Options for global regulatory adjustments
In September 2021, the European Systemic Risk Board (ESRB), which oversees the European Union (EU) financial system to prevent and mitigate risks, published an occasional paper discussing the importance of the Legal Entity Identifier (LEI). The paper highlights the opportunities that the LEI offers to facilitate faster, cheaper and safer transactions, not only in the financial markets, but for all financial transactions involving legal entities, worldwide. GLEIF welcomes the ESRB’s recommendations and offers a comprehensive perspective on how LEI regulation could help achieve them by overcoming obstacles on its way to becoming the de facto form of digitized organizational identity worldwide.
The unique and correct identification of entities involved in financial transactions is a fundamental element for financial stability, not only in the EU but globally. The ESRB paper states: “The LEI has the potential to become the identifier of the global economy. It offers a number of unique and important benefits, ensuring a consistent standard and format across jurisdictions, being readable in any language and providing a single location for information that can be accessed from anywhere in the world.”
GLEIF welcomes and agrees with this assessment.
In order for the LEI to fulfill this role, the global LEI system must now go beyond its original purpose of enabling the identification of companies in the capital markets and expand its scope to include business-to-business transactions. There are numerous examples of applications here: Invoicing processes could be carried out more efficiently and securely by relying on LEI rather than name and text analysis as is the case today. Trade finance is already being addressed and handled more efficiently by using the LEI and eliminating the complexity of parsing different languages and alphabets. Cross-border payment transactions can also be significantly improved by using the LEI to identify the recipient and the originator, as proposed in the Financial Stability Board’s (ESRB) report on Improving Cross-Border Payments, Level 3.
While recognizing the great potential of LEIs, the ESRB paper also points to potential barriers to global adoption by both financial and non-financial entities. These include issues related to the cost of obtaining and renewing an LEI, particularly for smaller entities, a lack of interest in and awareness of LEIs outside the financial services sector, and the absence of legal requirements for LEI use in global jurisdictions. The current annual renewal rate, which requires updating the legal entity’s credentials when they have changed, is also not frequent enough for some oversight purposes, as credentials need to be kept up to date for proper oversight.
To overcome these obstacles, the ESRB paper recommends extending the established global system for issuing LEIs to national business registries that could issue LEIs at the time of registration of a legal person, as well as to financial institutions that can facilitate the issuance of LEIs to their legal person clients by assuming the role of either registration agent or validation agent.
Options for regulatory adjustments
While GLEIF is not a regulator, it can offer an operational perspective on how global regulation could play an important supporting role in helping the global LEI system achieve the ESRB’s recommendations.
Exploring changes to company law around the world to compel the issuance of LEIs to all registered companies through the relevant business registries in each jurisdiction would eliminate the costs and administrative burdens that fall on the legal entity under the current system. If LEIs were instead issued by business registries, this would result in a system where the government (through its business registries) would issue LEIs based on the data already available in the official business registries.
This would bring the following advantages, among others:
The cost per LEI would fall dramatically due to economies of scale, and the legal entity cost could be eliminated altogether or replaced by a very modest fee at the business registry. On a cost-recovery basis, GLEIF would charge a very small service fee for the services provided to business registries issuing LEIs. In this way, all legal entities would be able to use LEIs in any type of business transaction and reporting, while regulators would see the need for market surveillance and monitoring covered in their jurisdictions. Requiring LEIs for subsidiaries of legal entities located outside the jurisdiction of a regulator, as well as for importers of goods and services, would meet many regulatory needs worldwide in finance and beyond.
Business registries would provide a link between registry data and the Global LEI System, which would serve supervisory purposes as it is the same data source currently used by regulators. This could then pave the way for LEIs to be used by the private sector in regulated KYC processes.
It would also mean that updates to legal entity reference data would be immediately available and easily accessible to the world, increasing their attractiveness to global investors for their funding needs. This is a huge advantage for global investors around the world who want up-to-date information on the companies they are considering or investing in, and for companies that need to update their profiles with financial service providers for anti-money laundering purposes.
As registries are the national authority for transmitting the identity of legal persons and the local expert for legal person data, some business registries may feel that giving legal persons an additional number (the LEI) is not a great extension of their specific activities. For example, four European registries (and one European statistical office) already have this capability as accredited LEI issuing bodies.
Overall, this would be a small price to pay for a greatly enhanced ability to monitor global systemic risk in the financial markets and a global identity assigned to all legal entities upon company registration.
Reactions of the EU authorities
In December 2021, the European Commission published its Communication on a strategy on supervisory data in the EU financial services sector – linked here. In it, the Commission states that it will propose changes to the relevant reporting regimes to systematically require the reporting of LEIs by entities holding them and will report by 2023 on whether or not to make LEIs mandatory for a wider range of legal entities. For example, the Commission is proposing greater use of LEIs in payments and as part of the anti-money laundering legislative package.
And in February 2022, the European Banking Authority (EBA) published its response to the ESRB recommendation on the identification of legal persons. The EBA states that it supports the introduction of a legally binding requirement at EU level for the use of LEIs. In addition, the EBA states that it is very supportive of any efforts to make the use of LEIs more widespread and expects the use of LEIs to improve in areas such as payment-related reporting.
Another way to comply with the ESRB’s recommendations could be adjustments to anti-money laundering laws around the world. Such laws could be updated to include an obligation for financial institutions to use LEIs for all legal entities for customer due diligence purposes.
In this case, implementation by the banking sector would be at very low cost to legal entities. Financial institutions can already become validators or registrars working with an accredited LEI issuer to issue LEIs to all their customers. These operating models already exist under the global LEI system.
This would also help to increase coverage at the global level, as entities involved in financial transactions outside the jurisdiction of a regulator would also have to comply with the requirements. This would also
This would also provide regulators with better transparency in relation to non-jurisdictional entities involved in their markets.
For the validation agent operating model, the additional costs of creating LEIs are relatively low, as the issuance and renewal of LEIs will be embedded in existing onboarding and due diligence processes. In many cases, the costs would be borne by the financial institutions. The overall cost of issuing LEIs would also decrease under this model, although not as much as with the inclusion of the business register.
Payment transaction law
Finally, payment legislation can also be used. The use of the LEI to identify the legal entity initiating and facilitating payments fits well with global efforts to improve the efficiency of international payments through the adoption of global international standards. The global transition to the ISO 20022 standard for financial messaging would also allow for easy integration, as the LEI is already a recognized identity standard under ISO 20022. As mentioned in the anti-money laundering discussion above, the integration of the LEI into payments would depend on financial institutions facilitating the procurement and maintenance of LEIs for their customer base.
The need for a global identifier is growing and will be accelerated by the digitization of the global economy. Businesses and consumers around the world will benefit from a concerted and coordinated push for a global and non-proprietary standard to confirm who they are doing business with, not only in the
not only in cross-border trade, but also in online purchasing, online payment, invoicing and a host of other related activities.
The wider use of LEIs, starting with mandatory issuance to all companies, would allow companies to be more visible to global investors in other countries, at minimal cost. It will also improve the security of e-commerce and all digital transactions.
This is a unique opportunity. As the ESRB states, “…broad international consensus has already been reached on the LEI, giving it a significant advantage over a number of other regional and international identifiers for businesses around the world.” Moreover, the global LEI system is the only open, commercially neutral and government-recognized system capable of establishing digital trust between all legal entities everywhere. It has been launched as a public good and GLEIF will continue to drive its adoption and use by the widest possible range of legal entities around the world.