The UK Government’s
upcoming
reforms to the Money Laundering Regulations (MLRs) mark a major step forward in the adoption of digital identity across regulated sectors. With HM Treasury backing digital ID
as a means to streamline checks and help meet the government’s aim of reducing compliance costs by 25%, the direction of travel is now clear: digital IDs are coming.
These reforms arrive at a time when many sectors, particularly property, legal, and financial services, are weighed down by outdated onboarding
practices. Manual identity verification and repeat AML checks remain common, leading to inefficiency, poor customer experience, and compliance risk.
Digital identity provides a way forward. By enabling secure and reusable identity data, it reduces friction for customers and lowers the burden
on firms, all while meeting ever-growing complex regulatory demands.
For businesses subject to AML rules, the message is increasingly clear: modernising compliance is not just about efficiency – it’s becoming
a regulatory expectation.
What the MLR reform package signals for the future of AML compliance
While no concrete details have been released about the upcoming package changes, which are being brought forward to before the end of this
year, the changes are aimed at “improving their [the MLRs] effectiveness” and ensuring they are “clear and proportionate to the risks”. Crucially, the HMT’s endorsement of digital ID validates it as a core component of future AML strategies.
With regards to digital ID, there is acknowledgment of the need to establish regulatory clarity over its use, and consultations are currently
taking place with regulated sectors. Establishing this baseline is crucial, as one of the biggest hurdles facing the industry is clarity on what digital IDs will be accepted in regulated industries. The Solicitors Regulation Authority and HMRC, for example,
both have their own guidance as to what forms of ID are deemed acceptable.
For AML activities, digital ID acceptance will transform how firms can carry out compliance. The use of a digital ID will simplify onboarding,
reduce duplication and enable more consistent AML checks. Forgery becomes much trickier and the IDs can provide added trust that the person is who they say they are. Ultimately, it makes the sharing and verification of documents easier and more secure.
Meeting evolving regulatory and customer expectations
The MLR changes are an indicator of how regulatory expectations are evolving, and they correlate with similar developments taking place, like
the Gov.UK
Wallet and the Data (Use and Access) Bill, which has created a set of standards, governance and oversight for digital verification services. While the use of digital IDs will not be mandatory, the more regulated firms have the capabilities to accept and process
them efficiently, the higher the level of expectation from regulators will be. The businesses adapting early will likely be meeting requirements in a more timely and accurate manner; likely increasing the bar of what is deemed acceptable.
For customers, while there can be hesitancy to change and make the jump to digital, technology like digital wallets demonstrate how quickly
uptake can occur. Given the popularity of using phone wallets to house payment cards, tickets for travel/events, and loyalty cards, consumers are already acquainted with using similar technology and this base level of understanding and use could allow for
the rapid uptake of digital IDs. Once an appetite for digital IDs becomes the norm, customers will start to want and expect it in other areas of life, such as for legal or property purchasing purposes. Unless tech can keep up with the demand, consumers may
grow frustrated.
The potential impact across regulated sectors – and what firms should consider
For regulated sectors like property, legal and financial services, the use of digital IDs could deliver newfound advantages. For property,
for instance, faster ID checks could speed up sales progression, reduce fall-through rates and avoid the need for repetitive checks between buyers and sellers. Each sector will be able to streamline their know your customer (KYC) and AML checks without compromising
risk controls. There will also be a cross-sector benefit, with the potential interoperability of digital IDs driving collaboration between different regulated parties.
Yet in order to take advantage of digital IDs, firms need to make several considerations when evaluating their identity and verification (IDV)
approach. For one, government-issued digital IDs will be part of the Gov.UK
wallet and, currently, the wallet’s reusability is restricted to government services. Only companies certified as Identity Service Providers (IDSPs) under the UK Digital Identity and Attributes Trust Framework can use the information in the GOV.UK Wallet and
share it with another business to prove a user’s identity, so organisations must work through these providers for other IDV purposes.
What’s more, while digital IDs will help drive the digitisation of the IDV process, other documents will still need to be verified physically,
so we could end up in a situation where businesses need the tools to be able to process both types of documentation, which is a factor companies need to take into account.
Manual processes for collecting and verifying physical documentation are time consuming and error prone, increasing the chances of non-compliance.
But IDSPs already provide IDV solutions that enable businesses to digitise the KYC and AML process – these platforms allow firms to quickly and remotely verify identities by
scanning physical documents and using facial recognition technology. And crucially, to be prepared for digital IDs’ arrival, organisations need to have the technology set up
to handle them; if they do not have digital IDV tools, then the use of digital IDs will not be as effective.
Time to evaluate IDV
The reforms to MLRs and, crucially, the HMT’s plans to encourage the use of digital IDs for identity verification checks is a key moment for
compliance activities in regulated sectors. While clarity needs to be established over their acceptability and use, it’s clear digital IDs are coming – and that regulatory and consumer expectations will increasingly expect their use.
Their adoption has the potential to transform customer onboarding and KYC/AML processes for regulated firms, both individually and collectively.
But to fully maximise their potential, companies need to have the digital IDV systems in place to manage their introduction and ensure consistency in their compliance workflows.
The green light has been given to digital IDs – their impending arrival should drive firms to evaluate their IDV approach.
