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The KYC industry

Where 'Know Your Customer' actually means 'Kick Your Customer'

The mutual fund KYC industryAnand Kumar

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If KYC is good, then more KYC must be better, right? Having a KYC for mutual fund investors prevents black money and benami investors from investing in mutual funds. So if we double the frequency at which the same investors have to get KYC'ed again and again, then that will surely do the job better, right? Well, at least that's the principle on which the KYC activity seems to be organised.

When I go through the archives of articles I have written for various newspapers, magazines and my own Value Research Online, the earliest one I come across is from March 23, 2014, slightly more than a decade ago. In the following decade, I found at least seven more. Basically, they are all the same. I could have reprinted any one of them today instead of going through the trouble of writing a fresh one. All of them can be summarised in these points:

1. The excessive and repetitive nature of KYC exercises is a burden on small retail investors and prevents many from investing in mutual funds.
2. The repeated demands for reKYC are not consistent and appear to have no logic.
3. Even if one goes through the process faithfully, a demand for reKYC can reappear at any time and create a sudden roadblock for mutual fund transactions.
4. The guidelines on how reKYC is to be done do not correspond to actual practice.

Actually, the problem is worse now than a decade ago. In those days, a much higher proportion of investors dealt with a distributor who provided in-person service. Moreover, this was universally true for new investors. This person knew how the system worked and would make sure that the KYC went through because they needed to get the transaction done to earn their commission. Nowadays, we are halfway through the transition to an all-digital system. In-person service is not available for direct digital investors or most other investors.

On top of that, it's clear from social media that a huge number-many lakhs-of investors have quietly been put into an 'on hold' KYC status and their mutual fund transactions are blocked. The process is not working as it should. For example, the official FAQ on KYC lists seven types of identity and address documents that can be used for KYC. However, countless people complain that of the seven, only Aadhaar is actually acceptable. Why should this be the case? Does anyone know?

People nowadays quote something called the 'Shirky principle'. It states that "institutions will try to preserve the problem to which they are the solution". When I look at the decade-long KYC mess, I feel this might be the case here, at least partially. When you go through a KYC process, someone makes money. If you have to go through it again needlessly, someone's revenue is doubled. reKYC is good business for the KYC industry.

Do you remember how toll roads used to be before Fastag came in? You would be zipping along a wonderful new highway and then suddenly have to get into a one-kilometre queue to pay the toll with actual cash! That's what mutual fund investing has come to. There's this fabulous new digital financial and banking system and a national digital ID system we have in this country that's the envy of the world. However, mutual fund investors have to run around to physical offices to prove their identity as if this is the 20th century.

This problem has become a festering wound for the Indian mutual fund investor. In reality, all we need is a modification in the rules/laws that as long as the money comes in and goes out through a KYC'ed bank account, that's all that's needed. This whole mutual fund KYC activity is just a gigantic make-work project that does not need to exist.

Also read: KYC for mutual fund investors eased

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