Uniform KYC rules: Submitting Know Your Customer (KYC) details has become an integral part of various financial transactions, from opening a bank account, investing in a mutual fund, or buying life insurance. Sometimes, you have to update these details repeatedly, which can be cumbersome. To simplify this process and reduce paperwork, time, and costs, the Financial Stability and Development Council (FSDC) has proposed a uniform KYC system. An expert committee, led by Finance Secretary TV Somanathan, has been formed by the central government to make recommendations on these uniform KYC norms.
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What is Uniform KYC?
According to ET, the FSDC, led by Finance Minister Nirmala Sitharaman, has recently suggested implementing uniform KYC to verify customers and make KYC records easily shareable across the financial sector. Uniform KYC can simplify the process for investors, avoiding repetitive KYC submissions to different financial intermediaries.
Johnson K Jose, Executive VP at Federal Bank, says the aim is to make KYC records interoperable, so customers can use one set of verified information for multiple financial services.
Current KYC norms
In simple terms, KYC is a process to confirm customers’ identity and address before they can use regulated financial products like stocks, mutual funds, insurance, and banking services. Currently, customers must provide KYC details each time they open a bank account, invest in mutual funds or stocks, or purchase insurance. Financial institutions may also request updates to KYC details periodically.
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Centralised KYC system
Established in 2016, the Central KYC Records Registry (CKYCR) aims to streamline the KYC process for investments in different financial assets. However, it currently only covers the capital markets. For example, if you’ve completed KYC through SEBI with a registered intermediary like a broker, depository participant, or mutual fund, you don’t need to repeat it for new investments. However, this doesn’t apply if you’re opening a bank account or purchasing life insurance.
The government’s proposal aims to eliminate this obstacle.
As per the government’s latest proposal, you must submit your KYC details to the relevant reporting entity when opening an account. Once your KYC documents are registered, you’ll receive a unique CKYC identifier—a 14-digit number linked to your ID proof. When you open an account with any reporting entity, they can retrieve your KYC details from the Central KYC Records Registry using this number.
Jose provides an example to clarify: Suppose an investor wishes to open a savings account, invest in a mutual fund, and apply for an insurance policy. Instead of giving KYC documents separately to the bank, mutual fund, and insurance company, the investor only needs to provide the CKYCR-linked KYC details once.
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Benefits of Uniform KYC
Customers will no longer need to undergo multiple KYC processes when opening accounts with various regulated entities like banks and insurance companies. According to Agrawal, a single KYC will allow customers to establish relationships with these institutions, saving time and increasing security.
Uniform KYC will also improve efficiency and cost-effectiveness for financial intermediaries. By accessing KYC information stored in CKYCRR, intermediaries can streamline the onboarding process and reduce costs associated with multiple registrations and data management.
Furthermore, uniform KYC will promote the digitalisation of the KYC process and help prevent illicit financial activities like money laundering. With CKYCRR responsible for storing and providing access to KYC records, intermediaries will not have to worry about data security.
Jose emphasises that uniform KYC minimises operational costs for banks and ensures compliance with regulatory requirements. It streamlines onboarding, reduces paperwork, and enhances customer satisfaction.
However, privacy and security concerns arise with uniform KYC due to the central repository of data. A data breach could lead to the misuse of thousands of records, highlighting the importance of robust security measures.
Risk-based KYC approach
The Finance Minister Nirmala Sitharaman discussed simplifying the KYC process by adopting a “risk-based” approach instead of the current “one-size-fits-all” method in her Budget 2024 speech.
Agrawal explains that the central government plans to implement a risk-based uniform KYC, which involves different levels of detail collection based on the risk profile of the customer. This approach allows for gradations in the KYC process, ranging from basic to advanced grades, which determine the depth of information collected. This new norm is expected to enhance the sharing of KYC records across the financial sector.
