Sebi miffed with new KYC system

Central KYC not in sync with Sebi's KRA system; regulator writes to finance ministry

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The Securities and Exchange Board of India (Sebi) is miffed with the new central Know Your Customer (KYC) process implemented for the entire financial system. And, has written to the finance ministry to rethink the move, said three sources.

According to Sebi, the new system is not in sync with the securities market KYC. And, has disrupted the common KYC process implemented through KYC Registration Agencies (KRAs).

“Sebi is supportive of the idea behind the new system but feels the implementation hasn’t been proper. It has also led to a lot of disruption, as there are several differences between the new and existing process, which has created confusion. It has written to the finance ministry and is awaiting further directions,” said a person.

The new process is being implemented through the Central Registry of Secularisation and Asset Reconstruction and Security Interest of India (Cersai), an online registry promoted by the central government. In a circular two weeks earlier, Sebi mandated all market intermediaries, including brokers and mutual funds (MFs), to make new KYC submissions to Cersai. The idea behind a centralised KYC is to ease entry into the financial system by doing this only once, with any financial sector intermediary — bank or insurance company or an MF. So, essentially, a first-time investor buying an MF will do a KYC and then based on the same paperwork, will be able to open a bank account or buy an insurance policy. The idea of such a centralised KYC has been under work for some years and is being implemented from August 1.

Meanwhile, Sebi has successfully implemented a common KYC since 2012 for the entire securities market through the KRA system. Under this, a market intermediary has to present the KYC documents with one of the four Sebi-registered KRAs, which store and maintain the investor data. Also, the database of all four KRAs is portable.

The new centralised KYC system has raised doubts over the role of these KRAs, as an intermediary now has to report to Cersai directly instead of these KRAs. More important, the documents required to open an account with a Sebi-registered entity isn’t the same as that mandated in the new central KYC system. The new system doesn’t insist on a PAN (income tax) number or in-person verification.

“As the new system doesn’t require PAN details, it runs the risk of duplication or investors creating multiple accounts. Also, the address proof requirement is different, which also creates the risk of investors opening accounts with fake address,” said a market intermediary.

Currently, there are about 22 million KYC records for capital market investors with KRAs. “Implementation of the new system could require collecting fresh KYC documents for all these KYC-compliant investors,” said an official with a KRA.

The concern within Sebi is that individuals might be discouraged from making new investments due to the pain of doing a KYC once again, he added. Although the new system is underway, sources said Sebi has sought clarity on a number of issues from the finance ministry. Based on the feedback from market players, Sebi has also made a few suggestions to improve the new system.

NEW CENTRAL KYC VS SEBI’S KRA

• PAN and in-person verification not part of new system
   
• Risk of duplication of accounts as PAN not mandated
   
• Risk of account opening through fake IDs as address requirements different
   
• Question over the role of Sebi-registered KRAs and existing database of 22 million clients