Legal Entity Identification – The Issues Facing Trusts

February 15th, 2016

With effect from January 2017, non-natural persons investing in financial markets will be required to obtain a Legal Entity Identifier before they can trade. What does this mean for trusts?

The Global Legal Entity Identity Foundation (GLEIF) based in Switzerland is introducing a system whereby every ‘legal entity’ will need to register and obtain a unique 20-character, alpha-numeric identification number – a Legal Entity Identifier (LEI) – before it can engage in financial transactions.

LEIs are already being issued but the new regulations will come into force in January 2017, and after that date an LEI will be required by all non-natural persons who invest in financial markets.

In the UK, acquiring an LEI will involve paying a fee of £115 plus VAT (renewable annually at a cost of around £70 per year) to the London Stock Exchange (LSE). LEIs issued by the London Stock Exchange (LSE) will be known as International Entity Identifiers (IEIs).

Problematically, while trusts are within the definition of a ‘legal entity’ for these purposes, the process for acquiring an LEI or IEI does not lend itself readily to trust applications. Not only must the applying entity provide the address of its ‘headquarters’ (a nonsense as far as trusts are concerned), the issuing body is required to validate the details of the entity against available public records and resources before an LEI can be issued. While this is fairly straightforward where the entity is a company, trusts will not usually have publicly available records and information against which their application can be validated – and if the entity cannot be issued with a LEI it will be left unable to trade in financial markets (even if acting through a third party fund manager).

Fortunately, the Financial Conduct Authority and the Wealth Management Association have recognised that some modification is needed to take account of the ‘quirky nature’ of trusts and both bodies are working closely with the LSE to ensure that the application process for trusts will be as smooth and straightforward as possible. In the meantime, the LSE appears to be taking a pragmatic approach to this problem and has confirmed that it has already issued IEIs to a number of trusts, having ‘partially corroborated’ the trust details from the trust documents or deeds.

The requirement for an LEI or IEI only exists where the trust or other entity is investing in investments that have to be ‘transactionally reported’ (such as stocks, shares, derivatives and similar) and it is expected that investment firms (such as discretionary fund managers) will apply for LEIs on behalf of trusts where they are required.

The requirement for an LEI would not apply where the trust or other entity is investing in collective investments such as bonds, unit trusts or pooled funds.