What is the Validation Agent Framework and How Will it Benefit Financial Institutions?

Legal Entity Identifiers have been around for some time now and are already doing a great job of increasing transparency on the financial market. But not long ago, McKinsey reported that LEIs had a much bigger potential to save the banking industry $2-4 billion annually in onboarding costs alone and since then, the GLEIF has been working with banks to help them put LEIs into the heart of the onboarding process.

The issue up until now is that legal entities normally acquire an LEI after they have already onboarded with a Financial Institution (FI). A legal entity needed to open a separate dialogue with an Local Operating Unit or Registration Agent like ManagedLEI to get their LEI number and they also needed to obtain and verify their organisations legal structure to finally obtain their LEI.

So, the GLEIF needed to come up with a way to help make it more easy for FIs and businesses to obtain LEIs earlier in the processes without alienating them during onboarding – a very sensitive time and early period in the customer lifecycle.

Enter the Validation Agent Framework. Many of the procedures that FIs use to onboard new clients are similar to those used when obtaining an LEI. These processes require time and effort to complete, requiring legal entities to find documents, LEI issuers to review them, verify them and deliver the data to the Global LEI Index before issuing the LEI. Depending on the size and nature of the business in question, this process may require several exchanges and an inevitable incurrence of time between each round.

An FI has no influence over this process but a negative experience of it can harm the FI. It makes a lot of sense to bring this LEI validation process into the FI onboarding process and make it easier for the end customer and in turn, the FI.

As put by the GLEIF:

“The Validation Agent Framework is a new operational model in the Global LEI System, which allows financial institutions to obtain and maintain Legal Entity Identifiers (LEIs) for their clients in cooperation with accredited LEI Issuer Organisations by leveraging their business as usual client identification procedures in Know Your Customer (KYC) and client onboarding processes.”

How Does the Validation Agent Framework Work?

Financial institutions that act as Validation Agents can liaise with Registration Agents on their client’s behalf to validate that these key checks have taken place without the client having to lift a finger.

The financial institution in the validation role benefits from:

  • A streamlined LEI issuance process for their clients, enhancing the customer experience in onboarding.
  • Digitisation of onboarding processes which standardise legal entity data, removing silos and legacy systems.
  • Additional opportunities to add client value and achieve market differentiation.
  • Enhanced internal data management processes which reduce costs.
  • A uniquely powerful foundation upon which to innovate and develop new digital services and revenue opportunities.

FIs are already being pushed to adapt to a highly digitised environment because of the recent pandemic. This digitisation will be a trend in years to come and any processes that can be adapted to work digitally will save an FI time and resource and shore them up for the future. Becoming a Validation Agent is one more step towards that goal.

What Will Validation Agents Do?

In the onboarding process, FIs will need to start checking if their new clients already have an LEI. If not, the FI will need to validate the following information in accordance with the ISO 17442 standard:

  1. Legal name.
  2. Authorised signatory.
  3. Business registry information.
  4. Headquarters address.
  5. Legal address.
  6. Branch address.
  7. Direct and ultimate parents.

This information can be shared with one or more partnered LEI issuers to obtain the LEI on behalf of their client.

As LEIs are still largely used by capital markets in order to comply with regulatory requirements such as those in MiFID II and SFTR, it is expected that the first FIs to sign up as Validation Agents will be those looking to streamline compliance for their clients. The GLEIF said:

“Today, legal entities operating in derivatives and many capital markets are required by law to obtain an LEI. GLEIF therefore anticipates that, in a bid to add client value, FIs seeking to streamline regulatory compliance processes for their clients will be among the first to apply for Validation Agent status.”

But it is expected and hoped that this framework will have a wider appeal because it can be used by companies like Certificate Authorities who issue Extended Validation and eIDAS Certificates and may want to provide a streamlined way for LEIs to be included in these certificates.

GLEIF Confirms J.P. Morgan as First Validation Agent in the Global LEI System

Read the full press release here.

J.P. Morgan’s Managing Director, Reference Data Strategy, George Brandman, said:

“Working as a Validation Agent will allow us to improve our client onboarding experience as well as create valuable industry LEI reference data. If a majority of financial institutions implemented this service, it would greatly multiply the number of LEIs in production to the benefit of all.”

Stephan Wolf, CEO, GLEIF, said:

“By becoming Validation Agents, financial institutions realise a range of operational and strategic benefits, both now and in the longer-term. Not only can J.P. Morgan streamline its client onboarding and lifecycle management processes, thereby improving its customer experience, it can also use the LEIs in innovative service offerings.”

Becoming a Validation Agent

For FIs gearing up to become a validation agents, one important decision is which Registration Agent to partner with. LEI Issuers vary greatly and it’s important to choose a partner that will be committed to a streamlined and fast issuance process.

ManagedLEI is unlike most Registration Agents, because we run on a an API based system. Once set-up, we can share LEI data through an API and automate the entire process!

To learn more about ManagedLEI and how we’re already set up and ready to receive your LEI verification data, contact us today.

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