The know-your-customer (KYC) process by financial entities is to authenticate a client’s identity and address prior to allowing them access to offerings such as banking, insurance, mutual funds, and shares. Some of these institutions may apply this process recurrently in order to maintain accurate records – an activity that clients often find tedious due to the extensive paperwork and time commitment it entails. To simplify the process, the Financial Stability and Development Council (FSDC) has suggested a standardised implementation of a one-time KYC procedure applicable across all financial services.
By adopting this uniform approach for the KYC protocol, it would eliminate the prerequisite for investors’ continual submission and validation of required documentation every time they open accounts with different banks or other financial institutions, like insurance firms, asset management companies, stockbrokers or depository participants. This consolidation not only signifies considerable cost-cutting measures for institutions by eliminating duplicative registration efforts but optimises data managerial tasks as well. Concurrently enhancing customer onboarding procedures by simplifying the process also gives this proposed method added value.
The current system
The requirement for customers to provide Know Your Customer (KYC) documents each time they establish a banking relationship, initiate investments in mutual funds or equities, or procure insurance can be repetitive.
In certain instances, financial institutions may also request that clients periodically update these details. To mitigate repetitions and streamline this process, the Central KYC Records Registry (CKYCR) was established in 2016. This central repository is earmarked solely for use within capital markets;Clients are obliged to provide KYC documentation whenever they establish a new bank account, begin participating in mutual funds or stock investments, or procure an insurance policy.
Occasionally, financial institutions may also request clients to refresh their KYC information. CKYCR was designed as a solution for mitigating the need for continuous submission of KYC documents when partaking in diverse financial assets investments. It should be noted that CKYCR is exclusive to capital markets.
Within the securities market sector, once clients finalise their KYC procedure via a registered intermediary – such as a broker, depository participant or mutual fund entity – there will be no further necessity to reiterate this process with subsequent investments.
Uniform KYC
In accordance with a government’s proposal, it is mandatory for individuals to submit KYC documentation as a prerequisite for account initiation. After successful document procurement and registration in the system, every individual shall obtain an exclusive Central KYC (CKYC), represented by a 14-digit number directly linked to their personal identification proofs.
In case of future requirements where financial institutions need to pull out customer data for opening new accounts or other services, they can conveniently retrieve relevant details from the Central KYC Records Registry via this unique numeric identifier.
CKYCR is a centralised repository of KYC records of the customers in the financial sector that enables uniform KYC norms and the inter-useability of KYC records. It will cater to the reporting entities (REs) of all four major regulators of the financial sector: Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA).
Some points
The implementation of a uniform KYC procedure will enable financial institutions to validate customer information utilising a more streamlined method. This process allows access to universally applicable, digitised KYC records across the financial sector.
Consequently, it eradicates the requirement for customers such as ourselves to undergo iterative KYC processes, hence enhancing efficiency and user experience.
“Uniform KYC brings uniformity in the KYC process and eliminates the need for investors to undergo the same KYC process multiple times when opening accounts with different financial intermediaries,” Keshav Reddy, Founder, Equal, a digital platform for Indians to share IDs with one click, told The Economic Times.
Maintaining the integrity of data privacy and security will indeed pose a considerable challenge for the Uniform KYC system, largely because any breach could potentially lead to the exploitation of millions of individuals.
This would invariably impact the verification processes employed by all financial institutions in its wake. The Reserve Bank of India has expressed apprehension concerning high-risk clientele being incorporated into systems via electronic KYC channels.
Cybersecurity professionals have further emphasized that CKYC necessitates details such as an individual’s PAN, which is used for tax purposes, and date of birth. These fundamental informations might provide fodder for financial fraud if compromised in any way.