The changing nature of the risk function and KYC

New generation banking – the changing nature of the risk function and KYC

Back in 2016 McKinsey predicted that the nature of the risk function in banking would be dramatically different by 2025.  But, the COVID-19 pandemic has served to accelerate the pace of change.

The pandemic has posed a massive challenge for banking risk management and Know Your Customer (KYC), with financial regulators warning that banks are more exposed than ever to financial crime.

As we move toward the next new normal, the banking industry must be on its guard and ready to up its risk management and KYC proficiency, especially as the new normal is expected to increase regulation even further.

How has the risk function evolved over the last decade?

In addition to regulation driven change, banks and financial services companies have been evolving rapidly thanks to increased digitisation, automated decisioning, the adoption of mobile channels and artificial intelligence (AI), to name but a few.

These advances have driven a faster, frictionless, more convenient experiences for customers. But, these dual goals of super convenience and regulatory adherence have caused a curious disconnect.

The consumer side is now incredibly technology driven, particularly where onboarding is concerned. Whilst on the corporate side efforts to create a smooth onboarding process have been rendered futile by the enormous bottleneck of work that is required to meet regulation and KYC requirements for transacting with commercial entities.

In response, organisations have taken a two pronged approach. They’ve invested heavily in data and technology solutions, whilst at the same time amassing huge teams of compliance analysts to process and interpret the data created by such solutions.

This combination of people, process and technology has enabled them to cope with the workload created by adherence to KYC regulations and building a risk-based approach to the control of money laundering and other forms of fraud and financial crime.

The result has been that relationship managers invest great efforts in trying to win corporate business, only to be delayed, forced to restructure deals or (at worst) to have deals rejected by Compliance.

Corporate clients are therefore subject to an incredibly disjointed process in which they are actively sold to by one part of the bank, only to then be delayed, have the deal restructured, or even be rejected by another division within the bank.

According to Thomson Reuters:

  • It takes an average of 32 days to onboard a new client
  • 307 employees on average now work on KYC adherence (as opposed to just 68 back in 2016)
  • A new client has to go through on average 8 different interactions with a bank during onboarding
  • Banks are expected increase in CDD and KYC outlays by 13% over the next 12 months

Not ideal. So where next?

The reality for banks operating in the post-COVID19 new normal is that manual processes and workflows can and will be very quickly overcome.  Maintaining the quality of due diligence and KYC compliance will almost certainly be impossible without a technology-driven response, particularly if compliance staff fall sick or are required to self-isolate.

Now more than ever banks need sophisticated compliance tools and procedures. The importance of harnessing automation, data and intelligence cannot be underplayed if banks are to detect faster than ever before the early signs of money laundering, fraud, and the financing of crime, whilst at the same time improving customer experiences, and streamlining the customer journey.

Mirroring predictions from McKinsey, PwC has concluded that “with the spotlight increasingly on risk and compliance functions, we anticipate organisations re-assessing both capacity and skill set of their risk and compliance teams in the near future.”

A transformative change is needed, and digitisation of risk management and KYC offers the solution for three reasons:

  1. Digital transformations in risk create real business value by improving efficiency and the quality of risk decisions
  2. A digitised risk function provides better monitoring and control and more effective regulatory compliance
  3. Digitisation enables a distributed compliance approach, reducing the workload on compliance teams by placing compliance at the heart of the business – front of mind for every member of staff, informing every decision, instructing every interaction and shaping every relationship

It is our belief that point three – distributed compliance – is where real opportunity lies in the new normal.

Distributed Compliance – the future of the risk function and KYC

“Distributed compliance” is a new term, so what do we mean by this?

Distributed Compliance recognises that the proliferation of KYC tasks has had a negative impact on a bank’s ability to onboard customers in a timely, orderly fashion, and furthermore that many of the tasks not requiring specialist knowledge can be best performed by other teams.

Distributed compliance therefore involves giving the compliance team control of a sophisticated decision engine to enable data coming in (matches of differing degrees to various data sources) to have rules applied and tasks created.

Further, it means distributing these tasks to appropriate staff (according to the rules), monitoring the completion of the tasks and evidencing the whole process.

The benefits of bringing compliance to the front line:

  • Before a relationship manager even embarks upon a relationship with a prospect they have a view of the KYC picture, and this ensures they know from the outset whether or not to pursue the relationship. If they proceed they know intuitively the additional questions to ask during the sales process, plus which products to offer and with which limits. Saving time, money, improving success from first point of contact, and importantly enhancing an organisations ability to meet regulatory KYC requirements
  • By distributing the KYC queue compliance analysts are left free to do what they do best and to focus on work that requires their skills and experience
  • With a cross-division view of customers and their business activities banks are better able to detect suspicius activities that could otherwise escape detection thanks to inconsistent client onboarding approaches

Artesian Solutions Rick and Compliance Hub (ARCH) brings KYC and risk decisioning to the front-line

Artesian’s Risk and Compliance Hub (ARCH) distributes simple KYC tasks to Relationship Managers and other appropriate people in the organisation, leaving KYC specialists to deal with complex tasks requiring their knowledge and experience.

  • ARCH enables full and transparent collaboration in an organisation so that policy specialists can place KYC actions exactly where they need them, and so that front line Relationship Managers can really know their customers before they even engage with them
  • ARCH integrates with industry-leading KYC service providers so that clients can simply access their chosen providers and automate the creation of flags and tasks when there are matches, according to clients’ policies
  • ARCH enables organisations to make full use of their combined knowledge and expertise in different areas to ensure that regulatory needs are met and also that task queues are minimised through distribution, and the needs of the customer in onboarding are met
  • ARCH provides always-on monitoring of adverse media and will also match the monitoring policy of clients for PEPs, sanctions and SIPs checks
  • ARCH creates an audit trail containing details of each search, flag, task and evidence undertaken in the application of KYC policy, including the time it was carried out and by which user

In early tests, ARCH has been 100% accurate in reflecting risk and KYC policy in pre-screening. In fact, it has (on average) uncovered 14% more risks than were identified in the onboarding process.

The data gathered in pre-screening has helped reduce the time spent in the data-gathering phase of onboarding by 90% – giving Relationship Managers more time to spend on building relationships.

“Artesian will help us put risk and compliance at the heart of our commercial process, to serve a greater need than regulation alone” Jeff Courtney, Head of Portfolio & Planning, Business & Commercial, Metro Bank

Want to ensure you’re ready for the next new normal?

Here at Artesian we want to inspire you to think differently about risk management and KYC compliance so that you may come out of the COVID-19 crisis stronger than ever.

To understand more about the future of risk management and KYC and the opportunity of harnessing digitised distributed compliance please download a free copy our new paper.