Client On-Boarding

A Best Practice Guide

Introduction
Client On-boarding is rapidly becoming an area of growing focus for Banks and Financial Instititutions. Ever-increasing compliance costs and operational overheads, increased regulatory scrutiny, and delayed revenues have heightened awareness of client on-boarding as an area with significant potential for process improvement. This whitepaper looks at the strengths and weaknesses of current on-boarding and Client Due Diligence practices. It examines the key challenges facing institutions, and looks at how factors such as organisational structure, operational strategy and system infrastructure can impact the effectiveness of on-boarding processes.

CURRENT PRACTICES & COMPLIANCE RISK

Serious weaknesses identified in banks systems and controls, as well as indications that some banks are willing to enter into very high-risk business relationships without adequate controls1
This is a serious indictment of current Client Due Diligence (CDD) standards in UK banking taken from the FSA report Banks management of high money-laundering risk situations1. In the context of its investigations the FSA looked at practices across 27 UK banking groups including 8 large banks, so the shortcomings are not limited to small and lightly resourced institutions. The report focuses on describing the weaknesses in two main areas. First, the inability of banks to keep complete and accessible records of their customer assessments, and second, routine failures to review their customers for changes in circumstances.

Certainly it seems that many institutions are still wrestling with compliance in the area of Client Due Diligence, and across initial KYC, AML and client classification processes. It appears that existing systems and controls are less than adequate to meet the ever-growing regulatory requirements. Our own qualitative research of client on-boarding practices carried out across 12 UK institutions also revealed a high prevalence of:

Manual paper trails and a low level of systems support Weak process traceability, often inadequate to meet
growing regulatory demands Uncoordinated management of client data Heightened regulatory focus is increasing pressure for banks to respond and to look seriously at their own on-boarding operations.
The FSA call for good practice:

Key findings reveal:

Using robust risk assessment systems and controls

appropriate to the nature, scale and complexities of the banks business.

Over a third of banks were unable to access relevant

information or provide a complete set of CDD files. Information was sometimes inaccessible in storage in countries with strict banking secrecy legislation or dispersed across multiple databases; some was lost or temporarily misplaced.

Quality assurance work to ensure risk assessment

policies, procedures, systems and controls are working effectively in practice.

At nearly half the banks visited, there was no

evidence of any Politically Exposed Person (PEP) or high risk customer files being reviewed, as required in many cases by the banks own policies.

A clear audit trail to show why customers are rated

as high, medium or low risk.

Clear processes for escalating the approval of high

risk and all PEP customer relationships to senior management or committees which consider AML risk and give appropriate challenge to Relationship Managers (RMs) and the business.1

More than half the banks failed to review regularly

and update customer information.

At nearly a third of banks in the sample, they found

that Relationship Managers (RMs) carried out annual reviews for customers but there was often inadequate management oversight
Banks management of high money-laundering risk situations Published by the FSA, June 20111

What is clear is that manual paper trails and low level systems support for client on-boarding are increasingly unacceptable to the regulators. Senior bank management wishing to have confidence that compliance mandates and policy requirements are being met in an organised fashion need comprehensive mechanisms in place to provide full process visibility and relevant management information. Automation is the only way to reassure management that performance is adequately monitored and reported to them.

The FSA is suggesting that, by operating a client on-boarding (COB) process that fails to ensure regulatory compliance, banks are not adhering to the core Principle 32 that a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

TRACKING PERFORMANCE
Indeed, tracking and measurement is not only critical from a compliance perspective, it is also key to understanding and improving the customer experience. As the first organisational interaction with a client, streamlined and efficient client on-boarding can be a important competitive differentiator, and can drive faster times to revenue as well as increasing cross sell opportunities.

Pent up dissatisfaction from traders and Relationship Managers is inevitably felt by customers too, and customer dissatisfaction leads directly to customer attrition. That attrition runs at twice the long-term rate during the first three months of a banking relationship.4 Implementation of effective controls to monitor the client on-boarding process can increase transparency, and empower organisations to address operational bottlenecks and to better understand and address the customer experience. Our research shows that when banks invest in improving the process, the operational efficiency gains are remarkable. The implementation of a global system with workflow management and metrics provides the opportunity to redesign the process from start to finish, making it both efficient and client centric. One large firm has reported a saving of 75% of time spent on internal processes resulting in a 40% increase in throughput.3

The Revenue Benefits

One large investment bank has calculated that

on-boarding a customer one week earlier is worth incremental revenue of $15,000.3

A global correspondent bank claims $150,000

incremental revenue for each week saved in on-boarding.3

LOOKING AT ORGANISATIONAL STRUCTURES

Organisational structure can also play a major part in process improvement. Larger banks have a dedicated COB function as the norm, with deeper specialist skills available within AML, Legal and Credit teams under separate reporting lines. Our research suggests that delays are often significant due to bottlenecks in the legal department and in compliance teams. Sucessfully managing this critical path can be essential to earlier realisation of revenue and this can be particularly key for certain business areas. For example, in the hedge fund space, certain tasks need to be completed with sufficient time between completion date and a launch date to bring the fund to market effectively.

Ait research shows that the first three months of

a customer relationship enables more cross selling than the next fifteen.4

Assets under management grow four times faster in

the first three months than in the next 3 years.4

However without automation many banks have almost no objective measure of the time taken beyond a coarse average. Progress-tracking systems that are in place are, in the main, based on spreadsheets and occasionally an Access database. Many client on-boarding (COB) line managers are largely flying blind, and senior managers who might take the initiative to raise process standards have no visibility of performance at all. Across our own findings, none of the banks we interviewed had developed KPIs for on-boarding. Only two had any sense of the longest time a customer might have to wait or how many customers were affected by delays. Only one institution had a well-developed feedback mechanism to keep the trader, the Relationship Manager and, ultimately, the customer, informed on progress and timescales. Within business units, the common perception of the on-boarding activity at the working level is one of a box ticking exercise to satisfy compliance rather than a key customer interaction. For Customer Relationship Managers, on-boarding is an administrative distraction that eats into their core productive time. We heard comments such as: We give no feedback on progress to the Relationship Manager - A Major Investment Bank

Effective Operational Structures

The organizational structures that appear to be the most effective have the client on-boarding (COB) team, including the first levels of AML and KYC work, under the control of Operations. With this approach, activities within the base Client Due Diligence framework can be handled almost entirely by the client on-boarding team who apply policies determined by the technical specialists. Additional reporting lines are only introduced on escalation to the Enhanced Due Diligence level (EDD), meaning faster on-boarding for many customers.

CENTRES OF EXCELLENCE
By optimising organisational structure and managing the critical path under a single reporting line as far as possible, institutions can yield significant benefits in terms of operational cost reduction and service enhancement. Some large players are going a step further and migrating from product specific onboarding teams to regional processing centres and global centres of excellence for client on-boarding and due diligence processing. Significant cost efficiencies have been achieved by optimising the use of in-country resources for data collection and leveraging economies of scale in off-shore centres for compliance processing.

Clearly, many banks would benefit from a full review of their customer data and rebuilding the on-boarding process is an excellent catalyst for that effort. Our own research found that banks that have implemented global client on-boarding systems have captured significant savings through retiring a wide range of business line and in-country databases and their associated maintenance and support. The impending introduction of the Global Legal Entity Identifier (LEI)6 offers a further incentive to banks and institutions to look closely at their existing data management infrastructures. It represents an opportune time to consider a more strategic approach to client data capture, one that deals with the incorporation of the new LEI requirements via a single corporate system and feeds all downstream databases. Not only will this build the mechanism for future changes but it paves the way for the ultimate removal of multiple client data silos which currently inhibit all risk and management reporting.

OPTIMISING CLIENT DATA MANAGEMENT

Another area that warrants focus is that of client data management. Rationalisation and optimisation of client data management can also significantly reduce operational costs and streamline on-boarding processes. For many institutions existing customer data has been built up over an extended period of globalisation, acquisition and increasing transaction complexity. Operations in different countries frequently have local systems and their own dedicated customer database. Acquisition inevitably brings new data structures. Best-of-breed dealing systems again require their own particular cut of the customer data, and bringing these into line with a corporate customer database is often not seen as a priority. Operationally it has been expedient to create multiple instances of a customer. Customer records are often duplicated to hold product specific settlement instructions, sometimes resulting in conflicting base data records for the same customer. This can lead to increased overheads in maintaining the data for any customer changes, overly complex system interfaces which need on-going maintenance, and hand tailored consolidation routines for management information (MIS) and risk systems. All of these add to cost and greatly increase operational risk.

Effective Data Controls

In the context of client data capture we found one leading institution had three noteworthy process controls in place that are difficult to improve upon:

Only the client on-boarding (COB) team can create

new customer records as a safeguard against duplication and procedural short-cuts

Customer reference data is captured into the

client on-boarding (COB) system and then pushed downstream to operational systems

The client on-boarding (COB) team has oversight

over subsequent data changes, without imposing undue bureaucracy. Standard Settlement Instruction (SSI) changes, for example, can be made by Operations, become effective, and then are queued for a review by the client on-boarding (COB) team to identify and question unlikely or unexpected changes

The think tank JWG has estimated that banks could potentially save between 1.6 billion and 4 billion in terms of maintaining wholesale counterparty data.5

CLIENT ON-BOARDING IMPLEMENTATION OPTIONS

So what are the options for institutions seeking to enhance their client on-boarding, KYC and CDD operations? Our research has identified that banks are following four main paths to improve their performance:

As a measure of the scale of this problem, one leading institution, in a recent data cleansing exercise, was able to reduce 18,000 customer records down to 2,000 currently active customers.3

Some banks have simply added more people to their COB

team and there is ample evidence in the recruitment

marketplace to show that throwing bodies at the problem remains fashionable. There is also equally clear evidence that this does not guarantee sector-leading performance.

CLIENT ON-BOARDING BEST PRACTICE

Where institutions do choose to look at and enhance existing infrastructures, it is our view that such an approach should be founded on an unequivocal board mandate to enhance the customer experience, and to obtain the incremental revenue available from rapid onboarding, whilst delivering the best practice recommendations of in-country regulators. Achieving that goal without the disciplines imposed by automation is unlikely to succeed in a bank of any scale or with an international reach. Systems need to support workflow management, static data propagation to downstream systems, document management and legal document execution, enhanced management reporting and fully transparent audit capabilities. Systems and processes should draw on the best available database sources to automate checks on the customer, but call appropriately upon trained manual oversight to verify the findings and document the decisions taken. Primarily, systems must meet the need for information from customers and from management, and underpinning this it must deliver proof of performance to management and to the regulators. Systems need to be effective for initial Client Due Diligence when setting up customers, for changes in their status or approved product range, and for changes in their legal groups or controlling interests. Routing the customer to an Enhanced Due Diligence review should be rules driven and consistent, and any management decision to override the rules should be justified and documented. Systems should schedule and drive the routine periodic review of customers and enforce quality standards by recording and attributing the reasons for any decisions taken. Systems need to be future proofed by accommodating the expected LEI standards. Finally any new development should be used as an opportunity to gain operational efficiencies, dealing with the routine in an automated fashion but drawing in higher-level technical skills when required. On the next page we offer our own best practice checklist for reorganising and automating client onboarding.

Other banks have approached the issue tactically by

extending existing AML systems to incorporate richer client on-boarding functionality. That may satisfy the immediate needs of the operations department but these systems frequently lack key workflow and document management functionality and fail to harvest the incremental revenue or achieve the full range of operational savings.

Others, in particular some larger institutions, have

selected a generalised business process management (BPM) package as a platform to build an in-house workflow system, often investing very significant sums into the project over extended time frames. This route is not an easy option. It requires Operations, Compliance and Legal to write very precise functional specifications for IT to understand and deliver. Even some of the largest global banks are struggling with implementation.

A strong alternative is a specialised client on-boarding

package with pre-configured functionality to manage the on-boarding workflow, and with interfaces to existing CRM, transaction processing and AML systems. In our experience, it appears that those banks have achieved the best results in the shortest time frames and have gained the expected improvements. Whichever path is chosen, our research shows that banks that have formally recognised accurate customer information as a fundamental platform for their target operating model are reaping the revenue benefits and cost savings. All of the banks we interviewed that have invested in client on-boarding and static data management have volunteered that the systems they implemented have fully justified their investment in terms of incremental income opportunities, risk reduction and cost savings. In every case, the payback period has been shorter than originally anticipated and continued investment in upgrades and enhancements is planned.

References
1. 2. 3. 4. 5. 6. Banks management of high money-laundering risk situations, FSA, June 2011 http://fsahandbook.info/FSA/html/handbook/PRIN/2/1 Fenergo independant research survey All Aboard: Best Practices for Client On-boarding, Aite Group webinar, June 8, 2010: Presented by Sophie Schmitt, Senior Analyst. (www.aitegroup.com) http://www.a-teamgroup.com/article/rbcs-sutton-and-jwgs-di-giammarino-tell-fima-delegates-how-to-get-counterparty-data-details-right/ Under introduction by SWIFT and DTCC

BEST PRACTICE ChECKLIST FOR REORGANISING & AUTOMATING CLIENT ON-BOARDING Obtain a clear board mandate to implement best practice and gain benefits and cost savings. Establish policies for accepting new customers and the decision parameters. Create and empower a dedicated client on-boarding (COB) team optimising global locations. Cut down the number of
people in the critical path and automate communication between them.

Create a centralised global customer record containing the unique customer identity data fields needed by downstream
systems in all relevant jurisdictions.

Collect and clean existing customer data. Understand duplicates and tackle the cause. Design a client on-boarding (COB) workflow which is customer focused. Capture information once and reuse it. Ensure that all legal documentation is created and distributed automatically and that returned documents are captured
and integrated with the customer record.

Assess the customer risk profile based on rules and keep a record of any decisions that override the rules; who and why. Avoid interrupting the critical path by using post facto review reports for low risk changes. Obtain approval for mid and high risk customers before activating the new relationship. Automatically publish the required data to downstream systems. Produce comprehensive Management Information for client on-boarding and feedback for the trader, Relationship Manager
and customer. Develop and implement KPIs for management.

Automatically schedule the periodic review of the customer and associated PEPs with automated comparison to external
databases. Generate alerts if the schedule is not fulfilled within a given period.

ABOUT FENERGO
Fenergo is a leading specialist in Client On-boading for Banking and Financial Services. Through our Deal Manager platform, we deliver an automated workflow and document management solution for Client Due Diligence, KYC and AML processing. Tailored for Corporate, Capital Markets and Investment Banks, our solutions offer best of breed tools to manage and monitor workflow, accountability and governance of data and processes, and have helped banks to enhance risk governance and address a range of regulatory compliance challenges.
For more information contact: www.fenergo.com info@fenergo.com