Retrospective KYC Rules Will Not Be Applied In The Isle Of Man

by Jason Gorringe, Tax-News.com, London

01 August 2003

The Isle of Man's Financial Supervision Commission will not be introducing compulsory retrospective Know Your Customer checks following the UK Financial Services Authority's rejection of a similar proposal over fears of widespread disruption to the City's financial institutions and service providers. However, FSC chief executive John Aspden has indicated that a review may need to be undertaken of the various international measures relating to anti-money laundering, according to the Isle of Man Online news service.

Under existing rules, firms in the United Kingdom and the Isle of Man are expected to identify new customers by carrying out the KYC tests, but this does not apply to clients who came onto their books prior to the introduction of the KYC rules. It has been estimated that to undertake a special review of all customers' identities would have cost the UK finance industry somewhere in the region of £170 million.

As an alternative to carrying out a comprehensive review of customer identity, last year, after lengthy negotiations with the FSA, the UK's 'big six' banks, Abbey National, Barclays, HBOS, HSBC Lloyds TSB and RBS), pledged to employ a simpler risk-based system which would minimize the disruption to their day-to-day business. This system was also applied to the IoM branches of UK and Irish banks.

The FSA arrived at the decision not to press ahead with the more stringent requirements after launching a cost benefit analysis of the proposals, which was undertaken by PricewaterhouseCoopers. "We needed to be satisfied that any new general regulatory obligation would be proportionate to the benefits and would not be detrimental to the industry's competitiveness, nor unduly inconvenience customers," Carol Sergeant, managing director of the FSA explained. "This was a difficult decision but given the findings, across the whole of the regulated sector, of the cost-benefit analysis, we could not be satisfied that a mandatory approach would be justified," she added.

Ms Sergeant concluded that the risk-based approach agreed upon by the big six banks was an appropriate method for dealing with the problem, and announced that the FSA would be fully supportive of this measure.

"For a number of firms the right approach will be for them to conduct a risk-based review of all or some of their existing customers. We fully support proactive risk-based action by firms that have done this, including the large UK retail banks and many others," the FSA director general confirmed.

Meanwhile, according to Mr Apsden, it is not yet a certainty that the Isle of Man will apply mandatory retrospective KYC checks at some future point, and the issue will not be properly discussed until after IMF and FATF reviews on money laundering have been throroghly assessed. However, he mentioned that regardless of the regulations in place: "It is clearly best practice of any financial institution to make sure accounts, on a risk-prioritised basis, are up to speed."

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