RegTech Intelligence 
The Legal Entity Identifier (LEI) has come some way since its formal establishment in November 2011. 10 March marked a new date for going forward, when a report by the LEI Regulatory Oversight Committee (LEI ROC) set out their policy design for the phase 1 collection of level 2 relationship data for the Global Legal Entity Identifier System (GLEIS), following the responses to a consultation paper in September 2015.
Before we review the key takeaways of the document, it may be useful to visualise where the LEI has got to. The timeline below provides a hint of the main events that have occurred since its inception. For a deeper dive into what the LEI is, and an overview of the consultation paper, preceding this report, read this article here.
On our way – LEI progress since 2011
A targeted framework
The March report builds on the drive to collect data on the direct and ultimate parents of legal entities, and mostly confirms the approach outlined in the preceding consultation paper. For ease of travel, the LEI ROC have adopted a safe, but steady, advance in their collection of this data, taking into account the limited coverage of level 1information and the issues raised in the consultation responses. The main points are listed below.
Uses
As outlined in the original consultation, the LEI ROC envisages a number of uses for the collection of relationship information for legal entities. Among these are the statistical benefits it may provide to academics and authorities and, if LEI coverage were to expand and the detail become more granular, the increased uses of LEIs in regulatory activities such as resolution. Despite this, some consultation responses did point out that there should be further mention of the private sector uses of LEI relationship information, for example, transparency and exposure.
Considering the data will be made freely available, relationship information could also have advantages for a firm’s KYC processes.
Indeed, it is not inescapable to assume that the recently announced UK PSC register may also derive some benefit from the level 2 information – they both maintain lists of beneficial ownership. But quite how these connections can be made is not yet fully visible – the PSC register is part of the AML drive focusing on natural persons with beneficial ownership, whereas the LEI ROC make clear that the aim of the LEI is to map relationships between entities. Still, as the recent LEI progress report outlined, there is a clear opportunity here for aggregation and harmonisation between these agendas.
The LEI ROC argue that the vast number of uses for the LEI gives more support to the need for incremental collection, so not everything is collected at once. Yet there seems to be a continual balancing act between momentum and quality for the GLEIS. Some consultation responses brought up the – quite understandable – question of why we are collecting relationship information when there is still incomplete coverage from the level 1 process and there are already a number of lists out there containing this information. The answer, it seems, is the need to press on.
Standards and definitions
As suggested by the consultation, the initial relationship types to be captured will be based on accounting standards – the International Financial Reporting Standard (IFRS) and the United States-Generally Accepted Accounting Principle (US GAAP) – which are already widely used, publicly available and reliable. Even though these standards were not intended for collecting this type of information, simplicity has attracted the LEI ROC towards their use.
Based on these accounting definitions of consolidation, entities that have an LEI will report their “ultimate accounting consolidating parent” (the highest level legal entity preparing consolidated financial statements), as well as their “direct accounting consolidating parent”. This is mainly because audited financial statements are a much simpler route to verification, and defining parents in this way helps to smooth the process.
Data organisation and business models
Phased collection of level 2 data is scheduled to begin at the end of 2016, yet data collection for level 2 will require a more specific process than the more simplistic business card information collected under level 1. The LEI ROC have decided that reporting will be undertaken by the child entity, despite consultation responses raising the issue that the child will likely have less information than the parent. There will also be some cases when the parent cannot be reported, such as when legal obstacles exist, the parent is a natural person or the entity has no controlling person, or the disclosure of information would be detrimental to the legal entity.
Nevertheless, the LEI ROC have decided not to obtain an alternative identifier for a parent who doesn’t have an LEI – though the child may request the parent obtain one, or the regulators may be able to mandate it. The favoured approach is to collect parent metadata, similar to level 1 reference data, with an eye to obtaining an LEI for them at a future date.
The trouble with validation
While the consultation highlighted broadly positive feedback to the current business model, where Local Operating Units (LOUs) provide the operational funding by charging registration fees, there are also some concerns with the affordability of level 2 data collection with the more complex validation process required.
The main worries were around the LOU’s lack of expertise or access to sources for verification of relationships, yet also included the privacy issues that may come up when trying to obtain data. More expensive verifications may lead to heightened costs in registration and potential harm to LEI uptake, and these factors led a number of respondents to suggest addressing level 1 coverage and the issue with costs first before pressing ahead.
Having taken this into account, the LEI ROC asserted that the business model may need to be adapted to reflect the issues and create the right balance between detail and cost. Regardless, they plan to continue with level 2 collection.
Conclusion
It’s clear that there is a drive to keep the momentum going with data collection. Despite some concerns being voiced, a generally positive response to the approach set out in the consultation has given the LEI ROC the mandate to press ahead, and level 2 data collection will probably commence in December 2016.
What is additionally interesting is the way the LEI is being captured by other, larger, mandatory regulations, and this could see it propelled to a position of importance over the next few years. MiFID II may have been delayed, but its lengthy ask of those under its grip to obtain an LEI for their counterparties is something firms need to prepare for. The LEI progress report from November additionally outlines an increasingly wide range of initiatives requiring the LEI for use in reporting. This is an encouraging trend.
Alongside other initiatives, such as the Common Reporting Standard, LEI progress marks an important step in the harmonisation and standardisation of data in an industry overwhelmed by regulatory demand. Any moves to sort out the problems it currently faces will surely be greeted with open arms.