What Is an LEI and How Does It Work?
Following the 2008 financial crisis, the Financial Stability Board (FSB) established the Global Legal Entity Identifier Foundation to support the implementation and use of the Legal Entity Identifier (LEI).
The LEI is a 20-digit, alpha-numeric code based on the ISO 17442 standard developed by the International Organization for Standardization (ISO). LEIs enable smarter, less costly and more reliable decisions about who to do business with, while bringing simplicity to onboarding and transacting.
Below, Stephan Wolf, CEO of the Global Legal Entity Identifier Foundation, gives his 101 on LEIs, and why he believes all businesses should have one.
What is an LEI?
There are seven billion people on our planet, over forty-five thousand companies on the major stock exchanges, and an infinite number of private businesses worldwide. This complex scenario brings with it a significant challenge in terms of identifying who’s who, who owns whom, and who owns what. Clearly, without the details of the organization you’re dealing with, doing business can be tricky. This is where LEIs come in.
In the past, accurately identifying legal entities on a global level has been a complex task, requiring a significant investment in time, money and resources. This was because there wasn’t a single, open and up-to-date database giving you all the information you needed.
And this lack of transparency ultimately led to financial crises, fraud and market abuse.
LEIs trace their origins to the 2008 financial crisis, when regulators and capital market players needed to quickly assess the extent of market participants exposed to Lehman Brothers and each of its hundreds of subsidiaries. This laid bare the critical need for a system to identify and understand exposures at the legal entity level instead of the aggregate, parent-company level. If it had been available at the time, a system that assigns an electronic, standard entity identifier to legally distinct parties would have helped to fill this gap.
LEIs trace their origins to the 2008 financial crisis, when regulators and capital market players needed to quickly assess the extent of market participants exposed to Lehman Brothers and each of its hundreds of subsidiaries.
In order to remedy this, the Financial Stability Board (FSB), together with the finance ministers and central bank governors represented in the G20, advocated developing a universal LEI for any legal entity involved in financial transactions. This is why GLEIF, the Global Legal Entity Identifier Foundation exists. We make available the Global LEI Index, which is the only global online source that provides open, standardized and high-quality legal entity reference data.
How do LEIs work?
The way the system works is simple. A business signs up and receives its LEI, a unique twenty-character code based on a standard developed by the International Organization for Standardization (ISO).
Each LEI connects to key reference information such as the name of a company or who owns it, which enables clear identification of legal entities. This reference information is validated against third party sources, before it’s hosted online for all to use.
By replacing siloed information with a standardized approach, LEIs take the complexity out of business transactions.
Since being introduced, LEIs have allowed public authorities to better evaluate risks, make corrective steps and improve data integrity. And they’re giving businesses the confidence they need to engage in transactions with total visibility, greater certainty and improved control.
Since being introduced, LEIs have allowed public authorities to better evaluate risks, make corrective steps and improve data integrity.
Why are LEIs important?
Current identification processes have significant manual components and often require the use of multiple databases in which a counterparty may be identified by a different name. Many banks and corporations still use names rather than identifiers, resulting in confusion. As an example, a large bank’s client services division recently found that it had an average of five names—with minor variations in its database—for the same organization. Additionally, commonly used databases, different divisions and IT systems within organizations can all have varying versions of the same entity’s name, making it harder to trace and to link information from multiple sources.
How do LEIs solve business problems?
In our recent report, A New Future for Legal Entity Identification, we looked into the challenges of entity identification in financial services. One of the biggest issues we found lay in onboarding new businesses. The report indicated that streamlined onboarding is far from a reality within the sector. In fact, over half (57%) of salespeople in banks said they spend 27% of their working week (or more than 1.5 days per week) onboarding new client organizations. With half (50%) of financial institutions using, on average, four identifiers to help identify client organizations during the onboarding process, inefficiencies are plaguing the process for many businesses.
This has significant consequences, with 39% of respondents reporting that there is a risk of losing business due to the length and complexity of the process. In fact, the respondents in our study believed that 15% of business is at risk as a result of the client losing patience with the process and 14% is lost because the client’s identity cannot be verified.
These are big figures for any business, and it further highlights how adopting LEIs for each client organization can provide slicker onboarding which leads to improved consistency, less risk of business loss and more efficient use of valuable resources. We’ve found that introducing LEIs into capital market onboarding and securities trade processing could reduce annual trade processing and onboarding costs by 10%. This would lead to a 3.5% reduction in overall capital markets operations costs (or US$150 million in annual savings) for the global investment banking industry alone.
Adopting LEIs for each client organization can provide slicker onboarding which leads to improved consistency, less risk of business loss and more efficient use of valuable resources.
Why should all businesses have an LEI?
There are millions of business entities on our planet, and it’s increasingly important that we can identify who is who and what is what. The LEI allows everyone to cut costs, accelerate operations and gain deeper insight into the global marketplace.
Integrating the LEI into other entity verification methods, including solutions based on digital certificates and blockchain technology, will allow anyone to easily connect all records associated with an organization and identify who owns whom. By becoming the common link, the LEI will provide certainty of identity in any online interaction, making it easier for everyone to participate in the global digital marketplace.
GLEIF is on a journey to increase LEI adoption so that in the future, via our database, anyone can get a 360-degree view of the business landscape, enabling smarter, less costly and more reliable decisions about who to do business with, while bringing simplicity to onboarding and transacting. This means businesses won’t lose time and money when they make a transaction because of an inefficient process – a compelling reason to get an LEI if you ever needed one.