From April 1, 2024, about 20% of mutual fund investors have been affected by the new Securities and Exchange Board of India (Sebi) rules that require a fresh KYC if the earlier one was based on a bank account statement. Sebi is simply implementing the updated Prevention of Money Laundering Act (PMLA) rules that no longer accept a bank statement as KYC proof. This has affected mainly older mutual fund account holders who would have used this route to verification. Those accounts, should they wish to transact with a new mutual fund, would need a fresh KYC. Another 5% have not linked their PAN with Aadhaar and another 5% have not verified their emails and phone numbers — both of these are older issues.

Step back and see that the global focus on KYC stems from the need to curb terror financing and money laundering after the 9/11 terror attacks in the US. The Financial Action Task Force (FATF), which is the global money laundering and terrorist financing watchdog, lays down the rules and does a periodic review of the member countries. Globally KYC remains a clunky and costly exercise with citizens being harassed both with time spent and denial of access to their own funds. The financial sector pays too with both time and money. PWC estimates that banks spend 3% of their operational costs on KYC, grown 14 times over the past decade. India is a member country and must follow global protocols.

These global protocols have consequences for the average citizen in India as she intersects with the financial sector — banks, capital market, insurance companies and pensions. There are two major issues that we face. One, frequent KYC updates. Two, the need for fresh KYC each time a new account is opened. Accounts termed as higher risk will need more frequent KYC verifications and there seems to be no way around it. However, the second problem is solvable and Sebi has solved it using the KYC Registration Agency (KRA) validation system that provides for uniform KYC and centralised storage and digitisation of KYC records in the securities market. If you do your KYC, or update your address, with any one entity in the capital market, it will reflect in all others as well. However, other parts of the market, outside the purview of Sebi, need individual KYC for each relationship.

The problem of uniform KYC should have been solved at the central government level when they set up the CKYC that promised a single source of truth of identity and address to the entire market. This was supposed to be a centralised KYC repository that would allow the citizen to upload documents once and then access the entire financial sector without the need for a fresh KYC each time.

However, CKYC has been a huge failure. In April 2023, the Reserve Bank of India (RBI) red-flagged the KYC done through CKYC and mandated that such accounts would need face-to-face validation by the banks. Regulatory body insiders say that CKYC data is “garbage-in-garbage-out” since there is no process for validating the proofs submitted by the individual.

In her 2023 Budget speech, the finance minister announced a simpler KYC process that would enable digital India in finance and a committee headed by finance secretary TV Somanathan was formed to address this issue. The committee must do two things. One, examine the success of the capital market system of using KRAs to validate the documents submitted by the individual and making portability a key goal of the entire KYC process. I should be able to open a bank account using an acceptable document and that one intersection with the financial sector should be enough to allow me to transact — physically and digitally — across the entire universe of the market (capital markets, insurance, pensions, loans). This is not a big ask. India has the technology to implement it.

Two, the failure of the CKYC system has led to huge losses in the financial sector as well as citizens’ harassment, fear and uncertainty. To be locked out of your own money has a cost that is more than money. There has to be accountability for the failure of the CKYC and an inquiry must be conducted as to why the data output is so bad that none of the regulators are willing to use the KYC done by the central government agency. Some of the pain felt by us must translate into consequences such as compulsory retirement or some other form of punitive action for those responsible. Or disband CKYC and start afresh.

India is moving fast on the financialisation highway. To have a fundamental flaw in the form of a botched KYC system will not only slow down this process but will hurt the most vulnerable people such as the elderly, the poor, or migrants the worst.

Monika Halan is the author of the best-selling book Let’s Talk Money. The views expressed are personal