Tuesday, 21 May 2024

How the Bank of England is driving trust and transparency with the LEI

5 min read

By Tanveer Bhatti

The standardised legal entity identifier will enhance due diligence, compliance, fraud screening, and regulatory reporting for faster, cheaper payments for consumers

  • BoE chooses LEI for CHAPS payment
  • Benefits extend to cross-border payments
  • Realising preparatory work benefits

The Financial Stability Board (FSB) encouraged global standards-setting bodies and international organisations with authority in the financial, banking, and payments space to drive forward legal entity identifier (LEI) references in their work, as reported in July 2022.

The Bank of England (BoE) is a high-profile champion of the LEI. The UK’s central bank affirmed its position to support wider LEI uptake and will introduce the unique identifier into the ISO 20022 standard for Clearing House Automated Payment System (CHAPS) payment messages on an ‘optional to send’ basis in June 2023.

All CHAPS direct participants—which include traditional high-street banks and a number of international and custody banks—are encouraged to start using LEI as early as possible.

As the next step in its phased approach, BoE will begin the mandatory inclusion of LEI in certain CHAPS payments in November 2024, with a vision to widen out the requirement to all CHAPS participants over time. Specifically, BoE will mandate the use of LEI, where the payment involves a transfer of funds between financial institutions.

UK’s central bank chooses LEI for CHAPS payment

Data standards are a strategic focus for BoE. Promoting uptake of LEI is a key part of its approach, as it provides a unique, global identifier that can be used across borders by all entities participating in financial transactions. Importantly, this identifier is connected to a free and open database of verified business information that is updated daily.

Implementing LEI for CHAPS payments has the potential to unlock a range of benefits and is supported by broad industry and international consensus. Guidance and recommendations on LEI use come from leading global experts setting standards for payments data, such as the Payments Market Practice Group, and both the High-Value Payments Plus and Cross-Border Payments and Reporting Plus working groups.

Wide usage of LEI can improve payment service providers’ efficiency in customer due diligence, compliance and fraud screening processes, and regulatory reporting. Ultimately, this supports faster and cheaper payments for end-consumers.

LEI can also help efforts to tackle financial crime, particularly by helping payment service providers connect to shared data repositories to enhance detection rates. It can also assist regulators when undertaking resolution activities to understand organisation-wide liabilities across jurisdictions and asset classes promptly. More broadly, LEI delivers the underlying trust and transparency needed to catalyse the creation of innovative new products and services.

Benefits extend to cross-border payments

The challenges facing the cross-border payments market—namely, high costs, low speed, limited access and insufficient transparency—are well-documented. Fortunately, the LEI benefits outlined above are particularly pronounced for cross-border payments. A consistent standard for entity identification can play a key role in supporting improved payment routing, customer due diligence, and financial crime detection.

As part of the G20 roadmap to enhance cross-border payments, the FSB is leading work to encourage the wider use of LEI in payments. National regulators and relevant stakeholders are now exploring the role LEI can play in streamlining customer due diligence. Stakeholders are also collaborating on pilot projects, including, among others, using LEI in payment standards and sanctions screening.

BoE has published its response to its consultation with the UK industry in Policy Statement on Implementing ISO 20022 in CHAPS. The Real-Time Gross Settlement Renewal Key Benefits webpage explains how LEI is a key enabler to unlock the full potential of the enhanced data in the ISO 20022 payment messaging standard.

While the use of LEI among certain financial institutions is established, registration rates for LEI among non-financial businesses in the UK are relatively low. This is why BoE is taking a proportionate approach to compliance with the mandatory usage of LEI in CHAPS. Nevertheless, LEI adoption is growing, and new issuance models being advocated and promoted by the Global Legal Entity Identifier Foundation (GLEIF), such as bulk issuance via business registries and the validation agent (VA) role, promise to drive further momentum.

Bulk LEI issuance is an initiative by which LEI could be issued to all the companies registered in a registration authority, allowing business registries to serve as LEI issuers to all their applicants, provided that the registry meets GLEIF verification requirements. The VA role allows financial institutions and other organisations involved in identity verification and validation to obtain and maintain LEI for their clients in cooperation with accredited LEI issuer organisations.

Are there specific gaps in LEI coverage for CHAPS direct participants? No, there are no gaps in LEI coverage for any current CHAPS direct participants, and LEI is required when onboarding any new participants.

Realising preparatory work benefits

Ahead of the LEI field going live in CHAPS in June 2023, data flows were seen in test environments. The policy approach aims to give the industry the certainty it needs to plan, design and invest to make the most of the new LEI data. BoE continues to engage with direct participants on their implementation approaches, and to give more practical detail, last year it published Additional Guidance: Detail on Mandating ISO 20022 Enhanced Data in CHAPS.

Within the bank, the use of LEI data has become increasingly important as an identifier and as a source of address and relationship information. BoE uses GLEIF’s daily file export and has designed validation rules to alert when changes have been made. GLEIF’s application programming interface is also used by both the bank’s data and business teams to investigate any queries.

By increasing the use of LEI data within internal systems, analytical outputs are improving. As LEI adoption increases, the benefits are expected to multiply, particularly if bulk LEI issuance is adopted. Using LEI also reduces the need for new identifiers to be created, as well as enabling the decommissioning of existing identifiers when it comes to system replacements and upgrades.

 

Tanveer Bhatti is the lead policy analyst at the Bank of England for the enhanced data fields of the new ISO 20022 payment message. Tanveer is the subject matter expert on the use of LEI in payments, as well as other enhanced data such as purpose codes, structured addresses, and structured remittance data.

This article first appeared on the GLEIF Blog. Used with permission.



Keywords: LEI, Cross Border Payments, Data, G20
Institution: Global Legal Entity Identifier Foundation (GLEIF), Bank Of England, Financial Stability Board
Country: United Kingdom
People: Tanveer Bhatti
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