In previous blogs in this series, we’ve touched upon a few themes which include the perception of the Middle East as having a “lighter touch” regulatory framework and carrying a “higher risk”. Despite the fact that Middle East regulators are becoming stricter on compliance standards and are increasingly and proactively engaging with FATF, and the clear efforts by financial institutions to implement checks and technology in the pursuit of compliance, the perception persists. As a result, financial institutions in the Middle East are becoming more risk averse, leading to a growing and worrying trend of de-risking.

What is De-Risking?

De-risking refers to the practice of financial institutions terminating or restricting business relationships as opposed to calculating and managing the scale and compliance cost of the regulatory risk associated with these clients.

Instead of managing the identified risks by assessing individual customer relationships, the trend of de-risking avoids risk by declining to provide financial services to whole categories of customers. This avoidance technique has been criticized by FATF, as it cuts off entire nations from the financial world and still does not effectively fight financial crime and terrorist financing.

A decision to de-risk should only be made after effective due diligence processes have been carried out, not as a blanket response to high-risk areas.

Replacing Fear with FinTech and RegTech

Instead of de-risking, the process can be replaced by effective Customer Due Diligence (CDD) or Enhanced Due Diligence (EDD) practices. The key to this is the collection of good quality information that can help financial institutions to accurately calculate the risk of a client and apply an appropriate level of due diligence.

After a decade of staggering regulatory change following the onset of the financial crisis, the industry response had typically been to cut costs by downsizing. This forces institutions to do more (to ensure compliance and protect regulation) with less (resources and budgets).

The recent rise of regulatory and financial technology companies is enabling financial institutions to manage compliance, while moving to a more cost- and operationally-efficient, and client-centric way of doing business. Investing in technology allows firms to eliminate cumbersome manual processes and reduce the duplication of effort for convoluted CDD processes, such as collecting client data and documentation.

From Compliance to Customer Experience

Automation and digitalization offered by RegTech firms can free up valuable resources that were previously dedicated to monotonous compliance tasks and re-focus them on providing an excellent client experience.

In terms of regulation, financial institutions are facing the same challenges, same deadlines, and same expectations. To address the pace of regulatory change, they will have to become more collaborative and inclusive to mirror the richer experience that clients are starting to demand.

This means engaging with the ever-growing FinTech and RegTech communities. The benefits that can arise between the blending of a strong, steadfast financial institution and an agile, technologically-advanced firm cannot be overstated. Once that balance is found, financial institutions can have the best of both worlds and deliver a trusted brand along with the technological advancements that a modern client needs and wants from their financial provider.

Embracing automation can be the solution to not only de-risking, but also making KYC compliance must easier to achieve and maintain. Middle East financial institutions need not shy away from managing certain clients or client segments. Instead, they can create a more inclusive financial services realm which aligns with the FATF Recommendations.

For more on the benefits of digitalization, download our whitepaper Middle East in Focus: Embracing Digital Transformation Across the Client Lifecycle.