Clamp down by FSA

The Financial Services Authority (FSA) is setting an example by clamping down on financial institutions found in breach of their regulatory requirements. FSA has started the year by issuing huge fines to two financial institutions; £1.085 million to HFC Bank (part of HSBC Group) for PPI failings and £250,000 to Square Mile Securities Limited (a stock brokerage company) for high pressure sales tactics.

The big question is, is FSA setting the tone for 2008? Are we going to see more fines issued for negligence or lack of having customer due diligence policies in place?

What puzzles me is that the average John is so naive enough to buy into the pressure sales tactics used by companies like Square Mile. We are not really talking about a door to door sales man trying to con innocent housewives. Surely, the customer also needs to take some responsibility, step back, educate oneself and then take a calculated risk. As they say, ignorance of law is no excuse. I feel, while FSA is clamping down on financial institutions to comply with its regulations, efforts ought to be made to educate the customer on making sound financial decisions based on calculated risk.

Note:
PPI covers repayments on loans, mortgages and credit cards if the borrower is unable to make them because of loss of earnings as a result of accident, sickness, unemployment or death.

News Links:
http://www.fsa.gov.uk/Pages/Library/Communication/PR/index.shtml
http://news.bbc.co.uk/1/hi/business/7191506.stm

What is KYC and what does it stand for?

To enhance my knowledge on the subject I engaged in a few discussions with some professionals on KYC. I realized that very few people have detailed knowledge on the subject. Given the increased need for the implementation of KYC, I decided to share some basic information on the subject.

The term KYC – Know Your Customer means that financial institutions such as banks and insurance companies are obligated to record information on their customers and to check the plausibility of the information entered. The basis for KYC is endorsed by Article 8 of the 3rd EU Anti-Money Laundering Directive, 12.5 of the Banking (General Practice) Regulatory Code under the Banking Act 1998 and 6.1 of the Financial Supervision (Conduct of Business) Regulatory Code under The Investment Business Act 1991 for UK.

KYC consists of two parts; Customer Identification Program (CIP) and Enhanced Due Diligence (EDD). CIP consists of collecting basic evidence on customer identification information such as utility bills, driver’s license, passports etc.

EDD goes further to adopt a risk based approach and demands financial institutions to identify the risk a customer represents, validate those risk categories and demonstrate effective customer due diligence to the regulator. The source of funds that are utilized as part of the business relationship and/or transaction as well as their intended use also must be determined. In the event that the source of the funds is not clear the financial institution must observe due diligence in carrying out a risk base assessment on the customer profile.

In an ideal situation this information is stored electronically in the “Know Your Customer” profile (KYC profile). Due to rapid globalization financial institutes all over the world should stress on KYC, keeping track of customer movements, risk assessment and profiling across borders. Breach of KYC and AML rules and regulations can result in serious penalties by the regulators.

Anjum

03/12/07