New draft regulations awarding non-Israeli banks and their subsidiaries exemptions from certain license requirement when extending credit and providing other financial services
The new Israeli Regulated Financial Services Law requires a person to obtain a license in order to engage in extending credit or providing financial asset services. The regulator recently published revised draft regulations, following public comments to the initial version, which award OECD-incorporated foreign banks and certain subsidiaries thereof exemptions from the license requirement.
The License Requirement under the Regulated Financial Services Law
1. The new Israeli Supervision of Financial Services (Regulated Financial Services Law) of 2016 (the “RFSL”) regulates various financial services, which were unregulated or partially regulated prior to its enactment. These services include the “Extension of Credit” (effective as of June 2017) and the provision of “Financial Asset Services” (due to become effective as of June 2018).
2. Both the Extension of Credit and the provision of Financial Asset Services are defined broadly in the RFSL. The Extension of Credit includes, amongst other things, extension of loans, other credit facilities, and guarantees. The provision of Financial Asset Services includes exchanging or conversion of Financial Assets, and managing or maintaining Financial Assets. The term “Financial Assets” includes, amongst other things, cash, checks, deposits and virtual currencies.[1]
3. The RFSL provides that certain entities – for example, Israeli and non–Israeli banks which are licensed by the Bank of Israel, Israeli pension funds, and insurers – are exempt from the license requirement. Additional exemptions from the license requirement may be determined in the RFSL regulations.
4. Following the enactment of the RFSL, a concern was raised that the RFSL prevents non-Israeli banks (which are not licensed by the Bank of Israel) from continuing to extend credit in Israel.
The New Draft Regulations (Second Version) – Exemption from License
5. Recently, the Capital Market, Insurance and Savings Authority (the “CMISA”), which is the authorized regulator of the RFSL, published the revised draft Regulations of Supervision of Financial Services (Regulated Financial Services) (Exemption from License Requirement) (Temporary Regulations) (the “Draft Regulations”). The Draft Regulations list additional exemptions from the license requirement.
6. We note that the Draft Regulations are not yet in force.
7. Under the Draft Regulations, the following type of entities, amongst others, will be exempt from the license requirement in connection with engaging in the Extension of Credit and the provision of Financial Asset Services in Israel:
• An entity incorporated in an OECD member country, which holds a banking license obtained from a supervisory authority of an OECD member country (“OECD Bank”).
• An entity controlled by an OECD Bank, which holds a license to extend credit obtained from a supervisory authority of an OECD member country.[2]
8. The explanatory notes of the Draft Regulations provide that these exemptions are aimed toward non-Israeli banking groups, including foreign banks, which are not licensed in Israel and are active in Israel through a representative office.[3]
9. The explanatory notes provide further, that during the period pending the approval of the regulations the CMISA will not take enforcement measures against entities set out in the Draft Regulations.
10. In order to allow the CMISA to re-examine the proposed exemptions, the Draft Regulations provide that the regulations shall apply temporarily, and shall expire on December 2019.
11. In addition, the current regulatory regime for the cross-border offering of credit can be deduced from a draft legal opinion published by the CMISA in May 2017 (the “Draft Opinion”) with respect to the territorial application of the RFSL. The Draft Opinion provides that the RFSL does not apply to credit activity conducted outside of Israel, even if such activity involves Israeli citizens, in keeping with principles of territorial application of Israeli law. However, the Draft Opinion concludes that in the event that there is a nexus between the credit provider and Israel, a close examination of such nexus will be required in order to establish whether the RFSL applies to any Extension of Credit. According to the Draft Opinion, the Extension of Credit is not subject to the RFSL if all the following conditions are met:
• The finance documents (credit and engagement documents) between the lender and the borrower (excluding security interests) are drafted in a language other than Hebrew, and such documents are signed outside of Israel and governed by non-Israeli law.
• The borrower’s accounts with respect to which the credit is extended are maintained in financial institutions outside of Israel.
• The lender does not contact new clients in Israel.
• The lender does not meet its clients in Israel.[4]
12. Although the Draft Opinion is not yet final, we believe it reflects the position of the CMISA with respect to the cross-border offering of credit from outside Israel. While the conditions set out in the Draft Opinion are rather restrictive, they should provide safe harbor for an offering of credit on a cross-border basis.
[1] Note that the “Financial Asset Services” do not include investment advice or discretionary portfolio management services. Such activities are regulated in Israel under a different law, the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management law, 5755-1995 (the “Investment Advice Law”) and a different regulator, the Israel Securities Authority.
[2] The Draft Regulations include additional exemption (relevant to the Extension of Credit license requirement only) applicable to Extension of Credit of more than NIS 10 million (approximately USD 2.9 million) which may be relevant to foreign institutions which are not OECD Banks or their subsidiaries.
[3] We note that using its authority to approve the use of the word “bank” in Israel, the Bank of Israel has adopted a policy of allowing foreign banks to maintain representative offices in Israel which may engage in certain limited activity. In addition, the Bank of Israel has issued a general permit for the use of the word “bank” by banks incorporated and licensed as a banking institution in an OECD member country. The general permit allows very limited activity in Israel, subject to certain terms and conditions set out in the general permit. A foreign bank which intends to engage in activities beyond those allowed under the general permit is required to apply for a specific permit from the Bank of Israel.
[4] The third condition is not entirely clear, in particular with respect to remote communications from outside Israel since the RFSL does not explicitly prohibit the offering or solicitation of the Extension of Credit (as opposed to, for example, the Investment Advice Law, which in general prohibits offering investment advice services to be provided by a non-licensed person). The application of the third and forth conditions is not clear also with respect to foreign banks which act in accordance with a permit from the Bank of Israel, allowing their representatives in Israel to meet with clients or potential clients and promote their services in Israel.
For additional information please contact your GKH attorney or one of the following Adv. Ofer Hanoh, partner and head of the Banking and Insurance department
(ofer@gkh-law.com) or Adv. Yigal Binyamini, partner (yigalb@gkh-law.com)
