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#6 in the LEI Lightbulb Series – The Road Ahead for the LEI Following ESRB Recommendations

Options for global regulatory adjustments

Author: Clare Rowley

  • Date: 2022-03-09
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In September 2021, the European Systemic Risk Board (ESRB), which oversees the financial system of the European Union (EU) to prevent and mitigate risk, published an occasional paper discussing the importance of the Legal Entity Identifier (LEI). The paper highlights the opportunities presented by the LEI to enable faster, cheaper, and more secure transactions, not just in financial markets but for all financial transactions involving legal entities, globally. In this blog, GLEIF welcomes the recommendations made by the ESRB and offers a broad perspective on how regulation could help the LEI achieve them by overcoming barriers on its path to becoming the world’s de facto form of digitized organizational identity.

Clear and correct identification of entities involved in financial transactions is a foundational element for financial stability, not just across the EU, but globally. The ESRB paper contends that: “The LEI […] has the potential to become the identifier of the global economy. It offers a number of unique and important benefits, as it ensures one standard and one format across all jurisdictions, is readable in any language and provides a single location for information that is retrievable from anywhere in the world.”

GLEIF welcomes this assessment and agrees.

For the LEI to fulfil this role, the Global LEI System now needs to expand beyond its inaugural purpose of enabling entity identification in capital markets and broaden its scope to encompass business-to-business transactions. Here, example use-cases are manifold: invoicing processes could be more efficiently and securely implemented by relying on the LEI rather than names and text parsing as is the case today. Trade finance is already being engaged and conducted in a more efficient manner by leveraging the LEI and eliminating the complexities of parsing different languages and alphabets. And cross border payment processes can also be significantly improved by using the LEI to identify the beneficiary and originator, as is suggested in the Financial Stability Board’s Enhancing Cross-border Payments report Stage 3 roadmap.

While ESRB paper recognizes the LEI’s broad potential, it also highlights potential inhibitors to global adoption, by both financial and non-financial legal entities. Among these are issues relating to the cost of obtaining and renewing an LEI, especially as it related to smaller entities; a lack of interest in, and awareness of, the LEI outside of the financial services sector; and the lack of legal requirements for the use of the LEI in global jurisdictions. The current annual renewal rate, which requires updating the reference data of the legal entity if it has changed, is also not frequent enough for some supervisory purposes, as the reference data needs to be up-to-date constantly to enable proper supervision.

To overcome these obstacles, the ESRB paper recommends that the established global system for issuing LEIs be extended to encompass national business registers, which could issue LEIs at the point of entity registration, and financial institutions, which can facilitate LEI issuance to their legal entity clients by assuming either Registration Agent or Validation Agent roles.

Options for regulatory adjustments

While GLEIF is not a regulatory body, it can offer an operational perspective on how global regulation could play an important supporting role in helping the Global LEI System achieve the recommendations made by the ESRB.

Company law

Exploring amendments to company law, worldwide, to mandate the issuing of LEIs to all registered entities via the relevant business registers in each jurisdiction, would remove the cost and administrative burden that, under the current system, falls to the legal entity. If instead the LEI were issued by the business registers, this would shift to a system where in fact the government (through their business registers) would issue LEIs based on the data already available in the official business registry source.

Here, benefits would include:

  • The costs per LEI would reduce dramatically given economies of scale and costs to the legal entity could be waived entirely or replaced by a very modest fee at the business register. On a cost-recovery basis, GLEIF would charge a very small service fee for the services provided to the business registers issuing LEIs. This way all legal entities could enjoy the use of the LEI in any kind of business transaction and reporting, while regulators would find market surveillance and supervision needs addressed across their jurisdictions. Demanding LEIs for legal entity subsidiaries that sit outside a regulator’s jurisdictions, as well as importers of goods and services, would satisfy many regulatory needs globally in finance and beyond.
  • The business registers would create a connection between the registry data and the Global LEI System, which would satisfy supervisory purposes, since it is the same data source that is currently used by supervisory authorities today. This could then pave the way for allowing LEIs to be used by the private sector in regulated KYC processes.
  • It would also mean updates to legal entities’ reference data are immediately available and easily accessible to the world - enhancing their attraction to global investors when it comes to their financing needs. This represents huge benefits for global investors around the world who like “up to date” information on the companies they are considering or are investing in and for companies that need to update their profiles with financial service providers for AML/CFT purposes.
  • Given registers are the national authority for conveying identity to legal entities and the local expert in legal entity data, some business registers may feel that issuing an additional number (the LEI) to entities is not a huge increase in their concrete activities. Four European registries (and one European statistical office), for example, already have this capability, as accredited LEI issuers.
  • In total, this would be a small price to pay for a significantly enhanced ability to monitor global systemic risk in financial markets and a global identity granted at company registration for all legal entities.

EU Authorities' Reactions

In December 2021, the European Commission published its Communication on a Strategy on supervisory data in EU financial services – linked here. Here the Commission notes that it will propose amendments in relevant reporting frameworks to systematically require reporting of the LEI by entities that have it and, by 2023, report on whether or not to make the LEI mandatory for a wider range of legal entities. For example, the Commission proposes greater use of the LEI in payments and as part of the legislative package on anti-money laundering.

And in February 2022, the European Banking Authority (EBA) published its response to the ESRB recommendation on identifying legal entities. The EBA indicates that it supports the introduction of an EU-level legally binding requirement for the use of the LEI. Additionally, the EBA states that it very much supports any effort in an extensive use of the LEI and expects an enhancement in the use of the LEI in areas such as Payment related reporting.

AML law

Another possibility to address the ESRB’s recommendations could be through adjustments to Anti-money Laundering regulations around the world. Such laws could be updated to include an obligation for financial institutions to use the LEI for all legal entities for the purposes of customer due diligence measures.

Here, implementation would be driven by the banking sector at very low cost to legal entities. Financial institutions can already become Validation Agents or Registration Agents working together with an accredited LEI issuer to issue LEIs to all their clients. These operating models already exist within the Global LEI System.

This would also help to increase the coverage on a global scale, because entities involved in financial transactions that sit outside of a regulator’s jurisdiction would also have to comply. This would also
provide supervisors with improved transparency on non-jurisdictional entities involved in their markets.

For the Validation Agent operating model, the additional costs of generating LEIs is relatively low as LEI issuance and renewal becomes embedded in the existing onboarding and due diligence processes. The costs would be borne in many cases by the financial institution. The total costs of issuing LEIs would decrease in this model too, although not as much as when the business register is involved.

Payments law

Lastly, payments legislation may also be leveraged. Use of the LEI to identify the legal entity originator and beneficiary of payments fits well with the global drive to enhance the efficiency of international through the implementation of global international standards. The global transition to the ISO 20022 financial messaging standard would also enable easy integration because the LEI is already a recognized identity standard within the ISO 20022 framework. As noted in the AML discussion above, integrating the LEI into payments would rely on financial institutions to facilitate obtaining and maintaining LEIs for their client base.

The need for a global identifier is increasing and being accelerated by the digitalization of the world’s economies. Businesses and consumers everywhere will benefit from a concerted and coordinated push for a global and non-proprietary standard that can confirm who they are doing business with, not only in
the context of cross-border trade, but also in the context of buying online, paying online, invoicing and a host of other related activities.

The broader use of the LEI, starting by mandating the issuing to all entities, would enable companies to have better visibility to global investors in other jurisdictions, and at a minimal cost. Additionally, it will allow for enhancements in security for e-commerce and all digital transactions.

This is a unique opportunity. As the ESRB notes: “…a broad international consensus has already been achieved on the LEI, giving it a significant advantage over a number of other regional and international entity identifiers in existence across the globe.” Moreover, the Global LEI System is the only open, commercially neutral, and regulatory endorsed system capable of establishing digitized trust between all legal entities everywhere. It was established as a public good, and GLEIF will continue drive its adoption and utilization across as broad a range of legal entities as possible around the world.

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About the author:

Clare Rowley is the Head of Business Operations at the Global Legal Entity Identifier Foundation (GLEIF). Prior to working with GLEIF, Ms. Rowley worked at the United States Federal Deposit Insurance Corporation where she led technology initiatives improving bank resolution programs and contributed to research on subprime mortgages. Ms. Rowley is a CFA® charter holder and holds a MS in Predictive Analytics from Northwestern University.

Tags for this article:
Regulation, Compliance, Policy Requirements, Global Legal Entity Identifier Foundation (GLEIF)