In practice, Customer Due Diligence (CDD) and Know Your Customer (KYC) are often regarded as similar processes. However, this is not entirely correct. Customer Due Diligence is a form of a ‘know your customer’ inventory in the literal sense of the word. What Customer Due Diligence and Know Your Customer have in common is the extensive compulsory identification of the client.

 The difference: Customer Due Diligence is about assessing risks associated with doing business with a client within the framework of the Money Laundering and Terrorist Financing (Prevention) Act (Dutch WWFT). KYC is about safeguarding the quality of advice for the client within the framework of the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR). A properly performed Know Your Customer and Customer Due Diligence process finally results in a proper – because tailored to the client’s risk profile – investment portfolio for a checked and verified client.

 SCOPE FinTech distinguishes between these two ‘know who your customer is’ processes. SCOPE FinTech specialises in SCOPE KYC Cloud Portal/CDD software.

Customer Due Diligence

A Customer Due Diligence has to be performed when a business falling under the scope of a law or regulation, with regard to the Money Laundering and Terrorist Financing (Prevention) Act or equal European or American legislation, wants to enter into a relationship with a client or prospective client. This applies for both a one-off transaction and a long-term client-supplier relationship. In fact, this is a risk inventory and assessment in accordance with the guidelines in relevant legislation.

All requests for a new account will have to be assessed for their risks. The client information that has been made available will have to be investigated and checked in depth. In case of an existing client–supplier relationship, the client’s transactions will have to be monitored.

Among other things, background checks are performed. It must be excluded under all circumstances that a person or company is involved in serious/relevant criminal or illegal activities. Risks such as a conspicuous reputation, a Public Exposed Person or a person who figures on a sanctions list. This has to be properly assessed in order to prevent any damage to the financial institution. 

What does the process entail?

MiFIDII Know Your Customer is aimed at providing maximum transparency in and safeguarding the accuracy of investment management advice for the client (also known as Suitability).

This is realised by creating the completest possible image of the client’s situation and mapping out the investment management objectives of clients. Within the SCOPE KYC Cloud solution, the entire client inventory process is gone through in a structured manner using a digital wizard with questions and entry fields. The inventory and questions are based on applicable legislation and regulations. SCOPE KYC Cloud Portal deals in sequence with:

  • The personal situation, including identification information and verification. The household composition may also be recorded here.
  • Each person’s knowledge and experience.
  • The financial position of the household and the persons making up the household.
  • The objectives and the assets to be invested.
  • Establishing the risk appetite determination through scenario analyses and determination of the psychological risk tolerance.
  • Discussing and wrapping up the KYC process, signing of contracts.

In addition to the objective risk appetite, which is mainly based on figures and the capacity to absorb losses, there is also a subjective risk appetite. How does the client deal with value losses in a declining stock market? Many asset managers do not investigate this subjective risk appetite. The Dutch Authority for the Financial Markets (AFM) also feels that a subjective risk appetite investigation, also known as risk tolerance, should be part of each SCOPE KYC Cloud Portal investigation.

In this field, the SCOPE KYC Cloud Portal collaborates with FinaMetrica. FinaMetrica has drawn up a questionnaire consisting of 12 questions that are easy to answer. Based on the answers provided, an investor profile is constructed. This software is scientifically sound, has been used more than a million times, and is self-learning. The FinaMetrica profile dictates and limits the possible portfolio composition, for example by determining a maximum equity percentage for the risk profile in question.

A report of the entire KYC inventory is printed. This report can be signed by the client and the asset manager. Based on the KYC inventory, the required client documentation for the custodian can also be generated.

SCOPE KYC Cloud Portal software optimises this KYC process, as it is always up to date in accordance with all (new) laws and regulations. If you need or want more information about SCOPE KYC Cloud Portal or CDD, feel free to contact us.