The untapped potential of LEIs
In a recent address to the Financial Stability Board (FSB), Victoria Cleveland, the Executive Director of Payments at the Bank of England, highlighted the opportunities and benefits of introducing Legal Entity Identifiers (LEIs) in cross-border payments. Her speech underscored how LEIs can enhance transparency, safety, and efficiency in the global financial system by standardizing payment processes for banks, businesses, and customers.
LEIs hold significant potential to streamline international transactions, especially in combating the challenges of cross-border payments. Let’s explore the key takeaways.
Key advantages of LEIs in cross-border payments:
1. Boosting KYC accuracy
LEIs serve as a standardized Entity Identifier, improving the accuracy and efficiency of Know Your Customer (KYC) processes. With LEIs, financial institutions can quickly verify transaction entities, leading to faster onboarding and compliance while reducing manual errors.
2. Enhancing transaction transparency
By enabling easy tracking of cross-border payments, LEIs reduce the risk of financial crimes such as money laundering and terrorist financing. Transparency in transaction data ensures that regulators can trace the origin and destination of funds more effectively, adding an extra layer of security to global financial systems.
3. Lowering the risk of fraud and errors
The standardization of information through LEIs significantly reduces the risk of human error and the occurrence of inaccurate or outdated data. With access to verified data, financial institutions can lower the probability of fraudulent transactions and mitigate risks associated with unverified entities.
India’s LEI success: A global model
India’s successful implementation of LEIs for large transactions highlights the potential for global adoption. By integrating LEIs into cross-border payment systems, international payments’ safety, reliability, and trustworthiness can be further improved. India’s experience shows that large-scale adoption can drive significant progress in financial security and efficiency. This model could easily be adapted to other countries to promote a unified, global approach.
Building a global LEI database
While LEIs have shown their worth as a global, accurate company database, the current number of LEIs (2.7 million) represents only a fraction of their potential reach. A more robust and expansive global LEI database would benefit financial institutions, regulators, and businesses of all sizes. However, stronger cooperation between regulators, businesses, and countries will be required to promote widespread adoption.
The strategic benefits of a large-scale LEI database:
1. Real-time, verified data
A global database of real-time, verified information would enable institutions to reduce risks and enhance the security of global markets. Consistent, accurate data readily available allows for better decision-making and streamlined regulatory compliance.
2. Improved international regulatory cooperation
A standardized global system of LEIs would foster smoother cross-border payment processes, enabling regulators from different countries to work together more effectively. This cooperation is critical for addressing the complexities of international financial regulations and ensuring smoother enforcement of compliance standards.
3. Promoting financial inclusion
A Global LEI System would benefit smaller businesses, particularly in developing markets. LEIs would make it easier for smaller entities to access international financial networks, enhancing their ability to participate in global trade and secure funding from global financial institutions. This would be pivotal in leveling the playing field for businesses worldwide.
Conclusion: The future of LEIs is bright
Victoria Cleveland’s speech underscores the immense potential that LEIs have in making cross-border payments safer, more efficient, and inclusive. Successful examples of LEI adoption in countries like India show that expanding the use of LEIs globally could significantly reduce financial risks, boost transparency, and promote global cooperation. The time is ripe to explore the broader implementation of LEIs, paving the way for a more secure, transparent, and inclusive financial ecosystem.
The untapped potential of LEIs awaits further exploration and adoption.
Source: Bank of England. (2024). Victoria Cleveland: Financial Stability Board – Regulatory Oversight Committee. Available at: https://www.bankofengland.co.uk/speech/2024/july/victoria-cleland-speech-financial-stability-board-regulatory-oversight-committee?sf194100026=1
