#4 in the LEI Lightbulb Blog Series - Soaring Regulatory Confidence puts LEI at Center of Trust in Payments Ecosystem
Author: Stephan Wolf
Use of the LEI within global payments is increasing. The Reserve Bank of India and Bank of England have mandated its use relative to large value transactions and CHAPS payments messaging respectfully. And since early 2020, GLEIF has responded to nine public consultations issued by high-profile regulatory authorities and organizations within the payments space, supporting the use of the LEI and identity management across a broad range of payments use cases. This blog post showcases the ascendancy of the LEI as a trust tool in payments. It highlights some of many use cases where the LEI has the potential to strengthen trust and eliminate risks, for example, in anti-money laundering (AML) in the recently published AML legislative package by the European Commission.
We do not have to look back further than the global economic collapse of 2008 to fully understand the worst-case scenario of unverified legal entities engaging in financial transactions. The LEI was created at the request of the G20 and Financial Stability Board (FSB) in response to this global catastrophe. Its objective is to provide a means to uniquely identify any legally distinct entity that engages in a transaction and subsequently reduce fraud and mitigate risk within the ecosystem.
With the LEI’s origin and objective in mind, it follows naturally that it offers potentially immeasurable value too when it comes to delivering transparency and trust in payment transactions. This value is widely recognized among many payment industry insiders, and in recent years, there has been burgeoning appetite and advocacy for LEI usage in a broad range of payments use cases. There has been significant industry-wide progress with two concrete mandates for LEI usage recently emanating from the Reserve Bank of India and the Bank of England in specific payment applications. Additionally, many regions and regulators are consulting on transformation within the ecosystem, and considering what role the LEI could play as a result. Since early 2020, GLEIF has shared information with regulatory authorities and organizations in the payments space on the LEI and its credentials in identity management via nine public consultations. Many more are anticipated in the years ahead.
Below is a summary of key recent developments within the payments’ arena, which demonstrate widening acceptance of the LEI as a tool capable of delivering an enhanced global payments ecosystem.
Mandate: LEI for Large Value Transactions
The Reserve Bank of India (RBI) has introduced a new mandate for the use of the LEI for all payment transactions of the value ₹50 crore (approximately €5.5 million) and above for entities using the Reserve Bank-run Centralized Payment Systems viz. Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT). By 1 April 2021, banks had to ensure that all remitter and beneficiary information in RTGS and NEFT payment messages were populated with the LEI. Data showed that in Q1 2021, India was ranked fifth in terms of the jurisdictions with the highest rate of LEI growth. This offers an indication of the mandate’s impact on LEI issuance.
A strong proponent for the LEI, the RBI had earlier introduced it as a requirement in over the counter (OTC) derivative and non-derivative markets and large corporate borrowers.
The RBI’s use of the LEI to verify the identity of participants in large value transactions is the first use case of its kind. Yet the potential risk management advantages it offers make it a compelling tactic that other central banks may wish to consider adopting.
Mandate: LEI in CHAPS Payments Message Standard (ISO 20022)
In December 2020, The Bank of England (BoE) published its ‘Policy Statement: Implementing ISO 20022 Enhanced data in CHAPS’. Within the document, the BoE reaffirms its proactive position “to support the wider uptake of the LEI - beyond the financial sector - to corporates. […] the Bank believes wider uptake of the LEI could unlock a number of key benefits and is working with Government and national and international stakeholders to promote LEI use cases. These include their potential role in enhancing cross-border payments as part of the Financial Stability Board’s roadmap, as well as the role the LEI can play to help tackle financial crime.”
The paper confirms the BoE’s long-held intention to “introduce the LEI into the CHAPS payment message standard when migrating to ISO 20022, in line with industry views and international consensus, including HVPSplus and CBPRplus guidance.”
It then sets out the following initial phasing timeline:
February 2023: LEIs will be introduced into ISO 20022 standard CHAPS payment messages on an ‘optional to send’ basis. While the BoE encourages all CHAPS Direct Participants to start using LEIs as early as possible, it will not become mandatory until spring 2024.
Spring 2024: The BoE will begin mandating LEIs to be used in by certain circumstances, with a vision to widen out the requirement to all participants over time. The BoE will mandate the use of the LEI where the payment involves a transfer of funds between Financial Institutions.
Within the report the BoE notes that the earlier firms adopt the LEI, the sooner they will derive its benefits. It also states an intention for the BoE to monitor the use of LEI for all transactions, with a view to assessing whether the mandatory requirement to include LEI data should be extended to all CHAPS payments. Industry will be provided with at least 18 months’ advance notice if the BoE extends any mandatory LEI requirements.
Consultation: Cross Border Payments
In February this year, GLEIF published a blog exploring the FSB’s support for the LEI in its Stage 3 roadmap on Enhancing Cross-Border Payments. In that publication, the FSB lists several focus areas that require global coordination and action to overcome the challenges and frictions in cross-border payments. Of particular note is the identification of ‘Establish Unique Identifiers with proxy registries’ as a key building block in the FSB’s roadmap to enhanced cross-border payments.
An action-oriented framework is laid out in the roadmap, which commits the FSB and GLEIF to collaborate in consultation with other prominent stakeholders to: “explore the scope for, and obstacles to develop, a global Unique Identifier (UI) for cross border payments and potentially other financial transactions, that takes into account existing identifiers including the LEI for legal entities….” This collaborative work effort is scheduled to run from October 2020 until December 2021 and GLEIF welcomes the opportunity to engage with it.
Additionally, as a further action mapped to the same ‘Establishing Unique Identifiers…’ building block, GLEIF will work in close coordination with the FSB, the Regulatory Oversight Committee (ROC) and national authorities to explore options for improving LEI adoption. This work effort will run from June 2021 to June 2022.
Reassuringly, the FSB roadmap makes the association between an enhanced payments ecosystem and legal entity identification. For cross-border payments, the ability for identity verification to happen across borders is critical and this is why the LEI is perfectly poised to provide a solution. Its universality makes it the perfect candidate for bestowing transparency in relation to entity identification across the global payments landscape.
Consultation: Instant Payments
In March 2021, the European Commission (EC) published its Consultation Strategy on Instant Payments in the EU. The purpose of the consultation is to identify obstacles to the creation of efficient pan-European instant payment solutions, to assess the effectiveness of potential solutions and to measure the potential benefits and costs of those solutions. The first part of this consultation involves surveying payment service providers (PSPs) and providers of supporting technical services. Of relevance to the LEI are the questions regarding sanctions screening. The survey asks whether there is a need for alleviated screening of transactions by PSPs involving clients vetted or whitelisted beforehand, or if a common EU-wide list of false hits and/or the use of the LEI for firms and digital IDs for individuals could solve any sanctions screening-related issue that instant payments may create.
GLEIF welcomes the EC’s consideration of the LEI as a potential solution to support the screening of instant payment transactions against sanction and watch lists and has a keen interest in the outcome of the survey.
The ‘LEI Lightbulb Blog Series’ from GLEIF aims to shine a light on the breadth of acceptance and advocacy for the LEI across the public and private sectors, geographies and use cases by highlighting which industry leaders, authorities and organizations are supportive of the LEI and for what purpose. By demonstrating how success derived from strong regulatory roots is giving rise to a ground swell of champions for further LEI regulation and voluntary LEI adoption across new and emerging applications, GLEIF hopes to educate on both the current and future potential value that ‘one global identity’ can deliver for businesses, regardless of sector, world-wide.
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Stephan Wolf is the CEO of the Global Legal Entity Identifier Foundation (GLEIF). Between January 2017 and June 2020, Mr. Wolf was Co-convener of the International Organization for Standardization Technical Committee 68 FinTech Technical Advisory Group (ISO TC 68 FinTech TAG). In January 2017, Mr. Wolf was named one of the Top 100 Leaders in Identity by One World Identity. He has extensive experience in establishing data operations and global implementation strategy. He has led the advancement of key business and product development strategies throughout his career. Mr. Wolf co-founded IS Innovative Software GmbH in 1989 and served first as its managing director. He was later named spokesman of the executive board of its successor IS.Teledata AG. This company ultimately became part of Interactive Data Corporation where Mr. Wolf held the role of CTO. Mr. Wolf holds a university degree in business administration from J. W. Goethe University, Frankfurt am Main.