Common KYC for All Your Financial Investments Soon

Dec 15, 2023 / Reading Time: Approx. 5 mins

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Common KYC for All Your Financial Investments Soon

Know Your Customer (KYC) is a mandatory step when venturing into most financial instruments from savings bank accounts to mutual funds. It is an essential regulatory requirement for financial institutions to gain a deeper understanding of their investors.

Nevertheless, the adoption of this compliance by investors has been sluggish, with not all of them fulfilling these KYC requirements. Investors perceive the process of adhering to KYC norms as complicated, requiring a significant amount of paperwork. To some extent, this perception holds true.

This is why there have been constant efforts to introduce a common KYC, also known as single KYC, across financial instruments for quite a time now. Well, it seems that the wait is finally over as the government is set to implement a common KYC system that will be applicable across various financial products such as mutual funds, insurance, bank Fixed Deposits (FD), National Pension System (NPS), stocks, and more.

"The work on single KYC for all kinds of financial services is in the making and should come out soon," said Mr Ajay Seth, Secretary of the Department of Economic Affairs.

At a recent FICCI event, he mentioned that a committee led by the deputy governor of the Reserve Bank of India (RBI) had been established by the government to institute a common KYC system for all financial products. The committee has completed its recommendations, and details of the initiative are expected to be revealed by the government shortly.

The initiative was initially disclosed by Finance Minister Nirmala Sitharaman last year to ease the compliance responsibilities for businesses.

Ms Sitharaman mentioned that the government is devising a system where, once you have completed your KYC, it can be utilised across different institutions and for various purposes over time. This way, you won't have to repeat the process each time, even if your business engagements vary.

Mr Ajay Seth further emphasised that this approach would lead to a reduction in paperwork and cost burdens for businesses.

At present, common KYC processes are necessary for various financial products. For example, separate KYCs are mandated for opening a bank account and investing in mutual funds.

Distributors believe that the current complexities in KYC requirements are somewhat discouraging potential investors from entering the mutual funds market. This KYC obstacle poses a significant challenge for the mutual fund industry.

The implementation of the common KYC would streamline customer onboarding by minimising the time required to bring in a new client.

A common KYC system has the potential to revolutionise the landscape of financial inclusion and significantly enhance retail investor participation across various financial products. This shift in KYC processes promises a more seamless and accessible financial ecosystem, ultimately fostering greater trust and participation from a broader range of individuals.

The separate KYC procedures not only result in redundant efforts but also act as a deterrent, particularly for those who find the process complex and time-consuming. A common KYC system would eliminate this redundancy, allowing individuals to undergo the KYC process once and apply it seamlessly across various financial institutions and products.

The common KYC can also positively impact financial inclusion. Many individuals, especially in remote areas, may face barriers to accessing financial services due to the challenges posed by multiple and intricate KYC requirements. Simplifying and centralising the KYC process would remove one of the hurdles that limit financial inclusion. This is crucial for individuals who may not have easy access to traditional banking services, empowering them to engage with a broader range of financial products.

Moreover, a single KYC process would enhance the overall customer experience, making it more user-friendly and less intimidating. Reducing paperwork and the time and effort required for KYC completion would make financial services more approachable for the average retail investor. This, in turn, could instil greater confidence in the financial system, encouraging more people to explore and invest in different financial instruments.

The impact on retail investor participation is particularly noteworthy. The current KYC complexities are often cited as a deterrent for potential investors, contributing to a hesitancy to engage with financial markets. A common KYC system would significantly reduce the friction in the onboarding process, attracting a larger pool of retail investors who may have otherwise been discouraged by the bureaucratic hurdles. This increased participation is not only beneficial for individual investors but also has broader implications for the growth and stability of the financial markets.

Furthermore, the ease of KYC compliance would likely lead to a more dynamic investment landscape. Retail investors would be more inclined to diversify their portfolios, exploring a wider range of financial products beyond traditional options. This diversification is essential for the overall health and resilience of the financial system, as it mitigates risks and contributes to a more balanced and sustainable market.

To conclude:

A common Know Your Customer (KYC) system holds the potential to foster financial inclusion and boost retail investor confidence and participation across various financial products. By simplifying the onboarding process, reducing barriers, and enhancing the overall user experience, a common KYC system can contribute to a more inclusive and dynamic financial ecosystem. This would benefit individuals, the financial industry, and the economy at large.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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