Written on: 28 February 2024

This Financial Markets Standards Board (“FMSB”) Transparency Draft is applicable to firms when onboarding or reviewing client files under the UK requirements for KYC and AML. It proposes a Standard for the Documentation Requirements, and processes for obtaining such documents.

The proposed Standard is structured in two main parts:

  • Core Principles: which relate to the way in which onboarding firms choose the required data points and source relevant evidence in the process of client onboarding, and
  • Annexes: including the Documentation Requirements, which consists of a list of the data points identified by participating firms, universally acceptable sources, and commonly available documents which can populate and evidence these data points to the level of credibility required.

Scope

The scope of application are any circumstances in which the UK regulations have been triggered, and is agnostic to the jurisdiction of the client. Although intended to apply to all client industries, specific focus has been placed on financial institutions including asset managers and funds.

The proposal does not impact onboarding firms’ risk assessment of a client, its connected parties, or any of its attributes. Neither is the proposal intended to modify an onboarding firm’s tolerance for whom they ultimately wish or do not wish to take on as a client. The Documentation Requirements are intended only to apply where Simplified or Standard Due Diligence is deemed sufficient.

The Standard recognises that firms may be subject to regulations not in scope, notably where the onboarding firm is bound by KYC rules from the country where the parent is incorporated, where the onboarding firm deems Enhanced Customer Due Diligence to be necessary, or where the client operates in a regulated industry where the UK requirements require additional evidence. Onboarding firms are not limited to the Documentation Requirements in the proposed Standard where any of these circumstances apply.

Background

When choosing whether to begin or continue a relationship with a client, financial services providers consider the potential benefits and risks, including the legal and reputational consequences of handling the proceeds of crime (money laundering), financing future crimes (e.g. terrorism financing), breaching sanctions, or being assessed as failing to have adequate procedures in place to prevent such actions by a relevant regulator. Before a firm can assess these risks, the firm must build a profile of the client or potential client.

The UK regulatory requirements and guidance for KYC adopts a principles-based approach, and therefore rarely specify the precise data points to be populated or parameters for evidence which firms may accept to conduct satisfactory due diligence. As a result, firms throughout the industry have adopted approaches which, although often minor in difference, nevertheless contribute to the process to onboard new clients and review existing clients being slow, costly and inefficient.

In April 2022, FMSB was approached by the Bank of England and FCA to continue the work begun by the Post-Trade Task Force they established. In Charting the Future of Post Trade the Task Force proposed recommendations to remedy these procedural inefficiencies. As a first stage, “[e]stablish standardised document requirements and data definitions and agreed mapping of data to KYC regulatory requirements for all client types… Standards need to be issued on the precise form of documents that would be acceptable”. This standardisation would also pave the way for future digitalisation and automation.

The proposed FMSB Standard takes forward the standardisation recommendation.

Purpose

For clients, the Standard aims to improve the client experience. Currently, buy-side clients and counterparties often must produce different documents, and repeatedly, to different financial service providers in order to be onboarded and conduct business. This Standard seeks to harmonise the documents required from clients, and also codify elements of best practice in the interaction between clients and onboarding firms.

For Onboarding Firms, it is anticipated that the harmonised Documentation Requirements will make the KYC process faster and more efficient in the immediate future, as well as pave the way for further gains through digitalisation and automation.

Approach

FMSB creates all of its content by consensus. The FMSB working group is chaired by Siobhan Clarke, Chief Investment Operations Officer at Royal London Asset Management, and consists of both the operational and policy functions from FMSB members and selected non- members.

The initial scope of the Documentation Requirements was defined by participants as the areas where documentary harmonisation was deemed most desirable and achievable.

Participants were asked individually to identify all the data points, and evidence types and acceptable sources to populate and verify those data points that they would require for clients and circumstances within scope. All the data points identified, and any sources and documents identified by all participants, were collated and refined to leave a subset of documents from the most credible sources that could reasonably be expected to be obtained. In a second round survey, participant firms have confirmed the alignment between the Documentation Requirements and their internal policies.

In compiling the documentation requirements, there has been a particular focus on credibility and sourcing of documents. Additionally, the documentation requirements have been designed to be both modular and granular to assist with future digitalisation and integration with automation (such as Perpetual KYC).

Interaction with Existing Regulation

This Standard is intended to provide practical guidance for firms onboarding new clients or reviewing existing clients in a manner that is compatible with, and works within the framework of, any applicable laws, regulations, and guidance for KYC and AML, including the Joint Money Laundering Steering Group Guidance and the UK Money Laundering Regulations and associated regimes (together, the “UK Requirements”).

Nothing in the Standard is intended to prevent Member Firms from continuing to take a risk- based approach in complying with the UK Requirements.

FMSB has consulted with relevant regulatory stakeholders and industry associations in drafting the proposed Standard, and will continue to do so during the Transparency Draft Period to ensure alignment with existing UK Requirements and adaptation to future changes.

Next Steps

A roundtable will be held at 16:00 on Monday 11 March 2024 to answer any questions on the proposed Standard and encourage participation in the consultation. The roundtable will take place at a location in the City of London. Interested parties are invited to register their interest in attending by contacting us at the email address below.

Please address any comments or enquiries by email to: secretariat@fmsb.com. Responses are requested by Friday 3 May 2024.

Privacy Policy

FMSB’s privacy policy can be found at www.fmsb.com.

Consultation Questions

Comments on any or all of the proposed Standard and Annexes are invited. We also encourage respondents to consider the following questions.

Approach

  1. Does the proposed approach adopt an appropriate balance between flexibility and prescriptiveness?

Effectiveness

  1. The Documentation Requirements are intended to be applicable where only the baseline due diligence is deemed necessary by the onboarding firm. Does the distinction between Simplified/Standard and Enhanced Due Diligence achieve this? If not, please suggest alternative language.

Alignment

  1. Are there any areas where the proposed Standard could be viewed as incompatible with the overarching UK AML/CTF risk-based regime?
  2. Are the Documentation Requirements compatible with the documents you accept for UK-driven Simplified/Standard Due Diligence (or equivalent suggested under question 3)? If not, please list the additional data points and/or alternative documents and sources.

Impact

  1. Is the proposed Standard compatible with your UK and non-UK onboarding policy and processes (as applicable)? Please state any differences.
  2. What is the impact on your firm of publication of this document in the form of an FMSB Standard vs. other FMSB output types?

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