During July, the Knesset passed the Control of Financial Services (Regulated Financial Services) Law. The Law is a harbinger of efforts to regulate the provision of financial services that had not been supervised up until now, apart from certain aspects pertaining to money laundering and the Regulation of Non-bank Loans Law. The Law also unifies the handling of all matters relating to the regulation of these services under one roof.
The next stages, as approved by the government, are regulation of credit and deposit services in order to enable entities to operate and offer alternatives to the banking system, and the promotion of legislation to regulate the peer-to-peer (P2P) lending platforms, all under the regulatory authority established by virtue of the Law.
The Law aims at all those unsupervised entities, already operating outside the banking system in Israel, as financial institutions for all intents and purposes, and are engaging in providing credit in its broadest sense, as well as other financial services that fall within the Law's definition of "financial services".
The absence of regulation has undesirable outcomes, the most evident being that, alongside legitimate businesses providing financial services, criminal elements have entered the market and created extensive infrastructure for tax evasion and money laundering. The involvement of criminal organizations in the provision of financial services has repercussions not only on law enforcement, but also on consumers of such services, who not infrequently seek financial service or credit from illegal sources. The provision of financial services by criminal elements taints the entire sector and could impair the development of a legitimate non-bank credit market.
Against this backdrop, the Law imposes licensing requirements on entities engaging in financial services – providing credit and offering financial asset service and subjects them to supervision by a new supervisor, who will be the Commissioner of the Capital Market, Insurance and Savings at the Ministry of Finance, unless the Minister of Finance appoints a separate independent commissioner.
The Law’s definition of the term “credit“ encompasses not only the provision of a loan, but also check discounting, factoring (financing of a business against the purchase of its accounts receivables), guaranteeing of another party's undertaking and more. Note that the provision of credit during a purchase of an asset or a service falls within the definition of "provision of credit" for the purposes of the Law, unless at issue is credit of less than NIS 30,000 to a single customer. In other words, merchants who offer clients to purchase assets in installments, when at issue are transactions at volumes exceeding NIS 30,000, will no longer be able to do so without obtaining a suitable license pursuant to the Law.
A financial asset service includes, inter alia, those services that up until now had been regulated as currency services under the Prohibition of Money Laundering Law.
Since the purpose of the Law is to fill an existing regulatory gap, it exempts entities that are already regulated by other financial laws, such as the Banking Law or the Securities Law, from the licensing requirements by virtue of the Law.
The Law also exempts private individuals who are providing credit through online platforms operating solely as brokers (P2P platforms) from the licensing requirements imposed thereby.
The Law also includes provisions regulating the control and the holding of means of control over financial service-providers and sets the requirements for organs and officers thereof, modeling the “fit and proper” examinations being conducted at other traditional financial institutions.
The Law further prescribes a list of consumer protection provisions aimed at regulating the mode of operation of financial service-providers, including the prohibition of misleading and deceptive conduct, disclosure obligations and provisions regarding early repayments, which are intended to supplement the provisions of the Regulation of Non–bank Loans Law. In this context, note that the Law does not intervene in the maximum interest rates prescribed within the scope of the Regulation of Non-bank Loans Law, and does not abolish the distinction between banking corporations and other lenders in relation to the maximum interest rates that may be charged, which is considered as discriminating against non-bank entities and as impairing the development of competition in the non-bank credit market.
The law imposes administrative and criminal sanctions on entities and managers that shirk the licensing obligation and amends the Banking (Customer Service) Law, to allow banks to refuse to provide a banking service to an entity that the bank believes is unlawfully operating without a license under the Law.
The Law, as it relates to the credit service-providers, will come into effect in June 2017, while the section relating to financial asset service-providers will come into effect in June 2018. Up until June 2018, currency service-providers (as defined in the Prohibition of Money Laundering Law) shall continue to be supervised by the Israel Tax Authority, apart from discounting activities, which will be subject to the Commissioner's supervision as of June 2017, since discounting is considered a credit service.
We recommend to all entities whose operations include the provision of a financial service or credit that they should examine the licensing obligation under the new law as soon as possible, since the transitional period prescribed in the law is rather short, while, according to the Law, the licensing procedure can take about four months to complete.
Originally published August 24, 2016
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