The Know Your Client (KYC) standard is an investing industry guideline that assures investment advisers have full knowledge of their customers’ risk tolerance, investment knowledge, and financial situation. Clients and investment advisors are both protected by KYC. Clients’ interests are protected when their financial adviser knows which assets are best for them. Investment counsellors are protected by knowing what they may and cannot put in their customers’ accounts. Risk management, customer acceptance policies, and transaction monitoring are just a few of the things that KYC compliance necessitates.

What You Should Know About KYC Regulations

The Know Your Client (KYC) rule is an ethical obligation for people in the securities business who engage with consumers during account establishment and maintenance. In July 2012, FINRA Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability) were enacted to address this problem. These rules are in place to preserve both the financial adviser and the client, as well as to assure that brokers and businesses treat consumers fairly.

Know Your Customer Rule 2090

The Know Your Customer Rule 2090 basically stipulates that while creating and managing customer accounts, every broker-dealer shall make a reasonable effort. Before any suggestions are given, the KYC rule is needed at the start of a client-broker interaction to determine the fundamental information about each customer. The important facts are those needed to efficiently serve the customer’s account and be aware of any specific handling instructions. 

Suitability Rule 2111

Regulation 2111 of the FINRA Rules of Fair Practices covers the matter of giving recommendations and goes hand in hand with the KYC rule. The scope of application A broker-dealer must have sound reasons for making an appropriate recommendation for a customer based on the customer’s financial status and requirements, according to Rule 2111. Prior to actually buying, selling, or exchanging security, the broker-dealer must do a comprehensive analysis of the customer’s factual details and profile, as well as the customer’s other assets.

Requirements for KYC Compliance

The Financial Crimes Enforcement Network (FinCEN) of the United States has established baseline KYC criteria in combination with the due diligence program’s core requirements. Financial institutions are required by FinCEN to verify the identity of their client relationships. Additional examination is necessary for companies with a significant anti-money laundering and terrorist funding (AML) risk. Financial institutions’ AML and customer identification program (CIP) credentials are gathered and validated by third parties.

Creating a Profile of the Customer

Investing consultants and enterprises must investigate and acquire data on a customer’s age, prior activities, tax affairs, financial commitments, investment experience, investment timeframe, liquidity needs, and risk appetite in order to fully comprehend each customer’s financial situation. Before creating an account, the SEC requires prospective customers to supply specific financial information such as their name, date of birth, address, job status, yearly income, net worth, investment intentions, and identification numbers.

KYC and Cryptocurrency

Cryptocurrency is lauded for being decentralized and a form of trade that encourages anonymity; nevertheless, these advantages also pose obstacles in the fight against money laundering. As a result, regulating organizations are exploring methods to implement KYC crypto on marketplaces, requiring cryptocurrency platforms, like financial institutions, to authenticate their consumers. Many sites have incorporated KYC processes, even if it is not yet mandated.

KYC in the Banking Sector

In the banking industry, KYC entails bankers and advisers identifying their clients, beneficial owners of businesses, the nature, and purpose of customer connections, and monitoring customer account for suspicious and unlawful activities. Banks must also keep track of and guarantee that client accounts are accurate.

KYC Documents

Different jurisdictions have different requirements. Account-holders, on the other hand, are usually required to present evidence of identification in the form of a government-issued ID. A driver’s license, birth record, id card, or passport may be required by some institutions. The address must also be verified in addition to the identification. This can be done with evidence of identification or a document proving the record’s address.

The Bottom Line

Know Your Customer (KYC) is a collection of norms and regulations used by investment and financial services firms to authenticate their clients’ identities and any related risks in the customer relationship. Investment advisers can also use KYC to guarantee that they have extensive information about their customers’ risk tolerance and financial situation. When validating the identity of clients and their beneficial owners, if any, financial institutions must follow rules set out by the US Financial Crimes Enforcement Network (FinCEN). They must check the facts around the customer connection, as well as watch for and report any suspicious or unlawful activities. As the need to comply with KYC regulations grows, the focus is moving to cryptocurrency marketplaces.