KYC rules to change: Uniform KYC for all — opening bank account to buying insurance to investing in stocks, mutual funds (2024)

Be it opening a bank account, investing in a mutual fund or buying a life insurance policy, submitting your know-your-customer (KYC) details is a must. Just submitting it is not enough, you may also need to update your KYC documents multiple times in some cases. It can be a hassle for many individuals to repeat the KYC process multiple times. To reduce the paperwork, time and cost of this process, the Financial Stability and Development Council (FSDC) has proposed to implement a uniform KYC system to verify customers across the financial sector. The central government has formed an expert committee under Finance Secretary TV Somanathan to make recommendations on uniform KYC norms, according to reports

What is uniform KYC? How will uniform KYC ease the process of onboarding? What is going to change for customers? ET Wealth Online explains

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What is a uniform KYC?

In its recent meetings, FSDC, chaired by Finance Minister Nirmala Sitharaman, proposed to bring uniform KYC to verify customers, ease inter-usability of KYC records across the financial sector, and simplify the digitalisation of the KYC process. "Uniform KYC brings uniformity in the KYC process and eliminates the need for investors to undergo the same KYC process multiple times when opening accounts with different financial intermediaries," says Keshav Reddy, Founder, of Equal, a digital platform for Indians to share IDs with one click.

Johnson K Jose, Executive Vice President & Head-Operations, Federal Bank, explains that the goal is to enable interoperability of KYC records, allowing customers to use the same verified information for multiple financial services,” says Johnson K Jose, Executive Vice President & Head-Operations, Federal Bank.

KYC compliance: What are the KYC norms now?

Simply put, KYC is a process to verify the identity and address details of customers before they are allowed to access any regulated financial product such as shares, mutual funds, insurance and banking. At present, customers have to submit KYC each time they open a bank account, or open an account to invest in mutual funds or stocks, or buy life or health or auto insurance. A financial institution can also ask customers to update their KYC details from time to time.

How does centralised KYC work? What will change in KYC norms?

Established in 2016, the Central KYC Records Registry (CKYCR) aims to eliminate the need to do KYC process repeatedly while investing in various types of financial assets. However, it is limited to only the capital markets. For instance, if you have done KYC through the Securities and Exchange Board of India (SEBI) through a registered intermediary such as a broker, depository participant , or mutual fund, you do not have to do your KYC again for new investments. But it will not apply if you are going to open a bank account or buy life insurance.

The government's proposal aims to remove this barrier.

CKYCR is a centralised repository of KYC records of the customers in the financial sector that enables uniform KYC norms and inter-useability of KYC records, says Sandeep Agrawal, Director and Co-founder, Teamlease Regtech. It caters to the reporting entities (REs) of all four major regulators of the financial sector: Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA), he adds.

According to the government’s latest proposal, you need to submit your KYC details with the respective reporting entity at the time of opening an account. Once the KYC documents are registered, you will get a unique CKYC identifier — a 14-digit number linked with the ID proof. When you go to open an account with any of the reporting entities, they can take your KYC details from the Central KYC Records Registry using this number. "Financial intermediaries will then not have to repeat the KYC process if the client’s KYC record is already registered with CKYCRR, as the KYC record can be easily retrieved in the electronic format from the registry," says Agrawal.

Jose uses an example to explain it: “Suppose an investor wants to open a savings account, invest in a mutual fund and apply for an insurance policy. Instead of submitting KYC documents separately to the bank, the mutual fund and the insurance company, the investor needs to only provide the CKYCR-linked KYC details once.”

Reddy explains that for a securities market entity (SEBI regulated), a standard account opening form (AOF) is generally divided into two parts:
a) Part I contains the basic and uniform KYC details of the investor as prescribed by the Central KYC Registry (uniform KYC) to be used by all registered financial intermediaries.
b) Part II contains additional KYC information that may be sought separately by the financial intermediary, such as a mutual fund, stockbroker or depository participant opening the investor’s account (additional KYC).

"The CKYCR (Central KYC Records Registry) has prescribed these uniform KYC guidelines and a standard KYC form and the supporting documents to be obtained by all registered financial intermediaries. Hence, such KYC details are shared by the CKYCR with other financial intermediaries with whom the investor may open accounts subsequently," Reddy adds.

Jose says this concept of CKYC can be used to bring in the uniform KYC procedure across the financial sector. “Entities such as banks, insurance companies, and mutual funds can access this repository to verify customer identities.”

Uniform KYC: How will it help customers and institutions?

Customers no longer have to go through KYC processes multiple times when opening accounts with various regulated entities such as banks and insurance companies. "A single KYC will allow the customer to enter into relationships with these financial institutions, saving time, streamlining the process , and increasing security," says Agrawal.

Uniform KYC will increase the efficiency and cost-effectiveness of the customer onboarding process for financial intermediaries. "The simplified process will allow the intermediary to access the KYC information stored in CKYCRR and exponentially improve onboarding efficiency. It will also reduce costs associated with multiplicity of registration and data upkeep," he adds.

This will further promote the digitalisation of the KYC process, and plug any gaps that might allow bad actors to undertake illicit financial activities, such as money laundering. In addition, with the CKYCRR responsible for storing and allowing access to KYC records, financial intermediaries will not have to worry about the data security of KYC records.

“For banks, uniform KYC minimises operational costs associated with redundant verification processes. It also ensures compliance with regulatory requirements, avoiding penalties and reputational risks. Banks can streamline onboarding that will reduce paperwork, accelerates account setup, and enhances customer satisfaction,” says Jose.

One of the major worries with uniform KYC is privacy and security. Any data breach will lead to the misuse of thousands of data as the information will be kept in a central repository.

Risk-based KYC: What is it? How is it going to help?

In her Budget 2024 speech, the finance minister talked about simplifying the KYC process using a “risk-based” approach instead of the present “one-size fits all”. Throwing some light on how it is going to work, Agrawal says, "The central government aims at a risk-based uniform KYC, meaning there can be gradations to the KYC process — like basic to advanced grades which will determine the depth of details that will be collected. This new norm can enhance inter-usability of KYC records across the financial sector.