The Markets in Financial Instruments Directive II (MiFID II) comes into force next year, with one of its key objectives being market transparency. This will see a new section added to the FCA Handbook which refers to the requirement to make transaction reports to the FCA with regards to certain financial instruments. These reports have to be completed for all clients and, where the client is not a natural person (i.e. an individual), it will need confirmation of their Legal Entity Identifier (LEI).
An LEI is a unique identifier for a client which is a legal entity or structure.
Which clients need a Legal Entity Identifier (LEI)?
Most commonly clients of an advice firm, these will include:
- Companies (public and private)
- Trusts (but not bare trusts)
A natural person (including sole traders and partnerships) does not require a LEI as their national insurance number will identify their involvement in the purchase of a financial instrument.
What types of financial instruments need to be reported?
The range of instruments is extensive but other than more complex instruments, such as derivatives, options, futures, warrants, bonds, swaps, etc. the most common instruments likely to apply include:
- Shares (in listed or unlisted companies) traded on a regulated market
- Investment trusts
- Exchange traded funds
Perhaps more importantly, it should be noted that not all MiFID financial instruments are included, as the transaction reporting rules do not apply to units in a collective investment scheme (as the client does not hold the underlying instrument under their title). Therefore, an LEI is not required for a legal entity investing solely in collective investment schemes i.e. ISAs, OEICs, General Investment Accounts. For the avoidance of doubt, investment bonds and insured pension schemes are not covered by these requirements as they are not MiFID instruments.
What action should you take?
If you have a client that is a company, trust or charity, they will require an LEI where you recommend one of the financial instruments listed above. Failure to hold an LEI will mean they will not be eligible to complete the transaction. You should therefore identify any clients that will be affected by the forthcoming requirement. On informing them, you may also wish to support them with the application process.
Should you refer any client that may require an LEI to a discretionary investment firm (DIF), you should seek clarification from that DIF to ascertain their position on carrying out transactions in financial instruments that will require your client to hold an LEI. Again, you may wish to assist your client in the application process. In both the above scenarios you should consider the suitability of the recommendation of certain financial instruments based on the additional cost of holding an LEI (see section below). This requirement applies from 3 January 2018 onwards.
How to obtain an LEI?
An LEI can be obtained directly from the London Stock Exchange (LSE) for an initial fee of £115 plus VAT, with an annual renewal fee of £70 plus VAT. The LSE have issued a step by step guide on requesting an LEI which can be accessed on the London Stock Exchange website.