Supervision over financial services (organized financial services) law – 2016

The new legislation on money changers and financial service providers is expected to be enacted in the coming weeks. The law intends to institutionalize the activities of financial service providers in Israel and to specify their area of operation. The new law creates much confusion and lack of clarity since there are many conflicts in the definitions it states, and requires substantial preparation in a very short time in order to comply with the regulatory requirements and to receive the relevant permit.

Definitions

As part of the definitions stated in the new legislation, a Financial Asset is defined as one of the following:

2. Check, promissory note or bill of exchange as defined in The Bills Law.
3. Bank Check or Travelers’ check.
4. Monetary deposit.
5. Bearer security within the meaning thereof in the Corporate Law.
6. Certificate or other object intended for the purchase of assets or services in respect of which a monetary value may be accumulated up to the amount determined by the Minister.
7. Virtual Currency.
8. Other financial assets determined by the Minister with the approval of the Finance Committee of the Knesset.

In addition, the new law provides a definition for granting credit:

1. Discounting of checks, promissory notes and exchange notes as defined in the Banknotes Ordinance;
2. The granting of credit against the assignment of the right of the recipient of the credit to receive financial assets since, including discounting services as defined in section 7A of the Banking Law (Customer Service) – 1981 (see explanation below).
3. The granting of credit by way of financing the purchase or lease of an asset or service, except for the granting of such credit by the seller of the property or a service provider through an occupation or rent that is one of the following:
   • Granting credit to an individual customer for an amount lower than NIS 30,000, or another amount determined by the Minister with the approval of the Finance Committee of the Knesset;
   • The granting of credit by a person who sells an asset or provides a service through an occupation, even for non-profit, whose business is in the sale of assets or the provision of non-financial services to a person who is not a consumer, as defined in the Consumer Protection Law – 1981;
   • The granting of credit that meets the conditions that have been determined by the Minister, including with respect to the credit period or the interest rate, with the approval of the Finance Committee of the Knesset;
4. Providing a guarantee for the financial commitment of another;
5. The granting of credit against which an asset is mortgaged without the right of recourse to the recipient of the credit due to non-fulfillment of the debt;

From the stated definitions, it is not clear whether or not an exchange of a check that takes a number of days is defined as granting credit. The following are examples of services provided by currency service providers and are interpreted by the Ministry of Finance as discounting checks:

• Shekel check exchange for foreign currency.
• Providing clearing solutions to foreign currency markets through clearing companies abroad.

According to the position of the Ministry of Finance, any receipt of a check that is not immediately exchanged is considered to be granting of credit. This position will cause almost all currency service providers today to be defined by the new legislation as credit providers. This, of course, is unreasonable and can have devastating consequences.

However, under Section 7A of the Banking Ordinance, discounting services are defined as follows: “Granting credit to the supplier by early payment of receipts due to him by a clearer for transactions executed by means of debit cards in return for assigning the supplier’s right to such receipts, provided by the clearing agent himself”.

From this definition it is clear that a case in which the credit provider receives a promissory note whose repayment date has not yet arrived in return for the payment made to the transferor of the promissory note, and in effect buys the debt note at a lower sum that expresses the interest and risk inherent therein. All the risks in respect of this promissory note go to the credit provider and he will also receive the full amount of the receipts when the date of payment on the note is due.

Why is it important?

The new legislation defines two types of licenses for monetary service providers:

1. License to provide services in financial assets.
2. License to grant credit.

Each of these licenses can be a basic license or an extended license, an extended license has more strict requirements.

The main difference between both types of licenses lies in the enactment of the legislation. For a license to provide services in financial assets, the enactment is from June 1^st, 2018. For a license to grant credit the enactment is from June 1^st, 2017.

Since, as noted earlier, according to the position of the Ministry of Finance it is expected that the absolute majority of currency service providers today will be defined under the new legislation as credit providers, there is a serious problem of lack of time in preparation for the entry into force of this legislation.

In addition, the law states that both types of licenses must possess a minimal capital in order to be in compliance (according to addition, section 37), as follows:

1. Service in financial assets – 300,000 NIS.
2. Credit provider – 500,000 NIS.
3. Service in financial assets (extended license) – 1,000,000 NIS.
4. Credit provider (extended license) – in accordance with accumulated credit:

The definition of Capital is also unclear, since the new legislation states “in accordance with the generally accepted accounting principles”. If this is so, a capital instrument cannot accumulate interest or linkage. However, in the Inflationary Adjustments Law, Amendment No. 1, Section 1A(a)(7) defines Capital as follows: “Capital notes and debentures that have not been repaid by the end of the tax year and the interest thereon is not more than 30% of rise in Consumer Price Index in the tax year”.

According to Section 72 (a), in the event of failure to comply with the provisions of the law, a fine of 100,000 NIS will be inflicted on an individual, or 250,000 NIS for a corporation.

*This consult cannot be regarded as a legal document and represents our firm’s understanding of the procedure.