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Article:

Investment Dealing: More Regulations for Trustees, Corporates and Charities

25 October 2017

The EU’s Second Markets in Financial Instruments Directive (MiFID II) represents a major overhaul of the existing legislation governing the regulatory framework for investment services. Do you need to register before 3 January 2018?
 

Background

The stated aims of MiFID II are to improve the functioning of financial markets, mitigate the potential for market abuse and improve transparency in terms of client costs and charges.

The Financial Conduct Authority has confirmed that this regulation, enacted before the 2016 EU Referendum, will continue to apply to the UK even after it leaves the EU as the financial services sector is so closely interlinked with the wider financial services community in Europe.
 

Impact on trust, corporate and charity clients

Trust, corporate and charity clients of investment managers will need to register for and obtain a Legal Entity Identifier (LEI) code by 3 January 2018 in order to deal or otherwise transact in investment holdings with any financial services provider across the EU after this date.

Clients of investment managers will, in future, be provided with more information with regard to the costs and charges incurred in respect of their investment portfolios and the effect on returns.

As a result of the regulatory changes, investment managers will, in due course, need to reissue investment management agreements, terms and conditions and other documents detailing their fees and charging structure to their clients.
 

What is an LEI?

An LEI is a unique reference code, particular to a single trust, company or charity, that will enable the tracking of investment transactions by all associated parties and appropriate regulatory bodies.

Without a valid LEI code, such entities will not be permitted to deal or transact in investments and, therefore, their investment portfolios will be effectively frozen on 3 January 2018 until such time that they obtain an LEI code.

Following registration and obtaining an LEI an entity will be required to annually renew their registration by reconfirming or updating the original information provided to obtain an LEI.
 

How to obtain an LEI

In most instances, an entity’s investment manager will already have systems in place to deal with the initial registration of their clients and obtaining a LEI code for them and should have made, or will shortly make, direct contact with the entity in respect of this matter. It is anticipated that investment managers will make a charge for dealing with the initial LEI registration and for the annual renewal.

If you have not heard from your investment manager by the middle of November 2017, we would recommend that you make contact with them to ensure that they are, or will be, dealing with this matter.

If an entity’s investment manager is unable to deal with registration on behalf of its clients, the entity can itself directly register using a third party provider such as the London Stock Exchange, by 3 January 2018, and then provide their investment manager with their unique LEI code. The LSE’s current fee for initial registration and obtaining a LEI code is £115 plus VAT per entity with an annual renewal fee of £70 plus VAT per entity.

To obtain an LEI code, the following information has to be submitted to the central registry:

  1. The exact legal name of the entity
  2. The correspondence or operational address of the entity
  3. The country where the entity is located
  4. The legal form of the entity (eg trust, charity, etc).
     

LEIs for third parties

External third parties (eg accountants or lawyers) who have authority to deal in investments on behalf of an entity will also be required to separately obtain their own unique LEI code. Without a valid LEI code a financial services provider will not be able to accept investment instructions from such a third party on behalf of the entity (even if the entity itself has a valid LEI code).
 

Consequences of not obtaining an LEI

An entity that does not hold a valid LEI code by 3 January 2018 will not be able to deal or transact in investments with financial services providers in the UK and across the EU until one is obtained. This could potentially cause significant financial difficulties for the entity in raising funds to meet 31 January 2018 tax liabilities or in meeting existing commitments to beneficiaries or stakeholders.
 

Regulations for individual investors

The MiFID II regulations will also apply to individuals who deal or otherwise transact in investment holdings with any financial services provider across the EU – although the process for an individual obtaining a Natural Person Identifier (NPI) code is much less onerous.

An NPI code is created on the basis of nationality and in the case of a UK national is derived from the individual’s National Insurance number, full name and date of birth (although for other nationalities other information such as a passport number and country of residence will be required).

As this information will already have been obtained by financial service providers when undertaking individual client take on procedures, in most cases, NPI codes will already have been obtained by investment managers for their individual clients.

For help and advice on reporting for trusts, or for more details on our services for trustees, please contact Andrew Jones or Paul Ayres.