Dear Clients and Friends,
We would like to update you that the Finance Committee of the Knesset has approved the draft of the Supervision of Financial Services Regulations (Regulated Financial Services) (Exemption from Licensing), 2022 (“Regulations”), replacing the Regulations for the Supervision of Financial Services (Regulated Financial Services) (Exemption from Licensing Obligation) (Temporary Order), 2018 (“Temporary Regulations”).
1. Background
1.1. In August 2016, the Supervision of Financial Services Law (Regulated Financial Services), 2016 (“Law”) has been published. Among other things, the Law aims to regulate and supervise entities that are neither banking corporations nor institutional entities, that engage in extension of credit or financial services.
1.2. In September 2018, the Temporary Regulations that aimed to exempt several entities from the licensing requirement (“Exemption”) for engaging in extension of credit or financial services have been published. The Temporary Regulations has expired on 31 December 2021. The current Regulations however are permanent and as mentioned above, replace the Temporary Regulations.
1.3. Below are the main changes and updates that were made by the Regulations.
2. Main Updates
2.1. In respect of the Existing Exemption for Providing Extension of Credit
2.1.1. The two following exemptions have been consolidated: The exemption for those who engage in derivatives or repurchase of securities transactions with the exemption that was granted to corporations that incorporated in a country which is a member of the OECD (“OECD Member Country”) whose main business is provision of securities trading services, for the accounts of others and for its own account. [1]
2.1.2. The Exemption for a corporation that is being controlled by a holder of an expanded license for providing extension of credit has been extended, so the corporation will be exempt from the licensing requirement even if part of its means of control is being held as pledgee by banking corporations and auxiliary corporations as defined by Banking (Licensing) Law, 1981 for the purposes of securing an obligation; acquires (as defined by the Regulations) and holders of licenses for providing extension of credit and deposit services. [2]
2.1.3. The requirements for the Exemption for special purpose corporations has been reduced in a way that a controlling shareholder that is a holder of an expanded license, will hold at least 80% of the means of control in the corporation as opposed to the 100% set previously in the Temporary Regulations, where other means of control that are owned by the controlling shareholders being held by various supervised entities as pledgee for the purposes of securing an obligation such as a holder of an expanded license for providing extension of credit; an insurer; a managing company; banking corporations and auxiliary corporations, should also be taken into account. The Regulations add two more supervised entities to the above list such as acquirers and holders of licenses for providing extension of credit and deposit services.
However, please note that the Regulations state that the holdings of each supervised 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.
2.1.4. The Regulations set a higher sum of credit transactions (at least 5 million NIS, instead of 3 million NIS) in order to receive the Exemption for corporates that provide extension of credit to commercial corporations only (as long as these corporations are not acquisition group).
2.1.5. The Temporary exemption for foreign corporations – as previously mentioned, the Regulations have set a few Exemptions for foreign corporations that were incorporated in an OECD Member Country and extend these Exemptions. In addition to those Exemptions, the Regulations add a new temporary exemption (valid until January 1st, 2024) from the licensing requirement for providing extension of credit to foreign corporations that provide Payment Services, and meet the following accumulative conditions:
2.1.5.1. The corporation has been incorporated in a Recognized Country, i.e., USA, one of the EU countries, or England;
2.1.5.2. The corporation holds a license from a supervision authority in a Recognized Country to provide Payment Services but in accordance with the definitions of “Payment Services” under the Israeli Payment Services Law, 5779 – 2019, i.e., any corporation that engages in: (a) acquiring of a Payment Transaction; (b) managing a Payment Account for the benefit of a Beneficiary or a Payer; (c) issuance of Means of Payment.
2.1.5.3. The corporation is regulated in a Recognized Country for the purpose of the Payment Services it provides;
2.1.5.4. The corporation is subject to AML provisions by the Recognized Country it was incorporated in, including regarding its activities in Israel;
2.1.5.5. The corporation is permitted and supervised, as part of its license, to engage in extension of credit ancillary to a Payment Service and the Israeli Fair Credit Law, 1993 will apply to such extension credit;
2.1.5.6. The corporation has an address for service of process in Israel.
However, it is important to note that the Regulations emphasize that such temporary exemption will apply only to activity that is considered as extension of credit ancillary to a Payment Service, as is defined under the laws of the Recognized Country that granted the corporation its license.
2.2. In respect of the Existing Exemption for Providing Service in Financial Asset
2.2.1. Similar to the Exemption for Providing Extension of Credit, the Temporary Regulations set several Exemptions for corporates that have been incorporated in an OECD Member Country (as seen in clause 2.1.1 above), and provide Service in Financial Asset and: (i) holds a foreign bank license; or (ii) controlled by a corporation that holds a foreign banking license, or controlled by the holder of the corporation that holds a foreign banking license The Regulations extend this Exemptions, and determine that all Exemptions that apply to foreign corporations who engage in providing extension of credit, will apply now on corporations who engage in providing Services in Financial Asset. [3]
2.2.2. Temporary exemption for foreign corporations. Similar to the temporary exemption that is granted by the Regulations to foreign corporations from the licensing requirements for providing extension of credit, the Regulations offer the same temporary exemption (until January 1st, 2024) in respect of those who provide Service in Financial Asset, and that fulfill the conditions stated above in clauses 2.1.5.1-2.1.5.4.
Please note that the Regulations determine a certain limitation on the activity of the foreign corporations in Israel in this regard, and the temporary exemption will be granted only in respect of the Payment Service that is permitted by the foreign Payment Services license the foreign corporation holds, and only in respect of an activity which does not involve virtual currency.
2.3. Initiation
The Regulations apply retroactively (starting as of January 1st, 2022, which is the expiration date of the Temporary Regulations). Therefore, with the publication of these Regulations in the official gazette they would be enter into force immediately.
2.4. Transitory Provision
2.4.1. Whoever is obligated to hold a license according to Law, and that was exempt pursuant to the Temporary Regulations on the eve of the commencement Regulations, is allowed to continue to operate even if they do not possess the aforementioned license, as long as they had applied for a license within 60 days of the day the Regulations have been published in the official gazette (as of the date of this memorandum,, the Regulations have not yet been published), have received a confirmation from The Capital Market, Insurance and Savings Commissioner on applying for such request, and there was yet to be a decision on their request.
2.4.2. A dealer that was exempt from the licensing requirement for providing extension of credit according to the Temporary Regulations, is nor required to receive a license for credit deals done at the before the Regulations were published, and that is until the due date of repaying those deals, or seven years from the date the Regulations have been published.
[1] The Temporary Regulations granted an Exemptions for corporations incorporated in an OECD Member Country, who: (i) holds a foreign banking license; or (ii) controlled by a corporation that holds a foreign banking license, or controlled by the holder of the corporation that holds a foreign banking license; or (iii) holds a license to engage in providing an insurance; or (iv) engages in providing trading services in securities transactions for their account or for the account of others. Now, the Exemption has been extended and applies to corporations (that have been incorporated in an OECD Member Country and are supervised by it), who engage in derivatives or repurchase of securities transactions or lending of securities transactions.
[2] While the Temporary Regulations set limited number of entities that can hold the controlling measures (without requiring a permission) as pledgee for said charge, e.g., a holder of an expanded license for providing extension of credit; an insurer; a managing company; a trustee for a liability certificate.
[3] Please refer to Section 2.1.1. above.
For more details about this memorandum, you may contact us at 03-6074510, or email Mr. Ofer Hanoh, Adv., the head of Banking & Finance department: ofer@gkh-law.com, or Mrs. Shani Galant-Frankfurt, Adv., a lawyer at the Banking & Finance department: shaniga@gkh-law.com.
