Tanveer Bhatti, Lead Policy Analyst at Bank of England
Tanveer Bhatti, Lead Policy Analyst at the Bank of England, explains the role that the Legal Entity Identifier (LEI) is playing in promoting trust and transparency across the UK’s financial sector.
In a report published in July 2022, the Financial Stability Board (FSB) encouraged global standards-setting bodies and international organizations with authority in the financial, banking, and payments space to drive forward LEI references in their work.
The Bank of England is a high-profile champion of the LEI; the UK’s central bank affirmed its position to support wider LEI uptake and will introduce the unique identifier into the ISO 20022 standard for CHAPS payment messages on an ‘optional to send’ basis in June 2023. All CHAPS Direct Participants – which include traditional high-street banks and a number of international and custody banks – are encouraged to start using LEIs as early as possible.
As the next step in its phased approach, the Bank of England will begin the mandatory inclusion of the LEI in certain CHAPS payments in November 2024, with a vision to widen out the requirement to all CHAPS participants over time. Specifically, the Bank will mandate the use of the LEI, where the payment involves a transfer of funds between financial institutions.
Tanveer Bhatti, Lead Policy Analyst at the Bank of England, explains why the Bank is driving LEI adoption and the benefits that can be realized across the payments ecosystem by leveraging this standardized identifier.
Why did the Bank of England choose the LEI for CHAPS Direct Participants?
In an increasingly globalized world, data standards are a strategic focus for the Bank of England. Promoting uptake of the LEI is a key part of our approach, as it provides a unique, global identifier that can be used across borders by all entities participating in financial transactions. Importantly, this identifier is connected to a free and open database of verified business information that is updated daily.
Implementing the LEI for CHAPS payments has the potential to unlock a range of benefits and is supported by broad industry and international consensus. Guidance and recommendations on LEI use come from leading global experts setting standards for payments data, such as the Payments Market Practice Group (PMPG) and both the High-Value Payments Plus (HVPS+) and Cross-Border Payments and Reporting Plus (CBPR+) working groups.
What specific benefits can the LEI deliver?
Wide usage of the LEI can improve payment service providers’ efficiency in customer due diligence, compliance and fraud screening processes, and regulatory reporting. Ultimately this supports faster and cheaper payments for end-consumers.
The LEI can also help efforts to tackle financial crime, particularly by helping payment service providers connect to shared data repositories to enhance detection rates. It can also assist regulators when undertaking resolution activities to understand organization-wide liabilities across jurisdictions and asset classes promptly.
More broadly, the LEI delivers the underlying trust and transparency needed to catalyze the creation of innovative new products and services.
How do these benefits extend to support cross-border payments?
The challenges facing the cross-border payments market – namely high costs, low speed, limited access, and insufficient transparency – are well-documented. Fortunately, the LEI benefits outlined above are particularly pronounced for cross-border payments. A consistent standard for entity identification can play a key role in supporting improved payment routing, customer due diligence, and financial crime detection.
As part of the G20 roadmap to enhance cross-border payments, the FSB is leading work to encourage the wider use of LEIs in payments. National regulators and relevant stakeholders are now exploring the role the LEI can play in streamlining customer due diligence. Stakeholders are also collaborating on pilot projects, including, among others, using the LEI in payment standards and sanctions screening.
For stakeholders that want more information on the benefits of the LEI, we have published the Bank of England’s response to its consultation with the UK industry: Policy Statement on Implementing ISO 20022 in CHAPS. Our Real-Time Gross Settlement (RTGS) Renewal Key Benefits webpage also explains how the LEI is a key enabler to unlock the full potential of the enhanced data in the ISO 20022 payment messaging standard.
What lessons have been learned in preparing for this transition to leverage the LEI?
While the use of the LEI among certain financial institutions is established, registration rates for LEIs among non-financial businesses in the UK are relatively low. This is why the Bank of England is taking a proportionate approach to compliance with the mandatory usage of the LEI in CHAPS. Nevertheless, LEI adoption is growing, and new issuance models being advocated and promoted by GLEIF, such as bulk issuance via business registries and the Validation Agent (VA) role, promise to drive further momentum.
Bulk LEI issuance is an initiative by which LEIs could be issued to all the companies registered in a registration authority, allowing business registries to serve as LEI issuers to all their applicants – provided that the registry meets GLEIF verification requirements. The Validation Agent role allows financial institutions and other organizations involved in identity verification and validation to obtain and maintain LEIs for their clients in cooperation with accredited LEI Issuer Organizations.
Are there specific gaps in LEI coverage for CHAPS Direct Participants?
No, there are no gaps in the LEI coverage for any current CHAPS Direct Participants, and the LEI is required when onboarding any new participants.
Is the Bank of England already realizing benefits from preparatory work or initial data flows?
Ahead of the LEI field going live in CHAPS in June 2023, we have seen data flows in our test environments. Our policy approach aims to give the industry the certainty it needs to plan, design and invest to make the most of the new LEI data. We continue to engage with our Direct Participants on their implementation approaches, and last year we published Additional Guidance: Detail on Mandating ISO 20022 Enhanced Data in CHAPS to give more practical detail.
Within the Bank, the use of LEI data has become increasingly important as an identifier and as a source of address and relationship information. We use GLEIF’s daily file export and have designed validation rules to alert when changes have been made. GLEIF’s API is also used by both the Bank’s data and business teams to investigate any queries.
By increasing the use of LEI data within internal systems, our analytical outputs are improving. As LEI adoption increases, we expect these benefits to multiply – particularly if bulk LEI issuance is adopted.
Using the LEI also reduces the need for new identifiers to be created, as well as enabling the decommissioning of existing identifiers when it comes to system replacements and upgrades.
