Disruption of business models in the financial sector has been high on the agenda of banks and other financial institutions worldwide, mainly due to the rise of FinTech start-up companies in recent years. Israel, being the Start-Up Nation, is a world leader in innovative financial technology, with more than 400 Israeli FinTech start-ups and more than $500 million of capital raised in 2016; but surprisingly, the downpour of initiatives to disrupt the Israeli financial markets is coming from the Israeli Ministry of Finance rather than from the FinTech industry.
Moshe Kahlon, who was appointed as Minister of Finance in May 2015, is best known and appreciated for the significant reform in the Israeli mobile communications market, which took place back in 2011-2012 during his term as the Minister of Communications. Riding the wave of success, Kahlon is all about promoting competition by structural reforms, and the Israeli concentrated financial market was an obvious target. To be fair, we should mention that many of the reforms (including the legendary “cellular reform”) were initiated by Kahlon’s predecessors, but he was the one to push hard on passing those reforms through the parliamentary process (sometimes in a pretty aggressive manner), without folding in the face of pressure from incumbent institutions or conservative regulators.
First in line was the reform in non-bank financial services, implemented pursuant to the Supervision of Financial Services (Regulated Financial Services) Law, 2016 (the “RFS Law”), which has been amended three times already, since its publication in August 2016, with two further significant amendments envisaged in the near future. A new regulator was established – the Supervisor of Financial Services (the “SFS”), sitting at the Capital Market, Insurance and Savings Authority (which became an independent governmental authority, rather than a department at the Ministry of Finance, only a few months before the RFS Law became effective).
The SFS is tasked with regulating a myriad of financial services providers which are not regulated by other authorities, with the purpose of exchanging shadow-banking and grey-economy market players with well-regulated financial services providers who in turn will form a legitimate alternative to banks:
Providers of Credit: for the first time, non-bank lenders will be subject to a comprehensive regulatory framework; the definition of “Credit” is extremely broad and is not limited to consumer lending, which makes the licensing regime applicable also to corporate lending by funds, credit provided by foreign financial institutions as part of more sophisticated financial products (such as margin loans and certain transactions in derivatives), factoring, etc.
Providers of Services in Financial Assets: encompassing a broadened scope of money services businesses, including a first explicit reference to virtual currencies.
Providers of Deposit and Credit Services: this is the attempt of the Ministry of Finance to encourage the formation of credit unions, which will form an alternative to the commercial banks regulated by the Bank of Israel.
Credit Card Issuers (not including debit or prepaid cards), Services for Comparison of Financial Costs (those who will be able to utilise the read-only access API to clients’ bank accounts), soon to be joined by consumer P2P lending platforms and presumably also payment services providers.
The RFS Law sets out a comprehensive regulatory framework, including a licensing obligation and permit requirements for significant holdings in license-holders, prudential regulation, corporate governance regime, consumer-protection related provisions, reporting obligations and Anti-Money Laundering and Counter-Terrorism Financing related requirements. Furthermore, the SFS is granted broad powers of supervision and enforcement, as well as administrative authority, including the authority to issue administrative injunctions and fines.
The RFS Law came into force on June 1 2017, with the effective date for Providers of Services in Financial Assets deferred to June 1 2018.
The second law aiming at a significant change in the Israeli financial market is the Law for Increasing Competition and Reducing Concentration in the Israeli Banking Market (Legislation Amendments), 2017 which follows the recommendations of the Increasing Competition in Common Banking and Financial Services Committee, headed by Dror Strum, the former Israeli Anti-Trust Commissioner (the “Strum Law”).
The Strum Law imposes vast structural changes in the Israeli payment cards market, touching several additional pro-competition aspects of the Israeli concentrated banking sector. Measures to be implemented pursuant to the Strum Law include:
The two major reforms described above, together with further financial reforms currently being implemented (such as the structural change in the ownership of the Tel-Aviv Stock Exchange) create various opportunities to join the Israeli market, for investors and service-providers, Israeli and foreign alike. While most of the abovementioned licenses may be granted only to Israeli corporations, there is no statutory limitation of foreign control or shareholding in such financial institutions, and decisions made by the various regulators in recent years show that the Israeli government is welcoming foreign investment, as long as they can see a solid capital structure, high level of business integrity and a strong commitment to promoting competition in the Israeli market.
It will be fascinating to see how all of the above reforms are implemented in the coming years, and if all parts of the puzzle will fall into place indeed.