Rising regulatory confidence puts LEI at the heart of trust in the payments ecosystem
The use of the LEI in global payments is increasing. The Reserve Bank of India and the Bank of England have mandated the use of the LEI for large-value transactions and CHAPS payment transfers, respectively. And since the early 2020s, GLEIF has responded to nine public consultations issued by high-level payments regulators and organizations supporting the use of LEI and identity management in a wide range of payments use cases. This blog post highlights the rise of the LEI as a trust tool in payments. It highlights some of the many use cases where the LEI has the potential to enhance trust and eliminate risk, for example in anti-money laundering (AML) in the European Commission’s recently published AML legislative package.
We need look no further back than the collapse of the global economy in 2008 to understand the worst-case scenario of unaudited legal entities in financial transactions. The LEI was created at the request of the G20 and the Financial Stability Board (FSB) in response to this global catastrophe. Its aim is to provide a means of uniquely identifying each legally distinct entity involved in a transaction, thereby reducing fraud and mitigating risks within the ecosystem.
Considering the origin and purpose of LEI, it is only logical that it also offers potentially invaluable value when it comes to providing transparency and trust in payments. This value is widely recognized by many payments industry insiders, and in recent years there has been a growing appetite and advocacy for the use of LEI in a wide range of payments use cases. Significant progress has been made across the industry with two specific mandates for the use of LEI in certain payment use cases recently issued by the Reserve Bank of India and the Bank of England. In addition, many regions and regulators are consulting on ecosystem transformation and considering the role LEI could play in this. Since the beginning of 2020, GLEIF has shared information about the LEI and its importance to identity management with regulators and organizations in the payments space through nine public consultations. Many more are expected in the coming years.
Below is a summary of key recent developments in the payments space that demonstrate the growing acceptance of LEIs as a tool for 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 LEI for all payment transactions worth ₹50 crore (approximately EUR 5.5 million) and above for entities using the centralised payment systems operated by the Reserve Bank, namely Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT). By April 1, 2021, banks will have to ensure that all remitter and beneficiary information in RTGS and NEFT payment messages are tagged with the LEI. The data showed that India ranked fifth among countries with the highest LEI growth rate in the first quarter of 2021. This gives an indication of the impact of the mandate on LEI issuance.
The RBI is a strong proponent of LEI and had earlier introduced it as a requirement for over-the-counter (OTC) derivatives and non-derivatives markets and large corporate borrowers.
The RBI’s use of LEI to verify the identity of participants in high value transactions is the first use case of its kind. But the potential risk management benefits make it a compelling tactic that other central banks might consider.
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”. In this document, the BoE reiterates its proactive stance to “support the wider adoption of the LEI – beyond the financial sector – by corporates”. The Bank believes that wider adoption of LEI could bring a number of important benefits and is working with government, national and international stakeholders to promote LEI use cases. These include their potential role in improving cross-border payments as part of the Financial Stability Board’s roadmap, and the role LEI can play in combating financial crime.”
The paper confirms the BoE’s long-standing intention to “introduce the LEI into the CHAPS payment messaging standard when the transition to ISO 20022 takes place, in line with industry views and international consensus, including HVPSplus and CBPRplus guidance”.
It then sets out the following timetable for the first phase:
February 2023: LEIs will be introduced in CHAPS payment messages according to the ISO 20022 standard on an “optional transmission” basis. The BoE encourages all CHAPS direct participants to start using LEIs as early as possible, but this will not be mandatory until spring 2024.
Spring 2024: The BoE will start making the use of LEIs mandatory in certain circumstances, with the aim of extending this requirement to all participants over time. The BoE will mandate the use of LEIs when the payment involves a transfer of funds between financial institutions.
In the report, the BoE notes that the earlier LEIs are introduced by companies, the more likely they are to reap the benefits. The BoE also intends to monitor the use of LEI for all transactions to assess whether mandatory LEI data should be extended to all CHAPS payments. The industry will be informed at least 18 months in advance if the BoE extends LEI requirements.
Consultation: Cross Border Payments
In February this year, GLEIF published a blog exploring the FSB’s support for LEIs in its Level 3 roadmap to improve cross-border payments. In this publication, the FSB lists several priority areas that require global coordination and action to overcome challenges and frictions in cross-border payments. Of particular note is the identification of “unique identifiers with proxy registers” as an important building block in the FSB’s roadmap for improved cross-border payments.
The Roadmap provides an action-oriented framework that commits the FSB and GLEIF to work together, in consultation with other key stakeholders, to: “explore the opportunities and barriers to the development of a global unique identifier (UI) for cross-border payments and potentially other financial transactions that takes into account existing identifiers, including LEIs for legal entities….”. This joint work is planned for the period October 2020 to December 2021 and GLEIF welcomes the opportunity to participate.
In addition, as a further measure under the same building block “Introduction of unique identifiers”, GLEIF will work in close coordination with the FSB, the Regulatory Oversight Committee (ROC) and national authorities to explore options to improve LEI implementation. This work will last from June 2021 to June 2022.
It is reassuring that the FSB roadmap makes a connection between an improved payments ecosystem and legal entity identification. For cross-border payments, the possibility of cross-border identity verification is crucial and therefore the LEI is the perfect solution. Its universality makes it the perfect candidate for creating transparency in terms of legal entity identification in the global payments landscape.
Consultation: Instant Payments
In March 2021, the European Commission (EC) published its Consultation Strategy for Immediate Payments in the EU. The aim of the consultation is to identify barriers to the creation of efficient pan-European instant payment solutions, assess the effectiveness of potential solutions and measure the potential benefits and costs of these solutions. The first part of this consultation involves a survey of payment service providers (PSPs) and providers of supporting technical services. Of relevance to LEIs are the questions on sanctions screening. The survey asks whether there is a need for facilitated transaction screening by PSPs involving previously screened or whitelisted customers, or whether a common EU-wide list of false hits and/or the use of LEIs for corporates and digital IDs for individuals could solve any sanction screening issues that may arise from instant payments.
GLEIF welcomes that the European Commission is considering LEI as a possible solution to support the screening of immediate payment transactions against sanctions and watch lists and is very interested in the results of the survey.
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