In its response to consultation initiated by the European Securities and Markets Authority, the former Wealth Management Association (now PIMFA) estimated in 2015 that up to 500,000 small retail clients might be treated as subject to an obligation to obtain a Legal Entity Identifier (LEI). The VAT-exclusive fees charged by London Stock Exchange as UK issuer is £115 for the initial issue of an LEI and £70 for renewal annually thereafter. If the WMA was correct, the implication is that for this sector alone fees totalling some £57.5 Million may be charged for initial issue of LEI’s, and up to £35 Million annually thereafter for renewals.
Coming within the class of small retail clients identified by the WMA, I am one of the trustees of the trusts declared in my late father’s will. The Financial Conduct Authority has advised me that no UK-authorised investment firm will trade in reportable instruments on behalf of the will trust unless a LEI is obtained for it. This, I am told, is a consequence of the European Union legislation commonly referred to as MiFID II, derived from the Markets in Financial Instruments Directive. It means that I am a prospective contributor to the substantial income stream that will fund LSE’s part in maintaining the global database of LEI’s. It is not a prospect with which I am happy.
But is the FCA’s advice correct?
From Article 13 of Commission delegated EU Regulation 2017/590 (http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0590&from=EN) it is plain that affected investment clients will be required to provide LEI codes that conform to the ISO 17442 standard and are recorded on a global database of such codes, but beyond saying that these requirements affect clients who are “eligible for the legal entity identifier code” the Regulation makes no attempt to define who such eligible clients are. For that one must turn to the terms of ISO 17442 itself (https://www.iso.org/obp/ui/#iso:std:iso:17442:ed-1:v1:en). (In passing, I am puzzled by Paragraph 2 of Article 13’s reference to “the” LEI code. Such wording suggests there is only one such code, when the evident intention of the scheme is that each entity should have its own unique code.)
It appears from my correspondence with the FCA that it treats Section 1 (“Scope”) in ISO 17442 as establishing the eligibility of my father’s trust for an LEI. The relevant part is as follows:
“This International Standard specifies the elements of an unambiguous legal entity identifier (LEI) scheme to identify the legal entities relevant to any financial transaction.
“The term “legal entities” includes, but is not limited to, unique parties that are legally or financially responsible for the performance of financial transactions or have the legal right in their jurisdiction to enter independently into legal contracts, regardless of whether they are incorporated or constituted in some other way (e.g. trust, partnership, contractual). It excludes natural persons, but includes governmental organizations and supranationals.”
The FCA appears to believe that the quoted reference to a trust indicates that ISO 17442 treats trusts generally as being eligible for LEIs. I take the contrary view that the expression “e.g. trust, partnership, contractual” relates only to the preceding statement “regardless of whether they are incorporated or constituted in some other way” and is intended to emphasise that the form in which a party was constituted is irrelevant to its eligibility for an LEI, as to which one looks instead to the two tests specified in the passage.
If I am correct then, if it is to be eligible for an LEI (and thus subject to the Article 13 regime in Regulation 2017/590), a “unique party” must either (a) be “legally or financially responsible for the performance of financial transactions” or (b) “have the legal right in [its] jurisdiction to enter independently into legal contracts”.
I take it to be obvious that a trust lacks the legal right to enter independently into a legal contract and that instead any such contract is one formed by the trustees for their trust’s benefit. I am less certain about whether a trust is “legally or financially responsible for the performance of financial transactions”, but again it seems to me that it is not the trust but instead its trustees that carry any such responsibility. If a dispute arises about a financial transaction involving trust property, an action for breach of the transaction’s obligations will lie against the trustees, not against the trust itself. If my analysis is correct then a trust is not eligible for an LEI according to the two tests laid down in Section 1 of ISO 17442.
The statement in ISO 17442 that the term ‘legal entities’ “includes, but is not limited to” parties that satisfy one of the two tests described above is completely unhelpful in clarifying eligibility for an LEI. Whilst indicating that parties other than those who satisfy one of the two tests set out above may also be eligible, it tells you nothing as to where the limits of such eligibility may lie. The FCA apparently attaches particular significance to the words “but is not limited to”, yet I see nothing in those words to suggest that eligibility for an LEI extends to trusts.
Section 3 of ISO 17442 contains definitions, including the definition of a legal entity as a “legal person or structure that is organized under the laws of any jurisdiction”. That cannot be treated as a comprehensive definition determining eligibility for a LEI because it would include individual natural persons, who have already been expressly excluded in Section 1. It takes us no further forward as to eligibility.
The way in which ISO 17442 is worded suggests that it was never intended to supply a prescriptive definition of eligibility for an LEI and thus determine the scope of legal obligations falling upon trustees. Yet every commentary I have seen on LEI’s appears to accept without question the notion that trusts are eligible to receive them (with the curious exception of bare trusts), and any such conclusion must rest upon an interpretation of the Standard’s wording – its words matter more than seems to have been intended. Plainly those words admit the possibility of a trust being held to be eligible for a LEI at some future date, yet as matters stand I see nothing in the Standard leading to a conclusion that trusts are currently eligible. If that is right then statements that trusts are legal entities that need to obtain an LEI in order to engage in reportable financial transactions after 3 January 2018 are wrongly treating the legislation and ISO 17442 as containing wording that is absent from both. Furthermore, if trusts are not eligible for LEIs then the Local Operating Units who issue LEI codes to them cannot be acting correctly, nor can investment firms be correct in advising their trustee clients to seek an LEI for their trust.
I find this a deeply unsatisfactory state of affairs.