During the last decade, financial institutions across the EU have navigated
frequent regulatory changes relating to their responsibility in fighting
financial economic crime (FEC), such as anti-money laundering and
combating the financing of terrorism (AML/CFT) regulations. Financial
institutions have had to reconstruct internal processes to ensure compliance as
a result.
A substantial number of sustainable finance regulations for international
European banks have come into effect (for example, the
CSRD
and the European Banking Authority’s
LOM
and
ESG
guidelines), and financial institutions will need to further mature their
adherence. These regulations will come with long lists of requirements designed
to create a clear picture of the customer’s sustainability profile — such as
know-your-customer (KYC) efforts in detecting FEC (hereon: KYC/FEC).
In this challenge lies opportunity: Sustainable finance teams can standardize
and optimize their processes in an efficient manner by learning from their
KYC/FEC counterparts.
So, where are the touchpoints?
At first glance, the two subjects seem wildly different: The risks related to
financial crime present themselves mostly through clients’ transactions behavior
and the bank’s payment and account services and products, whereas sustainability
risks involving clients materialize mostly through credit risk on the lending
side of financial institutions. However, the processes and challenges of
engaging with clients conducting client due diligence and collecting data are
similar.
KYC/FEC and sustainable finance are both sensitive topics that spark strong
public
reaction.
Financial institutions should exercise an increased level of attention to ensure
that, when they establish their sustainable finance infrastructure, they stay
clear of the inefficient processes previously experienced in KYC/FEC.
Takeaways from KYC/FEC
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Over the years, financial institutions have run into several common issues
related to KYC/FEC — and sustainable finance teams can learn from these when
implementing their frameworks and workflows:
-
Unstructured data collection: Financial institutions, independent of
their market share, still struggle to have one central system of data
collection. This often causes employees to reach out to clients for
information that could already have been stored in-house.
This approach can mean that:
-
Clients are constantly receiving document/clarification requests.
-
The financial institution waits (unnecessarily) for client feedback,
resulting in delays to the client journey.
-
Digital communication portals: Financial institutions commonly deploy
client-communication portals that have been bought via an external vendor,
which is ineffective. Buying an outside solution can be restrictive as the
system won’t be tailored to the specific needs of the clients of that
financial institution. A tailor-made portal offers an experience that
mirrors your company’s needs. Moreover, it can maintain a consistent
presence across all points of customer engagement — a consistency demanded
by consumers.
-
Unclear workflows: In any journey there should be a fixed, detailed and
clear workflow. The roles and responsibilities of each stakeholder within
the workflow must be clearly defined but also outline its implications. It
should be clear that not applying the actions of a role can lead to
implications that harm the entire workflow.
The way forward
Financial institutions are taking steps to implement processes to address
sustainable finance regulations. As a part of this, they also need to reach out
to clients to obtain any ESG-related datapoints required to be compliant. This
is where teams working in sustainable finance can exploit the lessons learned in
KYC/FEC:
-
Firstly, sustainable finance professionals can take the lead and create open
dialogue and collaborative channels with their financial crime counterparts
— as their teams are most likely not aware of the needs and requirements of
sustainable finance teams. If they don’t do this and both financial crime
and sustainable finance teams then request client documentation and ask
complicated questions independently, the client experience can become too
much of a burden. To maintain high levels of client satisfaction, financial
institutions should be wary of overcomplicating processes.
-
Secondly, sustainable finance teams should be aware that their requests will
likely be quite specific, to the point where clients will request continued
support. Clients can use guidance and assistance with technical data
requests on, for example, GHG emissions,
biodiversity
or water
usage.
The goal here should be to simplify the process to make it as efficient as
possible. As mentioned above, financial institutions must invest in a
simple, efficient and user-friendly client-communication portal. When
reaching out during onboarding, each requirement should have a clear and
specific description of what is needed — preferably, with examples attached.
A concise client-communication portal can also help employees of a financial
institution to ask questions correctly.
-
Lastly, financial institutions should learn from the experience in KYC/FEC
when dealing with a changing regulatory environment. There should always be
openness and transparency in terms of sharing challenges and shortcomings
proactively in the communication channels with regulators (ex:
AFM, DNB and
ECB).
Within KYC/FEC, banks frequently interact with the regulator and are often
involved in (costly) regulatory-remediation programs. To navigate the
sustainable finance landscape more effectively, banks can use these
interactions and the experiences as useful resources.
Sharing information for greater efficiency
Despite the sometimes-onerous requirements these regulations present for large
European banks, there are clear lessons sustainable finance professionals can
take from the extensive work of their counterparts in financial economic crime.
There is a wealth of experience and expertise for sustainable finance
professionals to tap into — and the main message is that teams should be looking
to proactively share information and collaborate whenever and wherever possible.
Great opportunities exist for these teams to share knowledge and improve
processes, driving efficiencies while ensuring client satisfaction and full
adherence to any new rules.
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Consultant
Kevin is a manager within the Client Lifecycle practice at Synechron - a global digital consultancy providing IT solutions for business - in Amsterdam.
Consultant, Regulatory Change and Compliance
Boris is a senior consultant in the Regulatory Change and Compliance practice at Synechron — a global digital consultancy providing IY solutions for business — in Amsterdam.
Published May 24, 2024 8am EDT / 5am PDT / 1pm BST / 2pm CEST