 "Centralised KYC system to make life easier")
The know-your-customer (KYC) process by financial institutions verifies identity and address before customers are allowed to access products such as shares, mutual funds, insurance, and banking. A financial institution may undertake the process periodically to update its records – a practice that customers may find irksome because of the paperwork and time involved. To help customers, the Financial Stability and Development Council (FSDC) has proposed a uniform and one-time KYC process for any financial service.
A uniform KYC system would end the need for investors to repeatedly submit and verify KYC documents when opening accounts with various financial institutions like banks, insurance companies, asset management firms, stockbrokers, and depository participants. It would reduce costs for institutions by ending multiple registrations and data maintenance. It would simplify customer on-boarding too.
Current KYC norms
Customers have to submit KYC documents each time they open a bank account, start investments in mutual funds or stocks, or buy insurance. A financial institution can also ask customers to update their KYC details occasionally. The Central KYC Records Registry (CKYCR) was introduced in 2016 to eliminate the requirement for repeated KYC processes when investing across various financial assets. However, CKYCR is only meant for capital markets. In the securities markets, once customers complete their KYC through a registered intermediary like a broker, depository participant, or mutual fund, they are not required to repeat the process for subsequent investments.
How uniform KYC will work
According to a new government proposal, individuals are required to provide KYC documents for opening an account. Once the documents are submitted and registered, individuals will receive a unique centralised KYC (CKYC) 14-digit number linked to their identity proof. When individuals contact them to open a new account, financial institutions can retrieve their details from the Central KYC Records Registry using the unique number.
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Benefits of Uniform KYC
The process of uniform KYC will allow financial institutions to verify customers through a relatively simpler means with access to inter-usable, digital KYC records across the financial sector. This can eliminate the need to undergo the same KYC process multiple times for users like us.
Challenges for the uniform kYC
Ensuring data privacy and security will be a challenge for uniform KYC, as any breach could result in the misuse of millions of people and hurt the verification process by all financial institutions. The Reserve Bank of India has flagged concerns about high-risk customers being on-boarded through electronic KYC. Despite using CKYC, banks must do video or physical checks for high-risk customers, necessitating periodic verification for high-risk customers. Cybersecurity experts have said CKYC requires people’s permanent account number, which is used to pay taxes, and date of birth – two sets of information that can be used for financial fraud if breached
