ISRAEL: Draft Regulations for the Supervision of Financial Services published for public comments

Draft Regulations for the Supervision of Financial Services (Regulated Financial Services) (Exemption from the licensing obligation) 2021, published for public comments

Dear clients and friends,

We would like to bring to your attention that the Ministry of Finance published a few days ago, draft Regulations for the Supervision of Financial Services (Regulated Financial Services) (Exemption from Licensing Obligation), 2021 (“Exemption Regulations” or “Regulations”) for public comments. These Regulations grant an exemption to certain entities from the requirement to hold a license to extend credit or a license to provide Financial Asset Services, pursuant to the Supervision of Financial Services Law (Regulated Financial Services) Law, 2016 (the “Law” or the “RFS Law”) and replace the Regulations for the Supervision of Financial Services (Regulated Financial Services) (Exemption from Licensing Obligation) (Temporary Order), 2018 (“Temporary Regulations”), which will expire on 31 December 2021.

There are a number of differences in the new draft Regulations from the Temporary Regulations. This includes, proposed widening of a number of the existing exemptions in the Temporary Regulations and new exemptions to certain providers of financial services and certain financial activities that until now were not exempted from the licensing obligations in the RFS Law.

In connection with the exemption from the licensing obligation for the extension of credit, the following key changes are being proposed under the new draft Regulations:

1. To consolidate the exemption for those who engage in securities trading for their own account or for the account of others (“broker-dealers”) (Regulation 2(4) of the Temporary Regulations) with the exemption for those who engage in derivatives or repurchase of securities transactions (Regulation 2(15) of the Temporary Regulations) and to align the conditions for the exemption for these activities: the entity eligible for the exemption will be required to be incorporated and supervised in an OECD member country; to be authorised to engage in the extension of credit as a ancillary activity to its trading and transactional activity as referred to above; the exemption will be granted for the provision of credit as an ancillary activity to its trading and transactional activity as referred to above;

2. To reduce the requirements in the Temporary Regulations for special purpose corporations (Regulation 2(5) and 2(7) of the Temporary Regulations) and to permit also merchant acquirers and the holders of licenses for the grant of deposit and credit services to hold means of control in such corporations as pledgee for the purposes of securing an obligation;

3. In connection with the exemption for a special purpose corporation for a particular venture (Regulation 2(7) of the Temporary Regulations), to reduce the requirements and to provide that a controlling shareholder (that is a holder of an expanded license), will hold at least 80% (and not 100%) of the means of control in the corporation. This will permit additional parties (that do not have a controlling interest) to hold means of control in such corporation. With this, it is proposed that the holdings of each holder of a means of control that is not the controlling shareholder will not exceed 10% of any type of means of control in the corporation; and

4. To cancel the exemption (Regulation 2(8) of the Temporary Regulations) that applies to corporations that provide credit to commercial corporations only, in transactions of at least NIS 3 million each, and to replace this with an exemption for corporations that provide credit to “sophisticated clients” – being individuals and corporations listed in items 11 and 12 of the first addition to the Securities Law (briefly, a corporation that has capital of NIS 50 million or an individual whose income or liquid assets meet the conditions of the Securities Law) (“Sophisticated Clients”), without any reference to the amount of credit provided.

In connection with the exemption from the licensing obligation for providers of Financial Asset Services, the following key changes are being proposed under the new draft Regulations:

1. To apply the exemption that is currently provided for the grant of credit to a holder of an insurance license in an OECD member country, also to the provision of Financial Asset Services, mutatis mutandis;

2. To apply the new consolidated exemption that is currently proposed to be provided to the grant of credit, for those who engage in broker-dealer services and derivatives services (as above), also the provision of Financial Asset Services, mutatis mutandis;

3. To grant a new exemption to the holders of a license for the operation of credit brokerage system in respect of Financial Asset Services that are provided as an ancillary service to the operation of the system; and

4. To grant a new exemption to corporations that provide Financial Asset Services to Sophisticated Clients (as described above).

Additionally, it is proposed that a temporary measure will be put in place for those entities that are currently exempt from the licensing obligations pursuant to the Temporary Regulations and for whom such exemption will expire with the expiry of the Temporary Regulations, so that such entities can continue to operate their business without a license so long as they submit an application to receive a license within 60 days of the commencement of the new draft Regulations and until the Commissioner of the Capital Market, Insurance and Savings has given his decision with respect to their application.

To read the draft Exemption Regulations (in Hebrew) in full >> press here.

To read the original wording of the Temporary Regulations (in Hebrew) >> press here.

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