Client Onboarding Regulations: Is Your Digital Solution Compliant?
Many financial services firms are working on digitizing their client onboarding processes. But these initiatives always run into the same question:
Is it compliant?
Most options for digital client onboarding can be sorted into two categories:
- Industry-specific integrated solutions
- Non-industry-specific point solutions
Choosing between these categories can be difficult (in fact, we wrote a whole whitepaper on the topic), and there are many factors which will impact the decision.
For many firms, however, it all comes back to compliance. For each solution you’re considering, we recommend asking the following questions:
Does it comply with SEC and FINRA rules?
There are several SEC and FINRA rules that apply to client onboarding and electronic data transfer and storage.* Here are some of the rules to be aware of:
Anti-Money Laundering (AML) – a set of regulations designed to make it more difficult for criminals to use banks, investment accounts, and other financial institutions to hide illegally-obtained funds.
Know Your Client/Customer (KYC) – a specific standard that falls under the umbrella of client onboarding AML. As part of customer onboarding, KYC mandates that investment advisors must use reasonable effort (including due diligence assessments) to verify client identities when a new account is opened.
Regulation Best Interest (Reg BI) – establishes a “best interest” standard of conduct for broker-dealers and advisors when recommending any securities transaction, investment strategy or type of account to a retail customer. The rules also require broker-dealers and investment advisers to provide a brief relationship summary, Form CRS, to retail investors.
SEC Books and Records Rules – require broker-dealers to make, keep, furnish and disseminate records and reports prescribed by the SEC under the Securities Exchange Act of 1934. Rules 17a-3 and 17a-4 delineate specific recordkeeping requirements for how to create and maintain these records.
SEC 33-7288 – an SEC Interpretive Release titled “Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information,” which provides guidance for delivering materials to clients digitally.
Most industry-specific client onboarding solutions will follow these rules by default. Non-industry-specific solutions, on the other hand, may require customization in order to be brought into compliance.
*Note: This is not a comprehensive list of requirements for client onboarding and electronic data transfer and storage. For more information on rules and regulations, see SEC Regulatory Actions and the FINRA Rules and Guidance Manual.
Does it integrate with third-party compliance tools?
Many firms use third-party software to automate onboarding compliance checks such as KYC/AML (Know Your Customer/Anti-Money Laundering).
Integrating these tools into the digital client onboarding process can be very useful, simplifying workflows and reducing duplicate data entry.
This is one often-overlooked element of compliance. In addition to following SEC and FINRA regulations by default, industry-specific digital solutions are also more likely to support compliance processes, for example by integrating with KYC/AML software.
Non-industry specific solutions won’t have these integrations, meaning you may have to build them yourself (or go without and sacrifice productivity).
Will it be updated for new regulations?
In the financial sector, regulations and technology both evolve rapidly. That means digital solutions have to be updated frequently in order to comply with the latest rules. In addition, new technology must be checked for compliance with pre-existing regulations.
Reg BI is the latest example of a major regulatory shakeup. Among other things, Reg BI added a new paperwork requirement — a relationship summary form, or Form CRS — to the client onboarding process, forcing many firms to adjust their onboarding workflows.
For firms using non-industry specific solutions for client onboarding, incorporating this new form (and associated record-keeping and disclosure requirements) into workflows presented a real challenge with a hard deadline. Many firms had to start sending Form CRS manually, while working on building a digital process using their point solutions.
For industry-specific solutions, the outlook was different.
For example, when Reg BI was announced, Docupace immediately got to work on a solution that would allow firms to integrate Form CRS into their client onboarding workflows. By the time Reg BI went into effect, firms using Docupace were already prepared to comply with the new rule without sacrificing productivity or profitability.
Reg BI is just one example of the constant evolution of industry regulations, which is why it’s important to choose digital solutions that are frequently updated to guarantee compliance.
Digital solutions like esignatures, straight-through-processing, and automated compliance checks can speed up and simplify the client onboarding process, reduce work for advisors and the back office, and create a smoother client experience.
But not all solutions are created equal, especially when it comes to compliance.
To summarize, the best digital client onboarding solution will:
- Comply with SEC and FINRA rules
- Integrate with third-party compliance tools
- Continue to evolve with emerging industry regulations
Using these criteria will help you select the right digital client onboarding solution for your firm — so you can reap the full benefits of digitization.