Legal Entity Identifiers (LEIs) have revolutionized the business landscape in very many ways. Given the growing number of business entities over the past two decades, there was a need to formulate a standardized system that will promote transparency, especially for cross-border transactions. The banking sector, in particular, relies on the 20-alphanumeric character codes for customer onboarding, trading, and other vital transactions.
Considering the efficiency of the LEI system, many countries have incorporated it into their jurisdiction. Studies have shown that in the past three years, around 1.5 million Legal Entity Identifiers have been issued, with the number expected to soar. The COVID 19 pandemic has brought new challenges especially in the context of business transactions across the globe; thus, more companies are likely to depend on LEIs to efficiently conduct their transactions with utmost transparency.
How LEIs Has Helped Businesses During the COVID 19 Pandemic
The Coronavirus pandemic has made countless businesses to seek alternative ways of operating due to the strict guidelines stipulated by health organizations.
Factors such as social distancing and working from home have become the new normal, forcing many companies to either adapt to the changes or risk becoming obsolete. Consequently, many businesses have shifted their normal operations to online platforms. Although the move has proven to be successful for many entities, it also brings new challenges, especially with issues to do with transparency. Nonetheless, Legal Entity Identifiers have played an instrumental part in establishing online trust among business organizations. The LEI system has made it easier for firms to know who is who and who owns whom (particularly in mergers and acquisitions). By maintaining a publicly verified database that is also free for anyone to access, it helps businesses of all sizes to ascertain the legitimacy of other market participants, thereby mitigating risks.
Additional Benefits to Using Legal Entity Identifiers
Apart from increasing trust and transparency, Legal Entity Identifiers also have several other benefits. For instance, these unique identifiers can be used to streamline automated workflows, thereby reducing operational costs besides saving time. Additionally, many businesses usually face the challenge of navigating complex regulations; however, having a simple, efficient, and reliable system such as LEI has eliminated some of those hurdles.
Given that Legal Entity Identifiers are being adopted at a more accelerated pace, it’s equally important to ensure that they are used correctly and securely. Ergo, financial institutions should be very keen on how to properly manage LEI.
The Challenges Facing LEIs
There has been a recent proposal to include LEI in payment messaging, even as ISO 20022 is becoming widely used as a worldwide standard of payment processing. While the popularity of Legal Entity Identifiers continues to rise globally, there still remains a need for managing them appropriately. This means that there has to be a proper understanding of when and how to use the systems. The mismanagement of LEI is something that can have a far-reaching effect especially in the context of MiFIR regulations in the European Union. Errors in Legal Entity Identifiers such as expired or missing LEIs can lead to adverse consequences in businesses including attracting large fines and inconsistencies in trading. In the event that a particular erroneous LEI has been detected, various stakeholders have the right to suspend the transactions until a valid LEI is issued. This can adversely impact and delay operations between the institutions involved.
Nevertheless, there are measures that can be taken to eliminate such risks. By educating business entities on the dangers that lie in having a lapsed LEI, entities would clearly understand the importance of having a valid LEI. Additionally, the registration and issuance of LEI can be automated to avoid cases of Legal Entity Identifiers becoming obsolete, thereby hindering various services and transactions. Proper LEI management can help banks to efficiently monitor the Legal Entity Identifiers that are being used. This can aid financial institutions to consolidate LEI information of all relevant institutions involved, thus making it easy to spot missing, incorrect, or outdated LEIs.
Legal Entity Identifier has greatly contributed to the transparency of business transactions. Financial institutions are nowadays able to verify and ascertain the legitimacy of companies that want to transact with them easily and efficiently. Moreover, LEI also facilitates efficiency by automating various features hence saving time in business operations. Given the sheer number of companies that have opted to use the system, it is projected that more businesses will follow suit in acquiring LEI.