About the regulation and LEI code

After the financial crisis of 2008, regulators throughout the world understood that it was very difficult for them to identify and monitor different parties operating on the global financial markets. Accordingly, the Financial Stability Board (FSB), in cooperation with the G20 finance ministers and central bank governors, developed a solution to create a universal ID-code, which would be mandatory for all legal persons operating on financial markets. The solution was the LEI code (Legal Entity Identifier) that is a global unique feature; in essence it is a registry code of an enterprise. In June 2014, FSB established the Global Legal Entity Identifier Foundation (GLEIF), an organisation whose responsibility is to organise the issuing of LEI codes, create a public database and promote the use of LEI. The issuance of codes is organised through partner organisations, whom GLEIF has accredited to issue the LEI codes. The homepage of GLEIF (www.gleif.org) provides the entire list of organisations who are authorised to issue LEI codes. As of creating the LEI code, the requirement of the code has also been actively implemented in many financial market regulations of the European Union and with MiFID II, these will also reach the wider public.

Obligations and potential benefits

The requirement to use the LEI code is applied in LHV Pank to all products and services, which enable trading with instruments covered by the MiFID II regulation. The scope of application of MiFID II is surprisingly wide and covers all instruments, which can be traded on the markets of the European Economic Area (EEA). There is an element of surprise about regulated securities, concerning the US securities, which can also be traded in parallel on some EEA exchanges, like the shares of Apple or Alphabet that are traded on both the US Nasdaq as well as the Frankfurt Stock Exchange. All MiFID requirements apply for such securities, regardless of the exchange where these securities are traded. Accordingly, the transactions on the US stock exchanges also require an LEI code starting from 3 January 2018 for a lot of instruments.

As regards the services of LHV, the LEI code will become automatically mandatory for options, LHV Trader, LHV Broker, Growth Account and Portfolio Management agreements and for transactions with European (incl. Baltic) transferable securities. In the case of transactions with US shares in the LHV internet bank, the need for an LEI code depends on the traded instrument; that is on whether or not the respective instrument is covered by MiFID II (LEI is mandatory).

Besides obligations, the LEI code may also prove useful. GLEIF, in cooperation with McKinsey consultants, has mapped the benefits that could be realised in the private sector through wider implementation of the LEI code. In brief, the benefits can be summarised as follows: standardised identification code with no inherent subjectivity, which makes identification of a legal person more efficient. McKinsey illustrated this with a large bank, whose different departments define one and the same client with five different names, whereas the spelling of the name contained only marginal variations. In the context of Estonia, we could use the automatic inquiry made to the commercial register to identify the enterprise as an example. Making an inquiry using only the name could most likely fail, since the spelling of the enterprise may be different, such as LHV Pank AS, AS LHV Pank or public limited company LHV Pank. Lack of “protocols” creates inefficiency and failures in the smooth functioning of IT-systems, in regard to which the LEI code provides potential solutions.

Befitting to the digital era, the LEI code depends on the network effect, which means that the more companies use the code, the more beneficial it will become for all users. If we consider that only 650,000 LEI codes have been issued globally and 830 in Estonia, it seems that the greater benefit for the private sector is still in the more distant future.

Application

LEI code can be applied for from all organisations accredited by GLEIF. Depending on the chosen service provider, initial registration may cost from 65 euros to nearly 200 euros. The concept of the LEI code stipulates the annual renewal of the code. First renewal must be done within 12 months after initial registration and within the renewal, the data of the company is confirmed and the renewal fee paid, which, depending on the service provider, varies from 40 to nearly 100 euros. Some of the service fees are allocated for maintenance of GLEIF as a non-profit organisation.

LHV Pank offers its clients a convenient LEI-code administration service: LHV applies for the LEI on behalf of the client from an approved body and renews it once a year. The service fee for initial registration via LHV is 120 euros and the annual renewal fee is 80 euros (plus VAT). More information on the conclusion of the agreement and the service is available on LHV’s webpage at (https://www.lhv.ee/en/lei).

Corporate or private?

The nearly 100 euros in extra costs most definitely raises a question for many as to whether to transfer the investments from a corporate account to a private account in order to avoid the LEI. In Estonia, an investment account system is used for private individuals, which as with enterprises, allows one to postpone income tax unless income is not paid out from the investment account. Using an investment account could be a good solution for many investors, especially if most of the investments are made into quoted instruments or funds. However, an investment account also has some disadvantages. For example, it is complicated to declare leveraged transactions and it is not possible to postpone income from investments that are not covered by the definition of financial assets, such as real estate or crowdfunding. It is time to take a fresh look at the legal structure of your investments.

Martin Mets
Product Manager of LHV’s investment products

* The article was published in LHV’s magazine “Investeeri” 4/2017

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