Taking a LEI-d back approach; MiFID II and Legal Entity Identifiers Taking a LEI-d back approach; MiFID II and Legal Entity Identifiers

14 Sep 2017 Richard Nuttall

As I’m sure you’re all aware, the Markets in Financial Instruments Directive II (MiFID II) comes into force next year, with one of its key objectives being market transparency.

The arrival of MiFID II will see a new section added to the FCA Handbook, which refers to the requirement to make transaction reports to the FCA with regards to certain financial instruments. These reports have to be completed for all clients and, where the client is not a natural person (i.e. an individual), confirmation of their Legal Entity Identifier (LEI) will be required. These forms will also need to confirm the LEI of the investment firm, or firms, involved in the transmission and/or execution of the order for that financial instrument.

This change is intended to serve as a useful tool for the regulatory authorities in monitoring trading activity and detecting market abuse, however, this requirement seems to be creating some uncertainty and confusion amongst advisers, which I hope to allay with this article.   

Whilst I don’t believe many advice firms will be affected, all firms should read this article carefully to understand the potential implications.

So, what is a Legal Entity Identifier (LEI)?

An LEI is a unique identifier for a client which is a legal entity or structure.

Which clients need a Legal Entity Identifier (LEI)?

Most commonly clients of an advice firm, these will include:

  • Companies (public and private)
  • Charities
  • Trusts (but not bare trusts)

What types of financial instruments need to be reported?

The range of instruments is extensive but other than more complex instruments, such as derivatives, options, futures, warrants, bonds, swaps, etc. the most common instruments likely to apply include:

  • Shares (in listed or unlisted companies) traded on a regulated market
  • Investment trusts
  • Exchange traded funds

Perhaps more importantly, it should be noted that not all MiFID financial instruments are included, as the transaction reporting rules do not apply to units in a collective investment scheme (as the client does not hold the underlying instrument under their title). For the avoidance of doubt, investment bonds and insured pension schemes are not covered by these requirements as they are not MiFID instruments.

Does my firm require an LEI?

Investment firms that are a counterparty to the transaction (those who transmit and/or execute orders) will also need an LEI. This will include those firms which carry out discretionary portfolio services but not discretion solely within collective investment funds (see below).

This will not however include firms that only provide advice and facilitate the client’s instructions.  

Whilst the majority of advice firms will not require an LEI, one will be required if the purchase of a financial instrument listed above is made under your company name.

What action should you take?

If you have a client that is a company, trust or charity, they will require an LEI where you recommend one of the financial instruments listed above. Failure to hold an LEI will mean they will not be eligible to complete the transaction. You should therefore identify any clients that will be affected by the forthcoming requirement. On informing them, you may also wish to support them with the application process. You can find further details on this within the section below.                  

Should you refer any client that may require an LEI to a discretionary investment firm (DIF), you should seek clarification from that DIF to ascertain their position on carrying out transactions in financial instruments that will require your client to hold an LEI. Again, you may wish to assist your client in the application process.                    

In both the above scenarios you should consider the suitability of the recommendation of certain financial instruments based on the additional cost of holding an LEI (see section below).

This requirement applies from the 3rd of January 2018 onwards.

How to obtain an LEI

 A LEI can be obtained directly from the London Stock Exchange (LSE) for an initial fee of £115 plus VAT, with an annual renewal fee of £70 plus VAT.                     

The LSE has issued a step-by-step guide to requesting an LEI, which can be accessed on its website (www.londonstockexchange.com)  

Our compliance helpdesk team have received a number of calls already on this subject and have complied a list of FAQs which can be accessed through our website.

If you have any specific questions regarding the above, please do not hesitate to contact the team at compliance@simplybiz.co.uk or telephone 01484 439 120.


Testimonials

"I left Sesame December 31st 2010 and took up Direct Registration with FSA. My Compliance is now handled by SimplyBiz.

"Firstly, you need to understand that Sesame may not tell you the truth with regard to 'the world outside Sesame' - I would suggest to you that you should believe nothing. If you leave they lose a stream of revenue. They may tell you that the FSA will be making it harder for small businesses operating outside the sphere of the network. Do not believe them.

"What are the advantages of direct authorisation? I'm no longer being treated as lowest common denominator. I have scope to use wider range of research tools. I've seen a twofold plus increase in my written business (it is growing annually.) I receive top class support services, positive meetings for members and have a more positive attitude to business.

"My advice to advisers at the time (the ones I came into contact with anyway) was to exit Sesame at the earliest opportunity and this advice remains still."

Colin Palmer
Colin Palmer Financial Services
 

Read More

Latest News

"30 years on, the prinicpal still carries the can"

April 11, 2018

Ken Davy considers the future of networks given recent court rulings on who carries liability for the actions of Appointed Representatives.

Read more >

Understanding what makes a good advice process

April 10, 2018

Dan Russell, Managing Director of SimplyBiz Investment Services, looks at how to make the most of all your client interactions and how the 'first meeting' may no longer be a  potential customer's first impression.

Read more >

SimplyBiz Mortgages adds The Melton to panel

April 09, 2018

SimplyBiz Mortgages has added The Melton Building Society and its subsidiary MBS Lending to its lender panel.

Read more >

SimplyBiz enters Aim market at 170p a share

April 04, 2018

The SimplyBiz Group successfully entered the AIM market at 8am on Wednesday 4 April 2018.

Read more >