Compliance is becoming an increasingly more important part of any broking business as Governments and regulators are cracking down on fraudulent activity and money laundering. For those who know me, will know that I also believe that everything listed below should also apply to brokerages operating in the crypto and token space.
An editorial by Chris Rowe of Financial Technology Consultancy Services Ltd
The traditional model for carrying out KYC, is to employ one of the large KYC companies to do standard KYC and AML checks on anyone or any business opening an account. In a traditional marketplace this may work but the reality is that most brokerages are multi-jurisdictional and operate globally. As markets such as LATAM and Africa are become increasingly more active, local companies will need to be engaged to do local checks, especially for Proof of Residency (POR) or checks with local government agencies or utility companies.
Any system used for uploading documents should also include document verification. This is extremely difficult to do in-house, but care should be taken to ensure that fraudulent documents are not submitted.
Once you are satisfied that the documents submitted are correct then checks need to be made that the individual or company is not flagged on any sanctions list or subject to adverse media.
If the brokerage operates across multiple jurisdictions, then suitability checks will also need to be made to ensure that they are not trading in a way that would not be permitted by their regulator.
We speak of KYC as a generic term, but KYB is just as important if you are looking to offer corporate accounts. The principles are much the same as with retail although there will need to be a much deeper dive into corporate details.
So, you have successfully onboarded your new client, but two further issues then need to be addressed. The first is how do you continually monitor your clients and the second is how do you safely hold their data. A client may pass the onboarding checks on day one but, for example, become a Politically Exposed Person on day two. Individuals and Corporates do change their circumstances often and a firm cannot say they “know their client” if the details held are wrong. Firms cannot expect clients to volunteer that their details have changed, the rule is “Know Your Client” and not “inform your broker of any change”.
Many of the current KYC providers do not adequately monitor clients post onboarding and this exposes the firm to having clients who may have become undesirable or higher risk. In some jurisdictions it is very difficult to obtain true and reliable online confirmation of client documents without manual checks, the best KYC providers have opened partnerships with local KYC firms particularly in Africa and Latin America to provide reliable local regulatory checks. Industry players constantly speak of the need to onboard quickly, there is hard evidence that a client who is not onboarded within a few minutes and who finds it difficult to upload the necessary information, will drop out and go elsewhere. So, while firms strive for fast onboarding it is not acceptable to cut corners on the information gathered and checks made.
In terms of client data, I spoke to Peter Halloway-Churchill, CEO of Seven Compliance LLP (www.sevencompliance.com) provides the following insight:
‘The need for continuous monitoring, done well, is as important as the initial onboarding, both for individuals and corporates. A client may pass the onboarding checks on day one but, for example, become a Politically Exposed Person on day two. Individuals and Corporates do change their circumstances often and a firm cannot say they “know their client” if the details held are wrong. Firms cannot expect clients to volunteer that their details have changed, the rule is “Know Your Client” and not “inform your broker of any change”. Many of the current KYC providers do not adequately monitor clients post onboarding and this exposes the firm to having clients who may have become undesirable or higher risk. In some jurisdictions it is very difficult to obtain true and reliable online confirmation of client documents without manual checks, the best KYC providers have opened partnerships with local KYC firms particularly in Africa and Latin America to provide reliable local regulatory checks. Industry players constantly speak of the need to onboard quickly, there is hard evidence that a client who is not onboarded within a few minutes and who finds it difficult to upload the necessary information, will drop out and go elsewhere. So, while firms strive for fast onboarding it is not acceptable to cut corners on the information gathered and checks made.
Client data is highly sensitive, particularly to the client and firms must make it clear to a client if onboarding checks are being done by third party firms, where those firms are domiciled and the GDPR regulations that govern them. With the need for continuous monitoring a KYC provider should have constant access to a firm’s client details without storing the client details itself. The firm that the client has opened an account with must be the only body that holds personal information. Clearly there are challenges to KYC, but with an effective system small and large firms alike can meet their regulatory obligations in an acceptable time frame. Regrettably some of the better known KYC providers have failed to keep up with current requirements and are slow with no continuous monitoring.’
This requirement has moved on considerably over recent years and the traditional way of carrying out KYC has changed substantially. It is now possible to engage with solution providers who offer comprehensive packages that cover all these different aspects, which will be considerably more cost effective than trying to do this all separately. It also allows smaller brokerages to be able to operate like the larger brokerages without the need of a sizable compliance team to carry out all these various processes. As always, I would highly recommend engaging with specialist consultants who will be able to give you the best advice and act as a protection to your business.
Chris Rowe
Having spent many years in the Voice and Data markets, I moved into the FX arena 10 years ago, selling bridging, aggregation and MetaTrader enhancements to spot FX and CFD brokerages. This included developing international marketplaces such as Turkey, China and the Far East. In 2020, after a short stint with a sophisticated deliverable FX platform provider, I decided to set up my own consultancy firm working with innovative technology providers to get their solutions to market. This covers everything from Compliance to Blockchains and the portfolio keeps expanding, recently adding banking and payments into the fold. My business has evolved over time and now is geared towards a free consultancy service for brokerages and other financial institutions, helping them source the right solutions for their businesses.
Outside of work, I am married with two children (and two dogs), as well as being a Level 2 rugby coach and a Level 2 rugby referee. I am also the Head Coach of the Colts section at Guildford Rugby Club. In my free time, I enjoy mountain biking, rugby, badminton and music.
