Almost everything about the Know Your Customer proposed rule was historic. One of the most significant aspects of the proposal was the number of public comments that it generated. Never before have the bank regulatory agencies seen such extensive use of the Administrative Procedures Act.
The FDIC released a report that summarized the comments and the findings were significant. In the words of FDIC Chairman Donna Tanoue, "The people have spoken - they have said "no".
Don't ever let anyone say that comments don't make a difference! We have just seen how powerful comments can be, and this happened even when many of the comments were made based on erroneous information or incorrect assumptions.
What actually happened here? First, the rule had some hidden compliance pitfalls, such as how banks should determine the source of funds, and how banks should determine and monitor reasonable activity for each customer. That made compliance managers concerned. Their concerns were specific. How to implement, manage, and monitor compliance with a rule containing specific requirements and vague guidance. We have seen that before and it is called CRA.
Bank CEOs were concerned about the rule generally, picked up on the concern vibes they were receiving from their compliance staff, and really heard the negative comments of customers. On this proposal, the CEOs wasted no time. The generated comment after comment - opposed to the proposal.
Bank management also quickly picked up on the concerns they began to hear from customers. Those who weren't negatively disposed already were quick to see the customer relations nightmare that could be looming over them. They sent in their comments.
But the real straw that broke the regulatory camel's back was the public - people. Just people who caught wind of the proposal and reacted. If we had thought this one through, we could have predicted this. The whole idea of knowing your customer involves asking prying questions. People don't like that.
And then there is the fact that the KYC proposal made easy news stories in more than the American Banker. The issues behind KYC are easy to grasp. The concepts are easy to describe. There is no financial insider vocabulary involved. There are no incomprehensible calculations - like APRs. It's just a simple concept. The bank would be required to ask who the customer is, ask the customer to prove it, and ask other more invasive questions.
Customers reacted with horror. The place they think of as safe and private was going to become prying and invasive. And once the banks knew all that about them (never mind that banks already do know all that) who knew what banks might do with it?
Enter the Internet. Spreading the word on this proposal was not limited to newspapers. It hit the Internet. Suddenly there were stories, chat rooms, and other Internet treatments floating ominously throughout cyberland. The compliance proposal had become a human interest story. Can you imagine that happening with Regulation Z?
We can learn several important things from this experience. First, commenting does make a difference. Never again will you have an excuse to sit back and wait for the final rule to come out before you 'waste' any time on it.
Second, presentation matters. It matters a lot. If this rule had been presented as a customer privacy protection concept, it probably would have been applauded. The fact is that in order to protect your customer's privacy, you have to know who that customer is. Spin made all the difference here.
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