The Drive to an Industry Solution to Standardize Client Data Management

By Matthew Stauffer, CEO, Clarient

Policymakers have been focused on greater transparency across the global financial markets as a way to lower risk and enhance market stability for more than a decade. From anti-money laundering (AML), to requirements such as Know Your Customer (KYC) and the Foreign Account Tax Compliance Act (FATCA), efforts to bring greater transparency to clients and counterparties have only increased in the wake of the global financial crisis.

KYC has been mandatory for all banks in the US for some time, including requirements in the 2001 Patriot Act. In Europe, the EU Parliament recently passed the 4th AML Directive and is giving EU member states at least two years to incorporate the new legislation into their national KYC and AML rules.

All of these efforts are designed to help achieve this goal, but they also create greater operational complexity and higher costs for firms in managing their client documentation and reference data. This problem is exacerbated by a lack of standardization, forcing companies to interpret regulations independently, resulting in slightly different policies and duplicative, inconsistent and time-consuming processes across the industry.

Firms also see this as an area of increasing cost and risk to them and frustration for their clients. The International Monetary Fund says incidents involving money laundering, compliance violations of KYC regulations, and other breaches are estimated to cost around 2-5 percent of the world’s gross domestic product.

According to a recent survey carried out by Aite Group and sponsored by The Depository Trust & Clearing Corporation (DTCC), C-level executives said they are concerned with the recent increase in financial penalties for non-compliance with sanctions and KYC requirements, and with record-breaking fines being levied against firms.

To ensure regulations are met, new checks now need to be performed and classifications need to be applied to legal entity data. This led more than 80 percent of firms who participated in the Aite Group survey to say they see regulatory drivers as the main reason for investment in legal entity data—with global derivatives regulations and tax transparency cited as the greatest operational challenges.

Similarly, the survey found 69 percent of firms indicated data quality and governance are the greatest legal entity data challenges, while 56 percent put siloed, legacy client data architecture as the second greatest challenge.

Consistent with the survey, an analysis from Celent notes that regulatory investigations have found serious gaps in firms’ existing processes and what is desired from a regulatory perspective.

Because of this, firms are now looking to take a more strategic approach to managing client data to meet current and new regulatory and risk management requirements. 

They are building business cases for holistic client data management—including the collection and monitoring of information on clients’ background and transactions, from on-boarding through trading and settlement. Firms are also recognizing that client onboarding and client reference data are no longer strategic differentiators.

The key to meeting data management challenges and compliance burdens lies in bending the cost and risk curves. To do so, the industry needs an integrated, global client data management utility to streamline interaction between market participants and their clients, and deliver the highest level of control, standardization, accuracy and data privacy for client data and documents, including on-boarding, KYC, and the ongoing client lifecycle.

However, currently, a large number of firms do not have a single location from which to provide all of their counterparties with the requisite legal entity data and documentation needed throughout the lifecycle of a trade. 

A Utility solution would provide a single interface for clients to improve efficiency—rather than dealing with multiple providers with different requirements, clients can contribute their data and documentation once to a single portal for both on-boarding and ongoing remediation.

An industry owned and governed client reference data and documentation utility will help participants worldwide to cope with evolving risk management and regulatory requirements, while consolidating critical information – and sharing that information with peers and permissioning it out to clients – from one location. 

Furthermore, a Utility solution will provide transparency to clients about exactly where they are in the on-boarding process, how their documents are utilized, why they are needed, and how they are stored. Bringing greater efficiency to these processes leads to greater satisfaction and business relationships by speeding up a client’s ability to trade.