Nicola Ingram, Director at Oben Regulatory in Jersey, examines the new Legal Entity Identifier, the firms in the Channel Islands that will be affected by it, and what action needs to be taken
What is a LEI and why is it needed?
Letters are arriving in the Channel Islands from stockbrokers in the UK advising certain finance firms that an identifying number – a Legal Entity Identifier (LEI) – is needed.
It’s likely those receiving letters are directors or officers of a company that’s traded in a financial instrument – for example, has bought or sold shares. It is this company that will need an identifier number. If a private individual, as a customer, places trades in their own name, a LEI isn’t required.
UK investment firms are writing to all those with whom they have had a trading relationship because they are getting prepared for new rules coming into effect. From 3 January 2018, every UK and EU-based investment house can only trade for persons (this means any legal entity) that have a unique identification number (a LEI).
What is the reason and what is the timeframe?
Investment firms and stock exchanges in the UK are regulated, which means they’re required to follow and comply with a number of rules. In January 2018, the new MiFID II rules come into force, and will require, among other things, all UK and EU investment houses (stockbrokers, for example) to provide regular reports to their regulators, including information to show that they are trading for customers (legal entities) registered with the Global Legal Entity Identifier Foundation (GLEIF).
This Swiss-based Foundation is the hub that creates the LEI number. It doesn’t, however, deal with applications for a LEI number. This is done through other organisations approved by the Foundation, such as the London Stock Exchange.
Do the new rules apply in the Channel Islands?
They won’t generally apply to investment houses in the islands. So if your entity is a customer of a Channel Island-based firm, you won’t need to make an application for a LEI.
Most likely the Jersey firm will need to obtain a LEI if it, in turn, trades with a UK or EU investment house, but its customers won’t.
There are, however, a few exceptions to this – for example, where an investment house is a Channel Island branch of a UK or European-based entity. Such branches will most likely be writing to their own customers (legal entities) advising them to obtain a LEI.
So, every legal entity trading with an UK or EU investment house may need a LEI?
Yes, that’s right. Each legal entity will require its own LEI. And note that ‘legal entity’ includes a multitude of different types of vehicles – for example, all types of funds (collective investment schemes, pension funds, sovereign wealth funds), all types of companies, all trusts, foundations and limited partnerships.
So, this applies to all trusts as well?
Yes, a trust is considered to be a legal entity for this purpose and it will require a LEI if it wishes to continue to trade in investments (through the trustee) with a UK or EU investment house.
It doesn’t matter, for example, whether the trust is a small family trust with an individual acting as trustee or whether the trust is for a high-net-worth family run by professional trustees – each trust (with the exception of bare trusts) will need its own LEI.
So, a local charity may need a LEI?
Yes, that’s right. If it seeks to trade on a financial market with a UK or EU broker, the charity will need a LEI. If, however, the local charity proposes to solely use a broker, which is incorporated and regulated in Jersey or Guernsey, then it wouldn’t be required to obtain a LEI.
What about my self-invested personal pension – will that need to apply for a LEI?
No – at the present time a self-invested personal pension doesn’t currently need to apply for a LEI, principally because this type of personal pension scheme is for a single private individual. Similarly, some small self-administered schemes with single members may be exempt. If in doubt, however, seek guidance from the issuers of the LEI or obtain professional advice.
Why does anyone in the Channel Islands need a LEI?
Although the new rules won’t apply to financial institutions incorporated in the Channel Islands (or indeed in other places such as Switzerland and other non-European countries), it is the case that any legal entity, wherever it is established or incorporated in the world, will require a LEI if it wants to buy or sell investments with a UK or EU investment house. Therefore, if you want your firm to continue dealings with the same stockbroker in the UK, you need to obtain a LEI.
If you’d rather not obtain a LEI for your company (or trust etc), the alternative is to consider establishing a relationship with a regulated investment firm incorporated in Jersey or Guernsey (or outside the EU), as it’s not, at least currently, subject to the incoming new rules.
Do I have to do anything?
Again, if you’re trading as a private individual then no, you don’t need to do anything. If, however, you’re trading using a legal entity – such as a company, limited partnership, trust or any other legal structure – then yes, you will need to take action.
The most immediate action you need to take is to make an application to obtain a LEI. An application can be completed online through the London Stock Exchange, which has been approved to issue LEIs.
Be prompt. While applications normally take a couple of days to process, there are currently so many applications that you should submit one as soon as possible to ensure you meet the deadline of 3 January 2018. Without a LEI you can’t trade – and it isn’t possible to trade on the basis that an application has been made.
There is a cost of approximately £120 for making an application.
Is this a one-off event, do I have to do anything else?
A LEI is valid for one year from the date of issue. You will most likely receive a reminder each year that the LEI needs to be renewed and a renewal fee will be payable (currently around £70).
Will all information provided be confidential? What information might be public?
The GLEIF has a searchable website. It shows information about everyone who has a LEI. The LEI system has been in operation for a few years and therefore a simple search will reveal the type of information disclosed about those entities on the GLEIF website.
At the present time, the GLEIF website reveals basic information about each entity – for example, the name of the entity, where it’s registered and its address. This is known as level one data and, according to GLEIF, this answers the question ‘who is who?’.
Another level (referred to as level two data) will be added to this public information. This will answer the question ‘who owns whom?’ and will allow the identification of the direct and ultimate parent of a legal entity. It is designed to enable transparency and allow entities owned by individual companies to be researched.
Anyone now applying for a LEI will be asked for level two information. If an application was made before May 2017, then level two information will need to be supplied.
Is the application process straightforward?
Yes, the application process is fairly straightforward and is completed online. It does, however, depend on the type of entity subject to the application.
For example, if you’re applying on behalf of a company, it’s easier to prove the existence of that company by reference to its registration in a Companies Register. In the case of a trust (for which there’s currently no central register), however, you may be required to provide information, such as an extract from the trust deed, to demonstrate the existence of the trust.