The Control of Financial Services (Regulated Financial Services) Law, 5776 – 2016 ("the Law") was promulgated in August 2016. The Law establishes, a mandatory licensing requirement for financial service-providers – credit providers or providers of financial asset services (jointly: "Financial Services").
One of the main innovations in this Law is that Financial Services Providers will be subject, for the first time, to supervision by a new financial regulator, who is tasked with regulating the segment of currency service-providers and the non-institutional credit segment – segments that are currently not regulated adequately or at all. Within the scope of the Law's objectives, the Law states that the supervisory role of the new regulator should lead to the creation and development of an adequate alternative to the banking system with respect to the provision of Financial Services. The Supervisor of the Capital Market, Insurance and Savings at the Ministry of Finance was appointed to the role of Supervisor of Financial Service Providers.
The Law defines two types of licenses for engaging in the provision of a Financial Service: a Credit-Provider license (which will come into effect on June 1, 2017) and a Financial Asset Service-Provider license (which will come into effect on June 1, 2018).
In this update, we elaborate on the licensing requirements prescribed in the Law, the types of licenses to be issued by virtue thereof and the main criteria for receiving such licenses.
Who is obligated to obtain a license to operate?
The provisions of the Law obligate a person to obtain a license if he/she is engaging in the provision of credit as an occupation or in the provision of a financial asset service as an occupation. We note that the term "as an occupation" is not defined; consequently, anyone engaging in Financial Services, as this term is defined in the Law, even if not as its core business activity, needs to consider whether their activities obligate them to obtain a license pursuant to the Law.
The provision of credit as an occupation
The Law defines the term "provision of credit" broadly and by way of illustration: for example: the provision of credit, loans, a credit line, check discounting, factoring services or the provision of a guarantee for another party's undertaking. The Law authorizes the Minister of Finance, with the approval of the Knesset Finance Committee, to exclude particular types of credit from application of the Law.
The provision of financial asset services as an occupation
The term "financial asset service" is defined as an activity other than the provision of credit, in which one financial asset is exchanged for another, or in which a financial asset is managed and maintained. Unlike the term "provision of credit", the term "financial asset" is defined in the Law as a closed list of assets, including, inter alia, cash, checks, promissory notes, bills of exchange, bank checks or travelers' checks, cards loadable with particular sums, bearer bonds and virtual currency. The Minister of Finance, with the approval of the Knesset Finance Committee, has the authority to include additional financial assets in the list, and thus, to obligate people and companies engaging therein to obtain the appropriate license by virtue of the Law.
Types of licenses for the provision of Financial Services
The Law defines four types of licenses, by type of service and volume of activity:
(a) a basic license for the Provision of Credit; (b) an expanded license for the Provision of Credit; (c) a basic license for the provision of Financial Asset Services; and (d) an expanded license for the provision of Financial Asset Services.
Any engagement in the provision of a Financial Service requires a basic license, while large volumes of activity require obtaining an expanded license.
Those engaging in the Provision of Credit are required to obtain an expanded license if their outstanding credit is at least NIS 25 million. The term "outstanding credit" is defined in the Law as the amount of debt of the credit recipients to the credit-provider, plus 10%.
Those engaging in the provision of Financial Asset Services are required to obtain an expanded license, if their business turnover attributable to financial asset services exceeds NIS 30 million (i.e., separately from their other business activities, if any).
The Law exempts from the licensing requirement those entities that are supervised by virtue of other financial laws, such as the Banking Law, the Securities Law and the Control over Financial Services (Insurance) Law, and private individuals who are providing credit through internet platforms serving solely as brokers (P2P platforms). The Supervisor will maintain a public register of providers of Financial Services.
Criteria for obtaining a license
Basic license – the criteria for obtaining a basic license include examinations of reliability and financial strength, while differentiating between individual license applicants and corporate applicants.
The criteria for receiving a basic license are based, for the most part, on the criteria already applicable to those wishing to register as a currency services provider pursuant to the Prohibition of Money Laundering Law, 5760 – 2000. The purpose of these criteria is to ensure that whoever engages in the provision of Financial Services is an upstanding party, without any past or present involvement in serious criminal activity, particularly financial crimes and money laundering.
In this context, one of the innovations of the Law is the definition of the term "influential party" vis-à-vis an individual providing a Financial Service, as any party capable of directing the activities of the provider of the Financial Services. The Law presumes that anyone financing more than 50% of the volume of activity of a Financial-Service Provider is an "influential party." Accordingly, the reliability review for the purpose of obtaining a license will also be performed in relation to an influential party, the aim being to combat the money laundering activities being conducted through financial service-providers, inter alia, by using straw entities.
When at issue is a corporation, the reliability review will also be conducted in relation to its controlling shareholders and officers.
We further note that, pursuant to the provisions of the Law, a change in control over a Financial Services-Provider will require a permit from the Supervisor.
In order to demonstrate its financial strength, an applicant for a basic license to provide a Financial Asset Service is required to hold minimum equity of NIS 300,000, while an applicant for a basic license to Provide Credit is required to hold minimum equity of NIS 500,000.
Expanded license – an expanded license will be issued solely to corporations registered in Israel (unlike with the basic license, which may also be issued to individuals). Upon being granted an expanded license, additional obligations relating to corporate governance will be imposed on the Financial Services Provider, including the obligation to appoint a board of directors comprised of at least three directors, and to appoint an independent auditor, as if the corporation were a publicly traded company. A change in holdings in a Financial Services Provider, beyond the thresholds defined in the Law, will require a permit from the Supervisor.
In order to obtain an expanded license for the provision of a Financial Asset Service, the applicant has to demonstrate that it has a minimum equity of NIS 1,000,000. In order to obtain an expanded license for the Provision of Credit, the applicant has to demonstrate that it has minimum equity of between NIS 1,000,00 and NIS 4,000,000, depending upon the volume of credit being provided.
The Law also defines a list of considerations that the Supervisor must take into account when deciding whether or not to grant an expanded license, in addition to the suitability factors being considered in relation to the basic license, such as the applicant's business plan, its financial strength and sources of financing, as well as other public interest considerations. These considerations serve to ensure the reliability of the expanded license applicant and its ability to carry out its plans and operate as a significant player in the market that could, inter alia, increase the competition in the market and develop it for the consumer benefit.
In addition to the requirements specified above, the Supervisor has the authority to impose additional obligations on licensees, including insurance obligations.
Originally published on December 25, 2016
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.