Complying with customer due diligence and KYC norms is perhaps the most important and time consuming aspect of initiating a new banking relationship. Yes, it is important to cover the credit risk, but the consequences of failing on the KYC or AML (Anti-Money Laundering) front are far more severe. This is the primary reason why many banks are spending billions annually on performing customer due diligence the old fashioned way. New EU guidelines and the tools that they provide aim to change just that.
The EU regulation on electronic identification and trust services (eIDAS) created a unified mechanism to digitally identify consumers. While most member states had national e-Identification schemes earlier, eIDAS allowed for a platform which could be used across the single market and boost sales of financial services and products across national borders. The 2017 Consumer Financial Services Action Plan aims to build upon the foundation laid by eIDAS in order to further its goals of increasing usability while maintaining security at the transactional level.
The action plan makes mention of RegTech or regulatory technology and how it can greatly simplify and automate the process of complying with all kinds of regulations - including KYC, AML and transactional identification. Banks currently use internal resources, external databases, as well as specialised vendors to perform or aid in performing these checks. It is not only a financial strain, but also causes delays in new client on-boarding or updating any changes. The use of electronic identification tools defined in the eIDAS guidelines will enable banks to accept and process KYC documents completely online. In its bid to further improve digital innovation, the Commission has invited industry members to help outline the steps needed to create such an environment.
The European Commission is studying the remote identification and supervisory practices of its members states in order to arrive at a consensus and develop guidelines based on best practices. The action plan calls for testing of cross border use of electronic identification by banks via the Connecting Europe Facility soon. Finally, implementation plans and information system architectures are being developed to create eBanking building blocks which will make full use of the electronic identification procedures under eIDAS.
Cross border use of retail financial products in the EU still remains low. Consumers suffer from opacity regarding fees and policies while the banks have to bear the cost of complying with multiple regulations of each member state where they wish to sell their products and services. The action plan aims to remove these barriers to entry and create a truly unified single market. For example, the plan calls for greater publicity and use of FIN-NET, which is a network of national organizations that allows for settling complaints in the financial services sector outside of courts. There is also a greater emphasis placed on identifying inconsistent regulations across member states and resolving these through various means including common legal frameworks.
eIDAS & 4th Anti-Money Laundering Directive - a short update (2017) by Andrea Servida