Large global banks including HSBC and Morgan Stanley are in talks to set up industry-wide services for money laundering and terrorist finance checks, as stricter regulation is forcing them to reduce costs by pooling resources.
Bankers and consultants said there was a flurry of discussions with data management and technology groups including Markit, The Depository Trust and Clearing Corporation, Broadridge Financial Solutions, Swift and Lysis Financial about joint checks of corporate and institutional customers.
US outsourcing group Genpact and London-based financial information firm Markit will announce the first such partnership to create an industry-wide service for screening new clients and managing customer reference data on Monday.
HSBC and Morgan Stanley are among the banks that will work with the two groups on the design of the service, aimed at slashing banks’ costs and improving compliance with a string of new rules in this area.
The move comes less than a year after a $1.9bn US fine paid by HSBC in a money-laundering scandal raised the alarm bells at global banks’ boards over potential costs of violating so-called “know your customer” regulation.
Those rules force banks to use software and other data gathering tools to identify risky or suspicious client accounts to combat money laundering, sanction breaches and the financing of terrorism.
Rather than each bank maintaining separate, overlapping files on customers, banks are considering pooling information about them in a “library” that would be available to all but owned and operated by a third party.
Yet some of the talks go beyond that by including the actual process of data gathering and even counterparty risk assessments.
“We are working with some clients to truly outsource a large part of it,” said Stephen Racioppo, chief revenue officer of Broadridge. “There is a tremendous opportunity to mutualise costs.”
“There are lots of economic reasons for creating one utility serving the whole banking industry,” said Jon Sweet, chief executive of at Lysis Financial, a London-based consulting and outsourcing group that is also involved in such talks.
DTCC, a US-based post-trade provider owned by banks, is already in the process of building a platform that could act as industry-wide provider for such data, people close to the situation said.
The talks in one of the industry’s most sensitive areas highlight how a plethora of stricter regulation is forcing even the largest global banks to give up their notorious unwillingness to co-operate.
Under pressure to improve lacklustre returns, banks are now seriously considering ways to slash costs by pooling resources particularly in the space of information technology, traditionally one of their biggest fixed costs.
Banks’ expenditures for growing demands from know your customer regulation alone will rise from $800m to up to $1.25bn in the next three years, according to estimates by SunGard Consulting Services.
Jeffrey Wallis, SunGard Consulting Services’ president, estimates that banks could reduce those costs by around half via outsourcing. “This is not without precedence. It is happening all the time around the world with credit scores so why can’t this model be applied to know your customer data?”
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