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Introduction of BEI Beyond Industry’s Level of Maturity, Research Warns

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Regardless of an understanding of the benefits of introducing a standard business entity identifier (BEI), the industry is as yet unconvinced that the cost of its introduction is justifiable. That is the message that the EDM Council, consultancy firm Bearingpoint and Swift heard loud and clear during interviews conducted with 15 international financial institutions as part of their research project on the future of the BEI.

The report is the culmination of primary research by the three organisations, including formal multi-person interviews with representatives from the 15 institutions and a number of informal discussions with other practitioners. The team defined the processes and applications that related to entity identification in each institution and then set about finding out how these worked in practice.

According to the report, there is broad agreement in the industry about the value and importance of an industry standard BEI for external cross-referencing, the processing of corporate actions, automation of post-trade processes and for non-standard regulatory reporting requirements.

However, the quantum leap required to move this industry from individual tactics to industry-wide alignment seems to be beyond our current level of maturity,” the report states.

Institutions are happy to engage in “point solutions” and “workarounds” on a departmental or functional basis with their own internal identifiers, but they are not yet prepared to invest in an enterprise-wide implementation of BEI. This is largely due to a lack of a real incentive to move away from proprietary identifiers and concerns over cost. Moreover, the report states that this situation is unlikely to change without either executive leadership or regulatory compulsion.

Mike Atkin, managing director of the EDM Council, explains: “Virtually every financial institution understands the underlying necessity of identifying business entities. It’s the key to KYC, risk management, client servicing, operational efficiency, regulatory compliance, and reporting. As such, many institutions have developed their own internal identification schemes and creating linkages to track all the relationships that exist, and others have similar initiatives underway. And most at the practitioner and head of data management level certainly understand and see value in an industry standard identifier. This is not really a question of cognition, this is more a question of prioritisation and allocation of scarce resources.”

Proving testament to this last year the industry witnessed an international vote of no confidence concerning the introduction of the ISO 16372 international business entity identifier (IBEI) when eight countries voted against the standard.

Eight European countries have since adopted the IBEI, but it failed to gain the backing of countries such as the UK and the US during the second ballot among national markets at the end of the year. The countries that have adopted the standard so far currently comprise Switzerland, France, Luxembourg, Liechtenstein, Belgium, Germany, Austria and Spain.

As an alternative to the IBEI, there has also been some serious discussion about making the bank identifier code (BIC) a universal identifier. Swift has talked about extending the code to cover investment funds via collective investment vehicle identification codes (CIVICs). However, this plan appeared to hit a stumbling block at the start of 2008. Swift’s plans were put under review at the start of the year reportedly due to concerns around cost and the lack of a concrete business case and all has since gone quiet on the western front.

“I was encouraged with the recent discussions on BIC and CIVIC,” adds Atkin. “Some of our members were – and still are – really interested in seeing this come about.”

The report is part of the EDM Council’s attempts to raise the profile of the BEI and get the industry – both financial institutions and vendors – talking about what is required to move forward.

“With all the ‘fits and starts’ associated with IBEI, we agreed to do some primary research to see if we could define and quantify the business justification requirement,” says Atkin. “The result is that there is a clear business justification, just not a short-term one. And if the case for an industry standard identifier is to be based solely on internal, near-term, cost-based objectives it does not have sufficient consensus required for implementation, at least among the top tier financial institutions. Industry consensus is necessary to move this forward,” he contends.

Given the confusion surrounding the BIC and the IBEI, the EDM report’s statement that previous discussions surrounding the introduction of a BEI have been ”uncoordinated and disjointed” seems to be fairly accurate.

However, despite the setbacks, the EDM Council believes that the future of the BEI is not as bleak as it first would seem. Industry developments such as the introduction of regulatory requirements related to AML, increased electronic governmental filing requirements and a new global capital reserve mandate combined with increasingly complex business analytics in support of investment strategies have all highlighted the need for a BEI, the report argues. In an environment such as this, firms must be able to track relationships between entities, the securities they issue and the counterparties they do business with, or face increased risk exposure or regulatory fines.

Up until now, there has been no action plan for implementation of a BEI, says Atkin, most of the industry discussion has been conceptual and focused on the immediate requirements of entity identification for priority objectives. So without a go-forward activity from ISO and with no industry-agreed implementation plan, many financial institutions had no choice but to create their internal tactical solutions. The problem is that the tactical approaches are viable in the short run for the immediate business requirements of the financial institutions, he explains, so the urgency of demand for an industry standard has diminished somewhat.

“But when you extrapolate the problem looking forward and understand that most business processes depend on accurate and well maintained links and hierarchies, you begin to see the value for corporate actions processing, for regulatory reporting, for external cross referencing, for automation of post-trade processing and for internal enterprise-wide synergy,” he explains.

Don’t forget that regulatory mandates drive action, adds Atkin, who does not rule out regulatory compulsion as a means to getting BEI escalated as a priority. “The other way for this issue to move forward is for it to be pushed upstream to executive management. In the current environment, many financial institutions are not able to look much further beyond their immediate operational requirements. Those at the top of the house hold the strategic reins for their organisations and that presents the industry with an opportunity to make the strategic case,” he says.

Atkin is confident that, for now, the industry is doing the right things: “The first task is to understand the current reality. I think we’ve accomplished that with this research. Now the hard work of crafting a strategic business case takes place. Combine that with global regulatory interest in transparency and I believe this conversation is far from over.”

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