New regulations issued by the Securities and Exchange Board of India are designed to streamline the ‘know your customer’ process by collecting information on clients in a centralised database. As of January 2012, clients will only have to go through the KYC process when they first approach an intermediary. From the initial meeting, the details will be loaded onto the KYC Registration Agency database, which can be accessed and verified by intermediaries in subsequent approaches to the market.
“To avoid duplication of KYC process with every intermediary, a mechanism for centralisation of KYC records in the securities market has been developed. An intermediary shall perform the initial KYC of its clients and upload the details on the system of the KRA (KYC Registration Agency),“ the agency said via a circular.
The circular itself is helpfully prescriptive in its requirements. The order requires stock brokers to
- disseminate the notice via their websites,
- amend rules and regulations,
- monitor compliance twice a year via audits and inspections and
- report the findings to SEBI within one month.
It does not contain, however, any information on how the regulator will manage the data or enforce the rule.
In August and again in October, SEBI took steps to simplify the trading account opening process for stock brokers by introducing uniform documentation and stipulating uniform KYC requirements for all intermediaries in the securities market. From October, all participants were directed to complete the same information gathering form with extra fields for Portfolio Managers, Venture Capital Funds, and Collective Investment Schemes to capture additional required information. On the new forms, applicants must disclose annual income and net worth, which should aid the broker to form a pattern or usual or expected account behaviour. The form usefully contains a checklist for completing the KYC form and a list of documents required from each type of client or applicant. The checklist covers what documentation is required, what a politically exposed person is and sticks to the ‘foreign’ definition, and lists individuals who are authorised to attest the documentation. Intermediaries are expected to by fully compliant with by January 2012.
The retail alternative
Overall, the KRA looks like a step closer to compliance for securities brokers and leaves few stones unturned in terms of documentation and authorisation. Creating a baseline of information needed from the client, should reduce problems around competition and loss of business, which saw clients in India moving to the firms who asked for little information. At the behest of the Indian financial intelligence unit, Indian retail banks are debating if and how they can introduce a similar system to its much larger client base. Although some in the sector are keen to get this moving, the challenges around collating basic KYC information from retail clients in India is hindering compliance progress.
First published on Compliance Knowledge Platform