Last week, an update was made to the regulations that permit, in certain circumstances, provision of financial services in Israel in the form of provision of credit or financial asset services without a license. The Supervision of Financial Services (Regulated Financial Services) Law, 5776-2016, has very broadly and sweepingly prohibited provision of such financial activities in Israel without a license issued by the Capital Market Authority. Hence the great importance to the updated regulations, which nevertheless permit various services without a license – from activity of foreign banks and insurance companies in the Israeli market, through large loan transactions between business corporations, to foreign currency exchange transactions for hotel guests.

The current update also added a new type of exemption to the regulations – payment services provided by foreign companies. This exemption will apply to foreign companies that hold a license to carry out payment services in the European Union, the United Kingdom or the United States. A temporary provision grants the exemption, allowing such companies to provide payment services, including provision of credit, also in Israel and without a separate Israeli license.

Regulations exempting regulated financial services from licenses

Last week, the Finance Committee approved renewal for another period as well as material updates to the regulations that exempt, in certain circumstances, a financial services provider from the obligation to hold an appropriate license under the aforesaid Supervision of Financial Services (Regulated Financial Services) Law (the full name of the regulations is: The Supervision of Financial Services (Regulated Financial Services) (Exemption from Licensing Obligation) Regulations, 5782-2022.

Generally, the Supervision Law establishes a broad obligation to hold a license as a condition for engaging in various financial occupations in Israel, including providing credit or servicing a financial asset. Both “credit provision” and “financial asset service” are concepts that are very broadly defined in the law, entailing a comprehensive license obligation. This obligation also includes cases in which the credit activity or service in financial assets is ancillary to a completely different main activity of companies that do not perceive themselves as “financial” entities.

The purpose of the exemption regulations is to waive the license obligation in instances where licensing is not necessary for fulfilling the purposes of the law. The Ministry of Finance divides these instances, which are included in the regulations, into four groups:

1. Foreign corporations from OECD countries that hold various licenses for financial activity in their domiciles (such as banks, insurers, etc.).
2. Entities which provide credit in relatively well developed markets and within the activity of sophisticated borrowers and lenders – for example, a corporation that provides credit “only to business corporations” with the amount of credit provided in a single transaction being no less than ILS 3 million; or when the entity’s business is providing credit to corporations through a venture capital fund.
3. Cooperative associations (such as farming communities known as moshavim or cooperative villages) – in the relationship between the association and its members and corporations under their control.
4. Certain instances in which the activity of the financial service is secondary and limited compared to the main business – such as a trust account managed by an attorney or an accountant for his clients or a hotel who carries out limited foreign currency exchange activity for its guests.

Added exemption for foreign authorized payment service providers and other changes

The new regulations include updates of several exemptions that were already included in the regulations. Among other changes, the exemption for holders of a license for transactions of derivatives or resale of securities was, on the one hand, reduced to license holders in OECD countries, but was extended also to lenders of securities, on the other hand. The exemption to insurers licensed in OECD countries was expanded to also include service in financial assets and not just providing credit.

The regulations also add a new temporary exemption, in effect until the end of 2023, for corporations from the United States, the European Union and the United Kingdom that hold a license to provide payment services in their country. We will briefly explain this exemption below.

Legislation for regulating licenses of payment services in Israel has been delayed for years. When the Supervision of Financial Services Law was passed in 2016, it was said that the law was the first step, to be followed by legislation for regulating supervision of payment services. Indeed, in 2018 a bill memorandum was issued for extending the supervision law to include payment services as well, but the memorandum was not followed through. Now, in 2022, it was replaced by the memorandum of a bill to regulate the business of payment services, with the supervision entrusted with the Israel Securities Authority (and not the Capital Market Authority). Due to the dissolution of the current Knesset, this memorandum too is not being followed through.

As to the foreign corporations’ payment services in Israel, the memorandum of the bill for the regulation of payment services indeed noted that they would require an Israeli license for their activity here, but the Supervisor (ISA, as stated) may ease specific requirements from a foreign corporation that holds a payment services license in the European Union. It should be noted that according to the memorandum, a payment services license holder is permitted to provide credit in a payment transaction without the need for a separate license from the Capital Market Authority for the credit provision activity.

Now, in a letter attached to the Finance Minister’ request to the Finance Committee to approve the exemption regulations is an explanation that the minister deemed it appropriate to exempt foreign corporations from the license obligation for provision of payment services in Israel temporarily, until the end of 2023, “until then, we believe, a law for regulating the business of payment services provision will be enacted.” It is noted that the temporary exemption is broad and “flexible” compared to that proposed in the bill memorandum. The exemption is broader in the sense that it does not only refer to license holders in the EU but also to those in the UK and the US; and it is more “flexible” in the sense that no Israeli supervisor will be involved, and the foreign corporation, which holds a license in its place of incorporation, may provide services in Israel provided that it is subject in its home country to provisions of prohibition of money laundering which include its Israeli activity (without a license, the Israeli order prohibiting money laundering will not apply at all). The new exemption will allow such a corporation to provide payment services in Israel, including servicing financial assets, and also provide credit within these activities. It is noted that the exemption expressly excludes payment services in crypto currencies (“virtual”, as they are called in the Law).

We note that this is not the only action by financial regulators to “tone down” the license obligations while waiting for the protracted legislation for regulating the business of payment services. One of the types of services that was supposed to be regulated under that law was the payment initiation service. Recently, the Bank of Israel instructed the banks to develop the support required for payment initiation services, and the Israel Securities Authority, as the supervisor in charge of the Financial Information Services Law, 5782-2021, issued a provision extending the actions permitted by license holders under this law to include a payment initiation service as well – notwithstanding that currently, no direct legislative regulation of such a service is in place.

It is recommended that companies that engage in provision of credit or service in financial assets – even as an ancillary part of a completely different main activity – examine whether they require a license in view of the updated exemption regulations, and in general. Specifically, we recommend that foreign companies that are engaged in payment services and operate or wish to operate in Israel review their current and potential business in Israel in view of the law and the current exemption regulations.