MFs face cost, operational pressures due to new KYC system

Industry player say the new system is costly and time-consuming as several details need to be filled

The domestic mutual fund sector is being saddled with a new cost burden due to the implementation of the new centralised know-your-customer (C-KYC) norms.

According to industry players, moving one customer to the new C-KYC system costs the fund house up to Rs 40. Given the past pace of new client addition along with the movement of existing clients to the new system, the aggregate cost is likely to go through the roof, they say.

The new system is aimed having a common KYC process for all financial sector intermediaries, which include mutual funds, banks, insurance companies and brokers.

Despite being bank or insurance customers, most new mutual fund clients aren't part of the C-KYC system and fund houses end up empanelling them, say industry players.

"We have to acquire new customers and can't turn the client away. There is no option left but to follow the new regulatory requirement," says a top chief executive officer (CEO) in the industry.

Under the new system, once a customer completes the C-KYC process, he can transact with any financial sector intermediary without having to submit the documents again.

The inter-usability or use of common data by different financial institutions reduces the burden of producing and verifying KYC documents every time when the customer approaches a new financial entity.

Further, executives point out the operational difficulties in getting c-KYC done. "We earlier thought that since process is online, it will be faster and cheaper. It is not only is costly but also takes more time as several details need to be filled," adds a chief operation officer (COO) of a fund house.

Prior to c-KYC, the KYC process usually was a 3-4 days affair. Now, as things stand under c-KYC, it takes anywhere from a week to 10 days on an average.

"We need clarity and level-play field where all financial sectors should be taking the burden. Else, the costs will keep pouring out of our pockets. In the financial sector, the profit margin for the MF industry is the lowest," said a CEO of a mid-sized fund house.

Another factor which could be making insurance and banking sectors go slow on c-KYC is the issue of inter-portability. For example, if a person had a bank account with say Bank 'A', he could not open another account with Bank 'B' without submitting documents. In case of mutual fund industry, over the last few years if an investor was KYC compliant and was investing in a fund house, he would not be required to go through the whole KYC process if he wished to open another account with other fund house.

It is worth noting that in recent years, with deposit rates being slashed at banks, several depositors are eyeing investments in mutual funds. This has not only increased the inflows in the sector but also the number of new investors.