formats. With the European Union’s General Data Protection Regulation (GDPR) due to come into force in May 2018, those challenges are even more pressing.

In effect, many tax authorities are now striving to outsource the policing of their tax systems. Short on resources, they expect financial institutions to take responsibility for monitoring client compliance – and for flagging up potential failures. Meanwhile, clients are more demanding too, expecting institutions to manage their tax risk, to use their data for their benefit and to respond to tax changes quickly.

Against this backdrop, asset managers that are not able to think strategically over the next few years about data management in the context of KYC and compliance run the risk of falling out with either their clients or the regulatory authorities – or both; they may also miss out on the opportunity to use data to get on the front foot. This means asset managers should consider these crucial questions now:

  1. Do you need to change the data you ask for from investors during on-boarding? For example, you may need more information on clients’ tax status, and to collect this data more frequently. You may even need to collect copies of their tax returns – and to ensure you have the in-house expertise required to analyse such documents.
  1. Does your on-boarding data include the information required to comply with MIFID II and the Financial Conduct Authority’s approach to product suitability? You may need more detail to help high-net-worth investors with inheritance tax planning, for example. More people throughout the business will need to be equipped to discuss such issues with clients.
  1. How do you manage customers’ tax position on an ongoing basis? While the FCA rules require advisers to take tax status into account during the initial client fact find, you may need to monitor this on an ongoing basis, since people’s tax status will change.
  1. Is your business vulnerable to legal action? Many governments, including the UK, are holding asset and wealth managers liable for assisting clients with tax evasion.
  1. How do you build compliance into new technologies such as robo-advice? Capturing the right data during an online interaction, particularly around suitability, can be difficult.
  1. How do you access a broader range of data? Clients and regulators will increasingly expect asset managers to capture insight from unstructured data – phone calls and face-to-face meetings, say – as well as traditional data. Social media may be one such challenge.
  1. How are you exploiting the value of this exponentially increasing data volume? Not only will clients expect products and services tailored to their needs according to what they know they have told you, but also, such delivery represents a huge opportunity to generate value.
  1. Are you using emerging technologies to overcome these challenges? Tools such as voice recognition and keyword analysis can help asset managers face down threats and exploit new opportunities.

Data and technology are at the core of an asset manager’s business, those managers who recognise this and use it to put the investors’ needs at the heart of their operating model and service offering will be the winners in the 21st century.

If you would like to discuss how PwC can help your firm respond to these challenges, please contact me on [email protected].

In our next post-conference article, Hazell Hallam and Diya Wilson will explore product choice and product suitability for increasingly demanding investors in an increasingly polarised industry.

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