An Overview of Inadequacies in KYC
Information Collection Procedure and Ways to Fix Such Inadequacies
In exempt markets the primary aim of regulatory bodies is to protect investor interest. In this context OSC has done extensive research to find deficiencies in actions performed by EMDs and has provided suggestions on how to better streamline procedures. In the following sections we will look at:
- Non existent or inadequate procedures and policies
- Inadequacies in collection of KYC information
Non Existent or Insufficient Procedures and Policies
In many instances OSC has noticed that exempt market dealers do not have written procedures and policies with respect to KYP, KYC and suitability practices for dealing in exempt market securities. Even if they do have such procedures and policies in place, those tend to be inadequate.
As for instance, some EMDs lack required procedures for review as well as approval of investments before any kind of recommendation is made to clients. Some dealers also do not have required criterion to be utilized for rejecting or accepting any specific investment.
Upon analysis OSC figured out that there were processes in place for collection of KYC information, for reviewing products and for assessing suitability. But EMDs often do not document such procedures in their procedures and policies manuals.
Suggestions from OSC
To correct the situation, OSC has suggested that exempt market dealers need to create, maintain as well as keep procedures and policies up to date and also enforce them to make sure they are complying with regulations related to exempt market securities.
Insufficient Process for KYC Information Collection
Another concern with relation to operations performed by exempt market dealers is related to insufficient process for collecting, documenting as well as maintaining required KYC information.
After detailed analysis OSC found that a standard know your client form is being used by EMDs for collection as well as documentation of KYC information. It has also been noticed that exempt market dealers lack required processes for collection, documentation and maintenance of necessary KYC data.
As for instance, dealers do not make sure that every investor they are working with necessarily fills up KYC form or all the details provided in KYC forms are filled. Some examples include missing data on net worth, investment objectives or net assets investor has.
Even if KYC information was provided, it has been noticed that KYC forms lacked all the required information like liquidity requirements or risk tolerance of investor.
- To solve these problems OSC recommends that KYC details need to be updated every year and more frequently if the investor underwent major life events like divorce, marriage, loss, child's birth or change in job.
- It is also suggested that all the KYC forms need to be dated and signed by investors as well as the registrant at the time it is filled.
- The KYC details collected by dealers need to be specific for demonstrating AI exemption compliance or for assessing any investment's suitability.
A Final Note
To summarize we can say that know your client or KYC information is quite important part of investment process in exempt markets and adherence to correct procedure can be quite helpful for EMDs in suggesting appropriate exempt products to investors.