‘I KNOW THAT I KNOW NOTHING’: WHAT SOCRATES CAN TEACH US ABOUT KNOW YOUR CUSTOMER (KYC) REMEDIATION

Robert Gibson, AVP – Genpact Capital Markets

Rob Gibson about know your customer (kyc) remediation

The phrase “I know that I know nothing,” often attributed to Socrates, has actually been interpreted to mean not that he does not know anything, but instead that there are things about which one can remain confident in the absence of absolute certainty. In the financial services industry, this idea holds particularly true in the area of KYC where getting to know your customer has traditionally been more of an art than a science with a heavy reliance on strong customer relationships. Even though financial institutions (FIs) will always strive to continue developing the art of creating deep, longstanding relationships with their customers, the globalization of markets and the dizzying pace of regulatory reform have each required firms to revisit even their most intimate customer relationships. But it is important to remember that without scientific processes and industrialized platforms, the potential for errors goes up, and as we have witnessed in several recent high-profile regulatory actions, the consequences for those errors can be quite dire.

In an effort to minimize errors, the industry must continually conduct reviews of their existing customer data. This activity typically takes place through either a regularly recurring renewal or through an ad hoc remediation process. It is the latter of the two, KYC remediation, which often creates the most headaches for the industry as a whole. Remediations can be sparked by any one of a number of events, including regulatory actions, internal audits, systems upgrades, or M&A activity to name a few. Often these events occur with little warning and at irregular intervals, placing extraordinary demands on operations, compliance and technology personnel.

However, since remediation is never an optional exercise, FIs must do what they can to complete the work, often diverting resources from other functions and employing ‘hired guns’ in the form of contractors at astronomical rates. The process can be so trying that just getting through it in one piece and avoiding backlogs takes every last resource leaving no room for strategic investments in platform or personnel for the next time. Even worse, a large portion of the institutional knowledge gained through the process ‘walks out the door’ at the end of each project as the contractors move to the next bank with the ability to charge even more.

In times past, this expense has been considered just another cost of doing business. However, in this new age of heightened regulation and compressed margins banks can no longer afford to look at the high price of KYC remediation as just another cost of doing business. It is time for the industry to look to a new model, one that leverages the benefits of strategic investment and compounding institutional knowledge provided through ‘as a service’ delivery.

When performing KYC remediation, organizations need a model that is consistent enough to ensure reliable results, yet scalable so that it can handle the lumpy nature of the workflow. It must also provide optimal value to the regulatory compliance team without being overly obtrusive for individual stakeholders and their core functions – and without sucking up all of the allocated investment. The ‘Remediation as a Service’ model meets these criteria. This model helps ensure that financial institutions meet their compliance requirements in a consistent and scalable way – without requiring the kind of outsized investments in people and technology that could disrupt other strategic initiatives, a key element for FIs.

The model must enable financial institutions to provide global regulators with a clear picture – affirming their compliance across all business lines and jurisdictions, while not affecting their normal business operations. In addition, the mandate to maintain compliance in the most cost-efficient way dictates the need for a strategic solution as opposed to a tactical one.

The output from the remediation process should resemble that of well-run factory with consistent results and a miniscule defect rate. In addition, FI executives want scalable solutions with the ability to better match costs with effort. Going forward, the use of service-based industrialized operations provides the elasticity these executives seek while delivering a more effective and scalable solution for their KYC remediation efforts. And while the art of getting to know your customer will always play a critical role in the KYC process, it is the science brought by ‘Remediation as a Service’ that will enable the industry, regulators and customers to gain true confidence going forward.

Robert Gibson, AVP – Genpact Capital Markets

Rob Gibson about know your customer (kyc) remediation

The phrase “I know that I know nothing,” often attributed to Socrates, has actually been interpreted to mean not that he does not know anything, but instead that there are things about which one can remain confident in the absence of absolute certainty. In the financial services industry, this idea holds particularly true in the area of KYC where getting to know your customer has traditionally been more of an art than a science with a heavy reliance on strong customer relationships. Even though financial institutions (FIs) will always strive to continue developing the art of creating deep, longstanding relationships with their customers, the globalization of markets and the dizzying pace of regulatory reform have each required firms to revisit even their most intimate customer relationships. But it is important to remember that without scientific processes and industrialized platforms, the potential for errors goes up, and as we have witnessed in several recent high-profile regulatory actions, the consequences for those errors can be quite dire.

In an effort to minimize errors, the industry must continually conduct reviews of their existing customer data. This activity typically takes place through either a regularly recurring renewal or through an ad hoc remediation process. It is the latter of the two, KYC remediation, which often creates the most headaches for the industry as a whole. Remediations can be sparked by any one of a number of events, including regulatory actions, internal audits, systems upgrades, or M&A activity to name a few. Often these events occur with little warning and at irregular intervals, placing extraordinary demands on operations, compliance and technology personnel.

However, since remediation is never an optional exercise, FIs must do what they can to complete the work, often diverting resources from other functions and employing ‘hired guns’ in the form of contractors at astronomical rates. The process can be so trying that just getting through it in one piece and avoiding backlogs takes every last resource leaving no room for strategic investments in platform or personnel for the next time. Even worse, a large portion of the institutional knowledge gained through the process ‘walks out the door’ at the end of each project as the contractors move to the next bank with the ability to charge even more.

In times past, this expense has been considered just another cost of doing business. However, in this new age of heightened regulation and compressed margins banks can no longer afford to look at the high price of KYC remediation as just another cost of doing business. It is time for the industry to look to a new model, one that leverages the benefits of strategic investment and compounding institutional knowledge provided through ‘as a service’ delivery.

When performing KYC remediation, organizations need a model that is consistent enough to ensure reliable results, yet scalable so that it can handle the lumpy nature of the workflow. It must also provide optimal value to the regulatory compliance team without being overly obtrusive for individual stakeholders and their core functions – and without sucking up all of the allocated investment. The ‘Remediation as a Service’ model meets these criteria. This model helps ensure that financial institutions meet their compliance requirements in a consistent and scalable way – without requiring the kind of outsized investments in people and technology that could disrupt other strategic initiatives, a key element for FIs.

The model must enable financial institutions to provide global regulators with a clear picture – affirming their compliance across all business lines and jurisdictions, while not affecting their normal business operations. In addition, the mandate to maintain compliance in the most cost-efficient way dictates the need for a strategic solution as opposed to a tactical one.

The output from the remediation process should resemble that of well-run factory with consistent results and a miniscule defect rate. In addition, FI executives want scalable solutions with the ability to better match costs with effort. Going forward, the use of service-based industrialized operations provides the elasticity these executives seek while delivering a more effective and scalable solution for their KYC remediation efforts. And while the art of getting to know your customer will always play a critical role in the KYC process, it is the science brought by ‘Remediation as a Service’ that will enable the industry, regulators and customers to gain true confidence going forward.