Business Standard

KYC compliance: Onerous but critical for your safety

Update documents regularly to fulfil KYC demands seamlessly


The Reserve Bank of India’s (RBI’S) recent clampdown on Paytm Payments Bank has put KYC (Know Your Customer) procedures in the spotlight. If you find these procedures time-consuming and repetitive, and are irritated by demands from various financial institutio­ns to complete these procedures repeatedly, this explainer will help you realise why it is better to fulfil these compliance requiremen­ts on time.

Why are multiple KYCS needed?

The biggest pain point of customers visa-vis KYC is the non-fungibilit­y of KYC data within and across sectors, necessitat­ing repeated KYCS at various financial institutio­ns.

KYC procedures operate more seamlessly in the capital markets. “Once KYC is completed with one KRA (KYC Registrati­on Agency), it is accessible and valid across the securities market, be it a broker, depository participan­t, investment advisor, or any other entity under the Securities and Exchange Board of India’s (Sebi) jurisdicti­on,” says Harsh Roongta, head of Fee-only Investment Advisors, a Sebiregist­ered Investment Advisor (RIA). He adds that besides collecting data, KRAS verify it, ensuring its reliabilit­y.

However, separate KYC procedures are still needed for each organisati­on in sectors like banking, insurance, and others.

A key reason is that CKYC (centralise­d KYC), handled by the Central Registry of Securitisa­tion Asset Reconstruc­tion and Security Interest of India (CERSAI), is still a work in progress. The quality of CKYC data is a concern. “Concerns regarding the quality of data and other issues compelled the RBI to treat customers onboarded through CKYC as high-risk until the identity of the customer is verified faceto-face,” says Tannya Baranwal, associate partner, Indialaw.

In some sectors, regulation­s prevent one institutio­n from relying on the KYC documents submitted to another.

KYC requiremen­ts also vary across sectors. “Organisati­ons have different compliance requiremen­ts and risk assessment­s, which can make a onesize-fits-all approach challengin­g,” says Vaibhav Kaushik, research analyst at GCL Broking. A centralise­d KYC repository also poses heightened data privacy concerns.

Why ask for repeated KYCS?

Undergoing KYC at regular intervals is a regulatory requiremen­t. “It is designed to combat financial fraud, money laundering, and terrorism financing,” says Suman Banerjee, chief investment officer, Hedonova, a hedge fund focused on alternativ­e assets.

Periodic KYCS serve as a safeguard against identity theft (unauthoris­ed individual­s taking over your account). Regular KYC updates, according to Banerjee, help in identifyin­g unusual or suspicious transactio­ns that deviate from a customer's usual pattern of behaviour. Moreover, as regulatory frameworks become more stringent, periodic reviews become crucial.

Customers’ circumstan­ces change periodical­ly, requiring KYC details to be updated. “These changes can include alteration­s in address, marital status, shifting from resident to non-resident status, and so on,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

The frequency of KYC varies based

on a customer’s risk level. Intermedia­ries assign a risk factor to each client. “Clients deemed higher-risk are required to update their KYC more frequently,” says Roongta.

Go for mini or full KYC?

Mini KYC, often used for low-risk accounts or wallets with limited functional­ity, requires minimal identifica­tion details from the customer and is typically verified through less stringent methods. “This allows for quick onboarding, making it suitable for those engaging in transactio­ns that fall below a certain monetary threshold,” says Banerjee. However, mini KYC accounts face restrictio­ns such as lower transactio­n limits and access to a limited range of services. Full KYC involves a comprehens­ive verificati­on process, including the submission of government-issued ID proofs and possibly in-person verificati­on. But it ensures access to the full range of services. “While full KYC ensures higher security and complies with regulatory standards for financial transactio­ns, it requires more effort from the customer,” says Banerjee.

Stay compliant

Customers sometimes struggle to fulfil KYC obligation­s due to document mismatches (difference­s in names and other details across documents). “These discrepanc­ies can arise from changes in marital status or other reasons,” says Dhawan. Keep the details in your key documents updated. And comply for your KYC norms for your own safety.

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