Time is almost up for those still preparing for the deluge of new regulation coming their way in the form of MiFID II from January. Some of the most common questions that technical teams are receiving from advisers are around legal entity identifiers.
These identifiers will be required where the client is not an individual. So if a client is acting under a legal entity or structure, such as a company, charity or trust (excluding bare trusts), they will require an LEI.
A natural person, including sole traders and partnerships, will not require an LEI as their National Insurance number will identify their involvement in the purchase of a financial instrument.
If a person is buying a financial instrument they will also need to confirm the LEI of the investment firm, or firms, involved in the transmission and/or execution of the order for that financial instrument.
The range of financial instruments the rule impacts is extensive, from common mechanisms such as shares traded on a regulated market, investment trusts or ETFs, to more complicated instruments like derivatives, bonds, options, futures and more.
That said, not all instruments are included. For instance, the rules do not apply to units in a collective investment scheme, since the client does not hold the underlying instrument. This means an LEI is not required for Isas, Oeics or other general investments, such as investment bonds and insured pension schemes.
What is more, legal entities do not require an LEI to hold an investment with a platform, since the investor is not executing a trade on a regulated exchange. The platform purchases and holds the investments and uses them to value the investor’s policy. As such, the platform holds the necessary LEIs to execute these trades.
But beware – platforms may adopt different approaches depending on the structure of their arrangements with clients, because they offer direct access to ETFs or simply because they interpret rules differently. It is best to approach each platform to check their plans.
A client can get a LEI from the London Stock Exchange for an initial fee of £115 plus VAT, with an annual renewal fee of £70 plus VAT. The London Stock Exchange has issued a step-by-step guide to requesting an LEI, which can be accessed on its website.
Elsewhere in MiFID II…
While LEIs do not impact platforms, Mifid II has made other changes that will affect how advisers interact with them.
When selecting a platform, fund or product, advisers will now need to regularly research the market to ensure their recommendations are sufficiently diverse to meet their client’s needs. Advisers, providers and distributors must work together to ensure clients are getting the products most suitable to them.
Many platforms will define their target market for their investment services based on information taken from the European MiFID template completed by fund managers.
They will then be required to monitor these target markets through regular product reviews, with information from complaints data and customer and adviser feedback. If issues are identified, then changes will be made, as well as a follow up with advisers.
Platforms will also be getting information directly from fund groups. These reports will be updated to include client type and distribution channel. The fund group will be responsible for periodically contacting advisers who regularly recommend their funds to ensure they are reaching its target market.