If you are going to invest your money with a financial institution, that institution is responsible for knowing your financial situation. A Know Your Customer, or KYC check is a financial regulation put in place to verify a client’s identity.
KYC Breakdown
The Know Your Client rule is a regulation that applies to professionals in the securities industry who are dealing with customers maintaining and opening securities accounts, according to Investopedia. This regulation protects both the broker and the customer, ensuring that customers are dealt with fairly by their broker. The reason it is called “Know Your Client” is that the broker has to establish the essential facts about a client before any financial advice or recommendations are given.
Suitability Rule
Along with the KYC, Rule 2111 — also known as the Suitability Rule — covers the subject of financial recommendations. Rule 2111 says that a financial recommendation can only be made once the client’s identity, financial situation and financial needs are fully known, explains Investopedia. The broker or dealer is required to complete a thorough review of all customer facts, including any other securities you own before advising you to buy or sell a security.
How to Complete a KYC Check
The customer identity verification used to be completed by an internal department in the financial institution you are working with, but these days it is more likely that this verification will be completed by an Identity Verification service provider or IDV, explains Forbes. The IDV will provide the user with a website where they will have to sign up to gain access to the verification page. Once you have signed up, the IDV service will ask for certain key identifiers to make sure you are who you say you are.
CDD vs. EDD
Brokers must determine what level of due diligence must be completed before approving a customer. Basic Customer Due Diligence (CDD) is information obtained for all customers to verify identity and complete a risk assessment. Enhanced Due Diligence (EDD) is reserved for higher risk customers and provides a deeper understanding of that individual’s activity in order to mitigate risk.
Some Problems With the KYC Process
Despite the best efforts to have the KYC system make sure customers and businesses are safe, a few problems with the system have developed, reports Forbes. There is increased customer friction, for example, because the process of opening a new account has become much longer and more complex. There are ever increasing compliance costs, with large firms now spending around $500 million annually on customer due diligence, Forbes continues. Keeping information up to date has also become much more difficult because in order to have identity verification work, the information must reflect the present time and any changes must be reported immediately. Updating the information can be a complicated process, and it has deterred some companies from reporting changes to their financial institution.
