The Markets in Financial Instruments Directive (2014/65/EU) and accompanying legislation (MiFID II), which comes into force on 3 January 2018, sets out various reporting and record-keeping obligations, one of which is a requirement for parties which execute financial transactions to report complete and accurate details of those transactions to the competent authority.
Identifying parties to transactions across markets is to be done “through the issuance of Legal Entity Identifiers (LEIs), unique identification of legal entities participating in financial transactions across the globe”.
The establishment of a global LEI system, as a co-ordinating and supervising body, is critical to improving measurement and monitoring of systemic risk. Standardised LEIs will enable regulators and organisations to more effectively measure and manage counterparty exposure while also resolving long standing issues on entity identification.
To aid global allocation of LEIs, local operating units have been formed and must be sponsored by local regulators to assign and maintain LEIs to firms on a cost recovery basis. The London Stock Exchange (LSE) has been endorsed as an authorised local operating unit in the UK.
The LSE requires investors who are deemed to be legal entities to obtain an LEI, by 3 January 2018, in order to continue to trade on the UK stock market. The LEI is a 20-character alphanumeric reference code that is unique to the legal entity. They are to enable consistent and accurate identification of all legal entities that are parties to financial transactions, including non-financial institutions.
Examples of legal entities include partnerships, government departments, companies (public and private), pension funds (but not self-invested personal pensions) and trusts (but not bare trusts). It excludes natural persons, but includes governmental organisations and charities.
There is confusion, in the industry, surrounding when a trust requires a LEI. A trust is a separate legal entity created (in lifetime or on death) by a settlor when assets are placed under the control of a trustee for the benefit of a beneficiary (or a class of beneficiaries).
When an individual effects an investment bond and places it into a trust, it is the bond provider that owns the funds. So, it is the bond provider that is legally or financially responsible for the performance of the financial transaction, therefore, as the trust is not participating in the financial transactions the trustees do not require an LEI.
Where the bond is open-architecture meaning that it can use investment platforms and discretionary fund managers, the trust does not require a LEI but the platform or DFM which then invest in reportable investments will require one.
However, where the trust is investing directly in, for example, collectives and are participating in the financial transaction then the trustees will need to obtain a LEI by the 3 January 2018. After 3 January 2018, before the trust can enter into a reportable financial transaction it will be required to quote its LEI to the service provider. If the trust does not obtain an LEI, then the trustees will not be able to obtain investment services from investment firms.
Bare trusts have been excluded from the requirement to obtain an LEI as the trustees are merely holding the benefits for a natural person, as nominee.
In conclusion the LEI initiative is designed to create a global reference data system that uniquely identifies every legal entity or structure, in any jurisdiction, that is party to a financial transaction. This is being adopted in the UK from the 3 January 2018, when the London Stock Exchange will require confirmation of the unique code before the party can trade on the UK stock market. But remember if the trust only holds an investment bond the trustees will not require an LEI, it is only when the trust invests directly in collectives that one will be required.