The Financial Stability Board is probably the most powerful body nobody has heard of. It was set up by the G20 after the financial crisis and is drawn largely from central bankers. One of the issues it has focused on is effective monitoring of counterparty risk in financial markets. In a process most bureaucrats will recognise, the Financial Stability Board (FSB) therefore spawned the Regulatory Oversight Group (ROC), which decided that what the world needed was better identification of the legal entities which are counterparties to transactions on financial markets, so it in turn spawned the Global Legal Entity Identity Foundation (GLEIF) based in Switzerland.
The GLEIF has designed a system where every ‘legal entity’ will need to register and obtain a unique identification number – a Legal Entity Identifier (LEI) before it can trade on financial markets. Crucially, to the dismay of the purists, in the world of GLEIF, ‘legal entities’ appears to include trusts.
Acquiring an LEI will of course involve a fee (in the UK around GBP100), and it will need renewing annually (a further fee, of course), but the real challenge is that the body which issues the LEI (which in the UK will be the London Stock Exchange) will need to validate the details of everyone it issues an LEI to against various public sources. If it can’t validate the details, then it can’t issue an LEI, and the entity can’t trade in financial markets, even when it’s acting through a third party such as a fund manager or broker.
This all works for corporate entities, but what about trusts? Trusts generally do not have publicly available information against which their application for an LEI can be validated. With the current plan, therefore, they will not be able to get an LEI.
To be fair, the London Stock Exchange acknowledges the problem and has looked for guidance to its own regulator, the Financial Conduct Authority. The regulator, however, seems to be disinclined to get in the way of the GLEIF, ROC or FSB.
LEIs are already being issued but the new regulations will come into force in January 2017, and after that date an LEI will be required by all investors in financial markets. We therefore seem to be heading for a situation in which, apparently by accident, trusts – one of the commonest ways of holding family wealth in the common-law world – are effectively locked out of participation in financial markets.
Some might call this a bit of a mess, but the American term of SNAFU might be nearer the mark. We can, however, only see if over the coming months some common sense can be brought into the process.
George Hodgson, Deputy Chief Executive, STEP