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Markets and Securities Services |
Luxembourg
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Complexity would be reduced too as web of
connections become streamlined. For example,
if 10 businesses are each working with the same
10 clients using point-to-point connections, each
of the businesses would request documents from
each of the clients. This would involve sets of
documents being shared 100 times. However, with
a universally trusted central counterparty, the
number of communications would be cut to 20,
as documents only need to be sent to the utility.
Unlock innovation
A utility, moreover, would have the resources
to be highly innovative, such as through the
development and use of cutting-edge financial
technologies (FinTech). For example, tailor-made
algorithms are needed to search huge in-house
databases while trawling for publicly available
information. New technologies are rich with
promise, but few individual companies have the
size and reputation necessary to fully unlock
this potential.
Several KYC utilities have emerged around the
world, but none addresses the specific needs of
the Luxembourg fund industry. Nowhere else is
so focused on international markets, meaning
that systems in Luxembourg have to cope with
multiple regulatory regimes, different standards
and a range of languages. Luxembourg’s
regulatory environment is also unique in the
sense that Luxembourg funds are distributed
cross-border in 70 countries, and requires
specialist treatment, as distributing cross-
border means that another layer of complexity
is added in terms of the local regulations to be
adhered to where the fund is distributed.
Assessing the fund industry appetite
A KYC utility for the whole fund industry sector in
the Grand Duchy is being discussed by a working
group of local market players. This innovation
should take care of the execution of rules related
to know-your-customer, know-your-customer’s-
customer and know-your-distributor protocols.
At its heart, a complete document repository is
required. This will enable a seamless exchange
of information about the probity of each client
between relevant participants. It will make life
easier for investors, as they will only need to prove
their good standing once with the central utility.
Moreover, to be of full benefit to the sector,
a centralised market utility should add value
services such as a risk-rating engine to add
context to the information. This would speed
the due-diligence process during onboarding
and give real-time updates on any changed
circumstances of existing clients. Processes
that could be accommodated include customer
identification, initial risk assessment, due
diligence and other forms such as on-site
(performed at client offices) and the know-your-
distributor checks, risk scoring, reputation risk
management, AML/CTF country risk assessment
and so on. It could also facilitate straight-
through processing of regulatory reporting.
Even though it has the potential to become a
powerful tool, a central utility will not necessarily
solve every question, however. It wouldn’t
absolve financial professionals from ultimately
making decisions about client acceptance, for
instance, and it would neither be able to monitor,
nor report suspicious, transactions.
Fintech promises major strides
forward. For example, a digital
identity is a representation of
a person’s real-world persona
in electronic format.