What is an LEI Code?
“LEI” is short for the Legal Entity Identifier. It is a 20-digit alphanumeric code that is unique to an entity that trades financial instruments. Each party to a financial transaction that falls under the jurisdiction of an EU regulatory body must have an LEI code that is included on every transactional document to identify the entity.
The LEI system is managed by the Global Legal Entity Identifier Foundation. It is a not-for-profit organization that was established in June of 2014 to ensure the quality and integrity of the LEI system. The LEI allows the entities to trade in transparency and compliance with MiFID II.
MiFID II specifically states that market surveillance requires each party to a transaction to be distinct and clearly identified. “In order to facilitate market surveillance, client identification should be consistent and unique.
KYC is a process where you learn the risk or suitability to your entity and understand who you do business with. Through increased KYC regulation, we see banks, insurers, creditors increasingly demanding that customers provide a lot and unique information and identification to ensure they are who they say they are.
KYC is about risk management. It is also about reducing the amount of financial crime in the market. It makes sure that you can trust business transactions online which is crucial. However, the diligent demands some organizations set can be frustrating for customers and it costs time, frustration and money.
One example is bank clients in the Nordic region, where the processes are extremely time-consuming. Their system has reached a point where a simpler and more efficient approach is needed without compromising on security. The banking sector as a whole would highly benefit from moving LEIs to the beginning of the onboarding process and implementing it more.
Marrying the two
What if you only needed one place to verify all the client information needed? When you adopt LEIs for each client transaction you can save time, gain transparency and smooth out onboarding. This is because the LEI database is open, up-to-date and contains all the information needed to identify an organization. Financial institutions have the opportunity to scale back from outdated systems that seek verification from several pieces of data into one single piece of data.
Until KYC is portable, global, user-owned, standard and supported by digital credentials, KYC/AML will continue getting more expensive and difficult to deal with. Another benefit in the example of business loan applications, eKYC could check and verify a business with an LEI in minutes and a loan could be granted with little to no friction for the customer.
This would speed up identification and verification as well as improve KYC processes. Post-onboarding, the LEI could be used with KYC for on-going monitoring. One example would be receiving negative feedback regarding a counterparties’ credit activity and, as a result, being able to tie this information to the unique code. It would be an efficient system to keep all information under one umbrella.