A Loan Market Association (LMA) survey has found that know-your-customer (KYC) checks are by far the biggest factor affecting settlement times in the global loan market. The problem is likely to worsen in 2016 as sanctions in certain markets continue to cause nervousness among banks’ growing KYC teams.
The LMA survey, conducted among its members across 27 countries, found that 45% of respondents thought KYC issues were the main cause of settlement delays. Following that, 21% believed slowdowns arriving from primary structuring and 22% thought pre-traded diligence were the main roadblocks.
The rise in KYC checks appears to be due to two things: a nervousness on the part of banks following regulatory investigations into money laundering in recent years, and the spate of sanctions – particularly regarding Russia – which have drawn increasing numbers of counterparties into jurisdiction. US banks and their advisers are having to walk away from deals
with Russian counterparties too, as sanctions against the country continue to affect
“There has been such a spotlight on the banks recently that they need to get this right, and as a result the KYC teams are very influential,” said Clive Wells, partner at Skadden Arps Slate Meagher & Flom in London.
How much longer the process is taking is not clear, but lawyers talk of waiting for anything between five days to nine weeks. “People aren’t capricious for the sake of it, they are just going through all the checks, which have increased,” said Wells.
- A LMA market survey has found that know-your-customer (KYC) checks are by far the biggest factor affecting settlement times in the global loan market;
- The rise in KYC checks appears to be due to a nervousness on the part of banks following regulatory investigations into money laundering in recent years, and the recent spate of sanctions;
- The problem of KYC checks is well-known among banks. In January SWIFT launched a KYC global depositary, but it does not apply to lending banks’ checks on borrowers;
- The survey also found that standardisation – both in documentation and rules – was the biggest factor in supporting developing markets’ growth.
According to Nigel Houghton, director at the LMA, one of the biggest issues is that each bank has a different view of what checks are required. “This is because regulators have not been prescriptive in terms of counterparty KYC requirements,” said Houghton.
“It could be a huge amount of work, or just refreshing the KYC the bank did the previous year. It is almost a black hole. As such it can be very time consuming and very onerous,” said Houghton.
The growing problem of KYC checks is well-known among banks. In January this year SWIFT [Society for Worldwide Interbank Financial Telecommunication] launched a KYC global depository. The system provides an alternative to bilateral checks for anti-money laundering, sanctions and other compliance. But the initiative only covers KYC on those institutions that are part of SWIFT. As such, it does not cover the KYC a lending bank or agent needs to carry out on borrowers – that remains a manual task.
Elsewhere in the survey, recipients were asked what the most important factor was in supporting developing market lending. Twenty-eight percent (the highest figure) chose standardisation of loan and market practices, regulation and documentation.
The LMA has been taking a leading role in changing this for some time. In 2014 it released a suite of local law documents for South Africa, Kenya, Uganda, Tanzania and Nigeria, subsequently adding Zambia. “But more needs to be done in terms of regulatory development. The LMA is working actively with rulemakers,” said David Ansara, associate director (Africa) of the LMA.
Looking ahead to 2016, participants were asked where they believed the most opportunity lay in the loan market. Despite the well-publicised trend of cash-rich corporates globally, the most popular choice was corporate M&A with 32%. Refinancings was second with 27%, followed by the leveraged market (19%), restructurings (13%) and emerging markets (7%).
The full survey can be found here
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