Know Your Customer Rules Kick In
New rules that require broker-dealers to collect vast quantities of information on customers are putting a strain on creaky and outmoded systems and procedures.
Finra’s 2090 rule, Know Your Customer (KYC), requires broker-dealers to collect specific customer data during the account onboarding process, that they will then need to use with the Finra 2111 rule to determine that customer’s risk profile and whether investments are suitable. The new rules, effective from two months ago, were proposed by Finra, the U.S. securities regulator, to provide better investor protection and market integrity.
“In an industry that’s under increased scrutiny, vigilant broker-dealers are realizing that if they don’t rethink how they accumulate and manage their data in the current regulatory environment, they may be putting themselves at risk,” said David Fetter, chief executive of Quadron Data Solutions, a provider of data management solutions.
Most of these regulations begin in the front office during the account opening process and end in the back office with compliance and regulators.
“Without excellent control over your firm’s account onboarding, record keeping and data management, it will be almost impossible to demonstrate the necessary knowledge and care in determining suitable investments,” said Fetter. “A firm’s ability to truly ‘know’ their customers can be significantly impacted by a shift in mindset to a holistic view of the account opening and management process.”
Quadron Data Solutions has teamed with Redtail Technology, a provider of web-based client relationship management (CRM), paperless office and e-mail archiving solutions, to provide advisors and brokers with a “two-way data exchange”, giving them a tighter integration between different core systems and an easier way to share data.
Automated customer information from Redtail CRM will feed directly into AccountQ, Quadron’s account opening system, and the firm’s account opening process.
Quadron will return client profitability information to Redtail providing advisors with a holistic view of client and prospect data within the application.
“We are providing those using our compliance applications with the ability to look not only at the account information, but to also pull record of contacts out of Redtail and view that as part of supervisory and compliance,” Fetter said. “It’s one way of addressing the new KYC requirements, specifically the need to supervise all client interactions.”
Redtail CRM data will pre-populate AccountQ with customer data to help reduce redundant data entry, resulting in the decrease of Not-In-Good-Order rates and fewer chances for manual error.
The account opening process provides the opportunity to collect information about the client that will then guide the investment strategy and trading decisions made for that account.
“By using its client onboarding solution to enhance and safeguard client data, banks can benefit from leveraging existing technologies and data repositories to enhance overall value and usability of client data,” said Marc Murphy, chief executive of Fenergo, a provider of onboarding software.
Firms must ensure all required data is obtained early in the process, as that information will be an integral foundation for all decisions related to that account.
“Protecting data integrity during account opening allows that same data to work efficiently in the middle office maintaining oversight of the risk profile and investment strategy for each account,” Fetter said. “If incorrect information is collected, entered and housed in the firm’s systems, it could affect the advisor’s ability to make proper investment recommendations for that client.”
To mitigate the risk of inaccurate data and maintain data integrity, firms should develop controls during account opening that allow them to edit and verify the accuracy of information as part of the workflow and foundation of their operational practices.
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