FMSB Publishes Latest Transparency Draft

The Financial Markets Standards Board (FMSB) has published its latest transparency draft, looking at best practices for processes around client onboarding, it is applicable to firms when onboarding or reviewing client files under the UK requirements for KYC and AML and proposes a Standard for the documentation requirements, and processes for obtaining such documents.

FMSB says 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 it ultimately wishes or does 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, FMSB says.

It adds the proposed 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.

“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,” FMSB observes. “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 had established. In Charting the Future of Post Trade the Task Force proposed recommendations to remedy these procedural inefficiencies, starting with the standardisation of documentation requirements and data definitions for the KYC process. This standardisation should also pave the way for future digitalisation and automation. FMSB says its proposed Standard takes forward the standardisation recommendation.

For clients, the Standard aims to improve the client experience. Currently, FMSB says, 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. The 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, FMSB says it anticipates 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.

“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,” FMSB states. “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 says it 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. The body will hold a roundtable discussion on 11 March in the City of London and invites interested parties to register their interest at secretariat@fmsb.com.