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ESRB discusses the future of LEI

The European Systemic Risk Board (ESRB) published an occasional paper to talk about the importance of the Legal Entity Identifier (LEI). The ESRBs’ role in the European Union (EU) is to avert and mitigate risks within the financial system. The paper views the opportunities presented by LEI to enable faster, less costly, and more secure transactions not just within financial markets but for all legal entities globally.

Legal Entity Identifier

The ESRB paper contents that: “Greater use of the LEI does not only have benefits for regulators and other authorities. The advantages are also available to the wider financial industry, non-financial industry, and academics. Being a public good, the LEI database can be freely consulted. The LEI creates the worldwide infrastructure for the digital age in the domain of legal entities, just as the telephone book did for the analog age.”

The Global Legal Entity Identifier Foundation (GLEIF), an overseeing body of the Global LEI System (GLEIS), evaluates the suitability of organizations seeking to operate as LEI issuers, welcomes the ESRB statements, and discusses the topic further.

GLEIF brings out that whilst the ESRB paper recognizes the LEI’s broad potential, the report also highlights potential inhibitors to global adoption, by both financial and non-financial legal entities. These include issues relating to the cost of obtaining an LEI as well as renewing it when needed for smaller companies; lack of interest or awareness outside just within finance sectors and how there isn’t any law requiring all countries to use certain codes which would make communication easier among different stakeholders involved. The current annual renewal rate, (which requires updating of reference data if it has changed in any way) is also not frequent enough for some supervisory purposes.

The ESRB has found a way to overcome these obstacles by recommending that the established global system for issuing LEIs be extended across national business registers and financial institutions. This will allow them both capable of fulfilling their role as an agency or advisor and facilitate LEI issuance to their legal entity clients by assuming either Registration Agent or Validation Agent roles.

Possible regulatory adjustments

The Global LEI System has been working hard to create a reliable and robust regulatory framework. However, as any system is only as good as its participants it’s important that we understand how global regulation can play an integral role in helping this new initiative succeed. GLEIF offers some insights into what type of operational perspective might be necessary for these regulations if they are going truly want to help achieve recommendations made by ESRB.

Company law

The introduction of global legislation to mandate the issuing of LEIs would be efficient for businesses around the world. This can only happen if all registered entities are issued with an LEI via their respective business registers.

AML law

Another possibility to address the ESRB’s recommendations could be by making adjustments to Anti Money Laundering regulations around the world. Such laws could possibly 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.

Payments law

Finally, as payments legislation continues to evolve and the global drive for efficiency becomes stronger every day—through innovations like ISO 20022 certification, which already leverages LEI identification standards within its framework—integrating this into our financial system would be a natural next step. As noted in the AML Law above, integrating the LEI into payments would then rely on financial institutions to facilitate obtaining and maintaining LEIs for their client base.

Key takeaways

The need for an international identifier is increasing as businesses and consumers everywhere are becoming more digital. A global standard that can confirm who they do business with will be not only beneficial in cross-border trade but also when buying online, paying by credit card over the phone, or even invoicing-related activities; it will inevitably help remove friction from transactions and boost security.

The Global LEI System is a unique and powerful identifier that has been gaining momentum as it can be used by all legal entities, unlike other regional or international systems which may not offer accurate information.

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