How Do Legal Entity Identifiers (LEIs) Impact Trusts in 2020?

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How Do Legal Entity Identifiers (LEIs) Impact Trusts in 2020?

The Global Legal Entity Identity Foundation has developed a system where each legal entity is requested to register and acquire a unique identification number – a Legal Entity Identifier (LEI) – before effectively being able to trade on financial markets.

The Financial Stability Board is a powerful body set up by the G20 after the appearance of the global financial crisis and is drawn largely from central bankers. One of the matters it has been dealing with is the efficient monitoring of counterparty risk within the financial markets. In a process most bureaucrats will acknowledge, the Financial Stability Board (FSB) therefore created the Regulatory Oversight Group (ROC), which recognised that the world needed better identification of the legal entities, and in turn it developed the Global Legal Entity Identity Foundation (GLEIF) based in Switzerland.

The Global Legal Entity Identity Foundation

The GLEIF has developed a system where every ‘legal entity’ is requested to register and acquire a unique identification number – a Legal Entity Identifier (LEI) – before it can trade on financial markets. Legal entities that also fall under the definition of a trust are also included as well, however it seems that they were not carefully taken into consideration after the projects initial launch on a global level.

Obtaining an LEI involves a fee and it requires annual renewal, but the challenge is that the body which issues the LEI will need to validate the details of everyone it issues an LEI to against diverse public sources. In the case that it can’t validate the details, then it won’t issue an LEI, and the entity can’t trade in financial markets, even when it’s acting through a third party, as for instance a fund manager or broker.

Trusts are also considered a form of legal entity which are required by regulation to obtain an LEI Code since January 2018. It generally works for corporate entities but trusts mostly do not have publicly available information with which their application for an LEI can be validated. Hence, with the old framework, trusts were not be able to obtain an LEI code.

Revisiting LEIs and EU-Based Trust Funds in 2020

Funds and investment funds have been re-examined since the financial crisis a few years back. The EU have introduced regulations such as the European Union Directive on Alternative Investment Fund Managers (AIFM). It aims to improve reporting practices and fund regulations. Only after this was implemented, were LEIs required by all investors in financial markets. With the exception of bare trusts, in 2020, any trust taking part in transactions will require an LEI. Before the new law in 2018, there was a situation by which trusts – one of the most common ways of holding family wealth in the common-law world were fundamentally left out of participation in financial markets.

It is worth noting that unless it is a discretionary trust, when it comes to applying for the LEI you may be requested to provide proof of existence of the trust itself, which can be resolved by providing a deed.