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Getting ready for the new financial instruments directive

All pension schemes now need a legal entity identified (LEI) by 3 January 2018. Without one, investment firms will not be able to provide them with financial services.

This is due to the Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) and the new Markets in Financial Investments Regulation (Regulation (EU) 600/2014) (MiFIR).

A legal entity identifier is 20-character code, unique to that entity and which the entity keeps throughout its existence. It is operated through the global registry, the Global Legal Entity Identifier Foundation. The codes allow all parties participating in a transaction to be identified, assisting with transparency and financial fraud. They also improve the quality of financial data, help with risk management in investment firms and reduce the risk of market abuse. 

Investment firms affected will not be able to execute a trade on behalf of a client who is eligible for a LEI but who does not have one. The new requirements affect trades in most financial instruments including shares, bonds, collective investment schemes, derivatives and emission allowances for article 26 of the new Markets in Financial Investments Regulation (Regulation (EU) 600/2014) (MiFIR).

Any legal person or structure organised under the laws of any jurisdiction is a ‘legal entity’ eligible for a LEI, regardless as to where they are based, including:
Companies
Charities
Unincorporated associations
Pension funds (but not self-invested personal pensions (SIPPs))
Trusts (but not bare trusts)

Natural persons and branches are not generally eligible for LEIs. Individuals may be required to supply a ‘natural person identifier’ when instructing investment firms to execute trades for them under the MiFID II transaction reporting obligations, but for UK nationals this is a National Insurance number.

Pension schemes fall within the definition of ‘legal entity’, and so have to obtain an LEI by 3 January 2018. Without an LEI, the scheme’s investment manager will not be able to continue to provide their investment services and so they will not, for example, be able to execute trades on behalf of the scheme.

While trustees and managers of pension schemes will usually be responsible for obtaining an LEI, some investment firms may agree (for a fee) to apply for the LEI on their client’s behalf.

There are approved LEI-issuing authorities for each jurisdiction. In the UK, this is the London Stock Exchange (LSE). Applications must be submitted through the LSE’s UnaVista platform, which will require a scheme to register before applying for an LEI. Helpfully the LSE has published a user guide to the registration and application process, as well as questions and answers. These say the following information is required to apply for the LEI:
Official name of the legal entity
Country of formation
Legal form of the entity
Address of current headquarters
Current address of legal formation
If applicable, the official business registry where the foundation of the entity has to be recorded on formation, e.g. Companies House
If applicable, the reference in the official business registry, e.g. company registration number
Supporting documentation can also be submitted such as articles, trust deeds, fund documentation or prospectuses
A fee of £115 plus VAT is payable by credit card for each LEI. For applications of ten or more LEIs, bulk fees are available to reduce the cost.

Issuing authorities are also meant to be collecting information about ownership and control of legal entities holding, or applying for, LEIs (so-called Level 2 data), but it is not immediately clear how this is being done.

In the case of discretionary trusts that cannot disclose all information, the Society of Trust and Estate Practitioners (STEP) has reported that the LSE has been accepting validation from the trust itself and will not require sight of the trust deed. For other trusts, STEP says the LSE accepts a scanned copy of the first couple of pages of the trust deed.

If a pension scheme needs a LEI, they should apply in plenty of time ahead of implementation of the MiFID II requirements on 3 January 2018. Tens of thousands of entities are likely to need LEIs, and it is reasonable to anticipate that delays may occur in processing applications and issuing the LEIs.

LEIs are only valid for a year, and can then be renewed. If they are not reviewed they then show as ‘lapsed’ on the global registry. While investment firms must renew their LEIs, guidance issued by the European Securities and Markets Authority (ESMA) suggests that the investment firms are not required to ensure that their clients or counterparties have done so.

Published:26 October 2017


Pensions Law Update - October 2017






Key Contact

Penny Cogher