Client Risk Assessment by Banks : Team Sport Rather Than A Solitary Player’s Game

Client Risk Assessment (CRA) is a crucial element for banks and financial institutions that are engaging with and servicing a wide spectrum of clients. But are banks and financial institutions best and appropriately positioned to perform a comprehensive risk assessment of all the clients – both New to Bank and Existing to Bank?  Do they have the exhaustive data sets, client behaviour patterns, all wealth sources and other required inputs for any and all clients – both prospective and existing clients? The answer could be No.

As part of the Client Due Diligence (CDD) process, assessing client’s profile in terms of their risk profile is a critical step for any bank or a financial entity. Organisations have made extensive improvements in this area and have deployed sophisticated models, rule engines and analytical systems to assess each client (individual or entity) across various parameters such as industry, source of wealth, geographic region / country, political exposure, initial deposit, adverse media reports, suspicious and non-compliant transactions etc.  All these varied parameters are assessed by the systems and each client is assigned appropriate risk rating / risk scoring as per the individual bank’s model / policy.

Current State

§  Risk assessment of the client is performed based on the information provided by the client or the limited data available / accessible with-in the bank / or a division of the bank. The risk assessment does not consider the same client’s behaviour and conduct in any other bank or across financial industry

§  Models, rule engines and systems to assess client risks are applied on the limited data sets

§  The CRA solutions / systems are hard-wired with the Client Due Diligence (CDD) / Know Your Customer (KYC) platforms

Challenges:

§  In-comprehensive client risk assessment as the data sets are limited and localised, not taking into the overall information across the client’s footprint

§  Risk lies with the bank, as the CRA is performed by the bank and related actions based on the CRA are carried out by the banks

§  Regulatory changes related to client risk assessment, will result in reviewing the CRA models and re-defining the rule engines and systems; With systems being hardwired to the CDD platforms, impact assessment and validations are required, which are potentially costly and inflexible

§  Cost and effort to define, build, validate, implement and maintain a CRA model, rule engines, technology system is high. Typically banks also maintain units to regularly assess impact of regulations, business environment changes, risk factors impacting CRA models which could further add to cost base

§  Small, Medium and Micro sized banks and financial institutions do not have sophisticated CRA systems and models to realistically assess clients which may become capital intensive to deploy and maintain, therefore denying a level playing field to these organisations in terms of adhering to regulations 

 

Prospective Future State:

Base profile of a client in terms of financial actions, conduct and behaviour patterns require a composite and a collaborative assessment at an industry level instead of at an individual bank / financial organisation level. Following future state is envisioned where the client risk assessment function is “externalised” – moved out of an individual bank / financial institution’s purview and “centralised” – driven by independent industry body (potentially governed by the regulator).

 

The banks become the CRA service consumer with the industry body being the CRA service provider based on the standard regulatory parameters and guidelines.

 Benefits:

§  Comprehensive client risk assessment as the data sets are industry wide across the client’s footprint

§  Risk is transferred from the bank to the Industry / Central body for careful and proper assessment

§  Regulatory changes related to client risk assessment, will have to be managed and upgraded by the industry body with the banks receiving the upgraded service / CRA results

§  Cost reduction for the banks as the related business functions and systems become redundant

§  APIfication of the CRA service leading to service oriented architecture construct and related merits, in terms of de-coupling the risk assessment service from other functions and services

§  Level playing field for small, medium and micro sized banks and financial institutions as they can subscribe to sophisticated and upgraded CRA service without much capital and operational expenditures; This will also lead to greater adherence to regulatory compliance for functions which were directly dependent on CRA, for such institutions

Client data is an asset for the banks and provides definite competitive advantage, but in the world of CRA, it is probably a team sport rather than a solitary player’s game.

Disclaimer: The views and content presented in this article are the author’s individual perceptions, views and ideas.