Although money laundering has long been a serious challenge for the financial services industry, it has been brought front and center in recent months with top-tier firms such as Danske Bank and Deutsche Bank being investigated.
For foreign exchange (forex) and contracts-for-difference (CFD) brokers, money laundering and fraud are two factors that they need to avoid. The Know Your Customer (KYC) process is essential to preventing fraud and money laundering.
The KYC process doesn’t just help brokers comply with regulations; it also allows them to maximize the success of the customer onboarding journey, as well as better manage risks.
Speaking to Finance Magnates, Simon Kelman, the Communications and Marketing Manager of HooYu, an identity confirmation and fraud investigation reg-tech firm, stressed the importance of the KYC process for brokers.
“The KYC process is the defensive line in protecting against money laundering and terrorist financing, the stronger the KYC process the more you protect yourself, however it’s important to remember KYC doesn’t have to come at the cost of customer experience, a lot of FX brokers could greatly speed-up their KYC and on-boarding by automating the process and not conducting it manually via email and in-house customer services.”
Are changes on the horizon for FX and CFD brokers?
The gaming and FX industry are connected in a number of ways. Recently, the UK Gambling Commission (UKGC) changed the timing of the KYC check to the point of first deposit where previously the gaming operator had to complete KYC within 72 hours.
This means that KYC is now conducted much earlier in the onboarding process than it previously was before. Although the same checks are taking place, there is more focus on providing a more streamlined and simpler customer journey reducing the loss of players.
In addition to changes in the gambling industry, the Cyprus Securities and Exchange Commission (CySEC) issued a directive earlier this year to focus more on preventing money laundering.
This has caused industry participants to believe that a change will be coming to the FX and CFD sectors regarding KYC regulation. So what can brokers do to stay ahead?
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“FX firms need to understand the KYC technology that is now available, so that they can comment constructively on any potential regulation further down the line,” said Kelman.
“A good example here is how the prepaid card industry already embraced KYC technologies and as such enabled them to make recommendations and lobby the regulators when MLD5 is being implemented.”
FX Brokers need to be getting ahead now
In 2018, European brokers had to deal with a lot of changes in the retail trading space. Limited leverage, negative balance protection, and the prohibition of binary options, among other changes. So how soon can brokers expect these changes to come into force?
“The UK Gambling Commission implemented their regulation changes with just four months’ notice, so I wouldn’t expect a protracted implementation if changes are announced,” highlighted Kelman.
“As a member of the EU, Cyprus must also implement the 5th Money Laundering Directive (5MLD) into national Cypriot legislation before January 2020. As such we would advise FX and CFD firms to start researching KYC technology now!”
At the very least, Kelman believes that brokers need to focus on conducting KYC checks that do more than just “eyeball” ID documents.
“They should outsource KYC to a RegTech specialist like HooYu who can detect forgeries in real-time using ID document validation, facial biometrics and digital footprint analysis to build more confidence that the customer is who they say they are.”
What changes can brokers expect?
As of yet, it’s not clear what changes brokers can expect in terms of KYC regulation. However, there are a number of weak points in the FX industry that will likely be targeted – namely, the lack of clarification regarding what checks brokers need to have in place.
“All KYC regulation is outcomes-based but is rarely clear enough to regulated entities as to define the standards of what level of identity verification must be achieved. In some regulated sectors, the regulator or industry trade associations produce detailed guidance notes on the regulation to give regulated firms better clarity as to what they have to achieve re AML controls,” added Kelman.
“The Law Society in the UK does this well for law firms, as does the Joint Money Laundering Steering Group for the UK banks. I would like to see some industry guidance notes for FX firms who to be honest, all appear to have different ideas around their KYC responsibilities.”