In brief: banking regulatory framework in Israel

Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

Banking legislation in Israel developed over several decades, starting from the Banking Ordinance 1941 from the period of the British Mandate, which authorised the governor of the Bank of Israel to appoint a Supervisor of Banks. This ordinance was almost entirely replaced by the Banking (Licensing) Law 1981.

The Bank of Israel Law of 1954 established a central bank. This law was later completely replaced by the Bank of Israel Law 2010.

Any banking corporation (bank, foreign bank, mortgage bank, investment finance bank, etc) interested in operating in Israel requires a licence from the governor of the Bank of Israel.  The examination of whether to grant a licence under the Banking (Licensing) Law – conducted by the Licensing Committee (composed of five members of the Advisory Committee of the Bank of Israel) – takes into account the following considerations, among other things:

• the plan of action of the applicant and the chances of its success;
• the suitability of the applicant’s controlling shareholders, directors and managers for their position;
• the contribution of granting the licence to competition in the capital market and, in particular, to competition in the banking system and the levels of service therein;
• the economic policy of the government; and
• public policy.

These considerations complement other threshold requirements listed in the Banking (Licensing) Law, including the obligation to hold minimum equity as detailed in the First Addition to the Banking (Licensing) Law. 

The most basic and fundamental principle in the activity of the Bank of Israel (and the Banking Supervision Department) is the stability value of a banking corporation. The Israeli banking system is highly centralised and consists of a number of players. Furthermore, only recently has a new digital bank been granted approval to begin its operations. Likewise, it is only recently that a merger between Bank Mizrahi and the Union Bank was approved (generally speaking, as the Bank of Israel prioritises stability over competition or multiplicity of players in the market).

The Banking (Licensing) Law fixes the areas of activity in which a bank is permitted to engage. It also, among other things, imposes restrictions on the holding of a means of control by a banking corporation or its controlling shareholder, pursuant to various reforms that were required to increase competition in the banking and financial systems in Israel.

The Banking (Customer Service) Law focuses on aspects of bank–customer relations. Among other things, it imposes obligations to provide certain services, such as receiving deposits, opening and managing a checking account and selling bank checks. Notwithstanding the aforesaid, a banking corporation is not obligated to provide a service that extends credit to the customer.

The Banking (Customer Service) Law also establishes:

• prohibitions on deception by act or omission, in writing or orally;
• general obligations of proper disclosure and publication of information (eg, on fees);
• a prohibition on conditioning services; and
• general provisions regarding the supervision of fees that a bank may charge its customers, including the governor’s authority to monitor fee amounts or their rates.

The Supervisor of Banks has general supervision and audit powers over every banking corporation. By virtue of this, the Supervisor of Banks has the authority to require banking corporations – as well as directors, employees or accountants of banking corporations – to provide information and documents in their possession that relate to the transactions of the banking corporation and to any corporation under its control. Furthermore, the Supervisor of Banks is entitled to give instructions (proper banking management directives) that relate to the methods of operation and administration of the banking corporation, of an officer in it and of anyone employed by it to ensure its proper management and to protect the interests of its customers.

In recent decades, the Supervisors of Banks have published many assorted proper banking management directives that deal with various areas under their trust supervision, including: 

• directives concerning capital measurement and adequacy (eg, requirements concerning supervisory capital; and the methods for calculating credit risks, operational risks, market risks and leverage ratio or liquidity coverage ratios);
• directives concerning management and control (eg, directives relating to the board of directors of a banking corporation and its methods of operation; directives concerning the remuneration policy, the auditor and chief accountant; and provisions relating to the internal audit function, the compliance function, the handling of public complaints and risk management);
• directives that relate to credit and investments (eg, provisions concerning the management of credit risk; the banking corporation’s transactions with related persons; limitations on the liability of a borrower and a group of borrowers; proper assessment of credit risks and proper measurement of debt; capital market activity; financing the acquisition of means of control in corporations; financial support; and restrictions on granting housing loans);
• directives that relate to financial risk (eg, directives concerning dividend distribution and self-acquisition; interest rate risk management; activity in the futures market; and market risk management and liquidity);
• directives concerning management risks (eg, provisions that relate to banking insurance; business continuity management; information technology management; cybersecurity; cloud computing; and communications banking);
• directives that relate to the relationship between the bank and the customer (eg, directives on the provision of benefits to customers; the management of anti-money laundering risks and terrorist financing; and fees, reduction or increase in interest rates); and
• specific directives that relate to customer accounts, loans, securities and debit cards.

In addition to the collection of proper banking management directives that apply to various aspects of the day-to-day operations of banking corporations, there is a profusion of directives published by the Supervisor of Banks that deal with reporting obligations to the public and reporting obligations to the Supervisor of Banks. By virtue of these directives, a banking corporation is required to present an annual financial report and publish it. Specific instructions have been determined for the structure of the various reports, their appendices, the annotations required to appear in them, etc. In addition, the Supervisor of Banks has determined a variety of directives concerning the reporting a banking corporation is required to submit to the Supervisor of Banks, including:

• libra and off-balance sheet data;
• profit and loss and business results;
• reports concerning credit cards and risk management;
• costs and interest rates;
• borrowers and related persons;
• means of control and investee companies; and
• administrative and operational data.

On 10 January 2022, the Bank of Israel granted Israel’s first digital bank a permanent bank licence – the first bank licence granted in several decades. On 25 December 2022, another digital bank was granted a bank licence by the Bank of Israel.

Regulated institutions

What are the defining characteristics of a bank to be caught by the banking laws and regulations? Is non-bank fintech regulated differently?

Any banking corporation (bank, foreign bank, mortgage bank or investment finance bank) interested in operating in Israel requires a licence from the governor of the Bank of Israel. The Licensing Committee determines whether to grant a licence under the Banking (Licensing) Law.

The Banking (Licensing) Law provides for the areas of activity banks are permitted to engage in. Such activities include:

• receiving cash deposits in checking accounts for use as payment towards cheques on demand;
• issuing securities;
• managing a payment system, including the collection of funds, their transfer and conversion;
• providing credit;
• renting safes;
• providing financial and economic advice in the bank’s field of business and various other areas (eg, pension advice, investment consulting and marketing); and
• carrying out transactions that are expressly permitted to the bank by the Banking (Licensing) Law and other activities that accompany the transactions detailed in the Banking (Licensing) Law.

Additionally, the Banking (Licensing) Law establishes ‘uniqueness of occupation’. This refers to activities that only a banking corporation holding a licence from the governor is permitted to perform, such as receiving deposits (from 30 persons or more at one time) and providing credit at the same time as well as issuing securities that require a prospectus under the Securities Law and providing credit at the same time. It follows that while banking legislation does not prohibit competition in the extension of credit, only a bank or other banking corporation is entitled to provide credit against receiving deposits from the public.

The Financial Services Supervision (Regulated Financial Services) Law 2016 started a revolution as it is the first law to regulate the activities of non-bank lenders, which until that point were only subject to sporadic legislation (eg, the Non-Banks Loans Regulation Law 1993); however, they were not, until its enactment, subject to a designated regulator.

By virtue of this law, a new regulator was established – the Supervisor of Financial Services – under the Capital Market, Insurance and Savings Authority, which has since become an independent authority (until November 2016, it was subject to the Finance Ministry). This law establishes directives that are similar to the banking legislation described above and authorises the new regulator to issue directives regarding the proper management of the entities under its supervision, similar to the proper banking management directives of the Supervisor of Banks.

Various amendments have been made since the enactment of the Financial Services Supervision (Regulated Financial Services) Law that have introduced additional financial entities into the scope of its application, which are already competing in the banking system and are expected to compete more vigorously in the future, such as:

• peer-to-peer lending platforms;
• credit card issuers, which are not exempt from the application of the law, as credit card companies are; and
• credit unions, whose activities resemble the activities of small banks.

In September 2022, the Regulations for the Supervision of Financial Services (Regulated Financial Services) (Exemption from Licensing Obligation) 2022 were approved. Their purpose is to exempt entities for which a licence under the Supervision of Regulated Financial Services 2016 is not required to fulfil the purposes of the law. Among those entities are foreign corporations from member states of the Organisation for Economic Co-operation and Development (OECD) that already have relevant licenses for financial activity (eg, holders of a bank licence).

In accordance with the exemption regulations, there is a relatively broad but time-limited exemption (until January 2024) for foreign corporations that provide payment services and that, among other things, are incorporated in a ‘recognised country’ (the United States, an EU member state or the United Kingdom) and hold a licence to provide payment services by the relevant regulator in the recognised country.

Permanent exemptions are given to foreign corporations that are incorporated in one of the OECD countries and that, among other things, hold a bank licence (or are controlled by such a corporation, or are under the control of the controlling owner of such a corporation).

On 10 January 2022, a memorandum was published for the Law Regulating the Occupation of Payment Services 5722-2022, which seeks to subject entities that provide payment services to a different authority. Such entities are defined in the memorandum as those engaged in, among other things, payment account management, issuance of payment means, acquisition of payment operations and initiation of payment instructions. In accordance with the current wording of the memorandum, certain financial asset service providers currently supervised under the Capital Market, Insurance and Savings Authority (as well as small acquirers that are currently supervised by the Supervisor of Banks at the Bank of Israel) will be transferred to the supervision of the Securities Authority.

On 10 January 2022, the Bank of Israel granted Israel’s first digital bank a permanent bank licence – the first bank licence granted in several decades. On 25 December 2022, another digital bank was granted a bank licence by the Bank of Israel.

Do the rules vary depending on the size or complexity of the banking institution?

The provisions of the law (including the provisions of the Banking (Licensing) Law; the Banking (Customer Service) Law and the rules issued pursuant to it; and the proper banking management directives published periodically by the Supervisor of Banks) apply in a similar way to all banking corporations. At the same time, certain banking corporations (eg, credit card companies or credit card acquiring service providers) are exempt from some of the proper banking management directives (eg, an acquirer whose scope of activity is relatively low is only subject to part of the proper banking management directives).

The same is true for entities supervised by the Capital Market, Insurance and Savings Authority by virtue of the Financial Services Supervision (Regulated Financial Services) Law. The difference between the various entities lies in the type of licence required (a ‘regular’ licence or an ‘extended’ licence), which impacts the scope of information that must be provided to the regulator in the framework of applying for a licence as well as the amount of equity that entity must hold.

In addition, a licensing obligation can be noted that applies to an entity engaged in providing deposit and credit services. This is an activity similar to banking activity; however, it is limited to providing services only to members of an association that provide these services. At the same time, to the extent that such entity exceeds a scope of activity of 1 billion shekels, supervision of that entity is transferred to the Supervisor of Banks of the Bank of Israel. 

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

Banking legislation in Israel developed over several decades, starting from the Banking Ordinance 1941 from the period of the British Mandate, which authorised the governor of the Bank of Israel to appoint a Supervisor of Banks. This ordinance was almost entirely replaced by the Banking (Licensing) Law 1981.

The Bank of Israel Law of 1954 established a central bank. This law was later completely replaced by the Bank of Israel Law 2010.

Any banking corporation (bank, foreign bank, mortgage bank, investment finance bank, etc) interested in operating in Israel requires a licence from the governor of the Bank of Israel.

The Banking (Licensing) Law provides for the areas of activity banks are permitted to engage in. Such activities include:

• receiving cash deposits in checking accounts for use as payment towards cheques on demand;
• issuing securities;
• managing a payment system, including the collection of funds, their transfer and conversion;
• providing credit;
• renting safes;
• providing financial and economic advice in the bank’s field of business and various other areas (eg, pension advice, investment consulting and marketing); and
• carrying out transactions that are expressly permitted to the bank by the Banking (Licensing) Law and other activities that accompany the transactions detailed in the Banking (Licensing) Law.

Additionally, the Banking (Licensing) Law establishes ‘uniqueness of occupation’. This refers to activities that only a banking corporation holding a licence from the governor is permitted to perform, such as receiving deposits (from 30 persons or more at one time) and providing credit at the same time as well as issuing securities that require a prospectus under the Securities Law and providing credit at the same time. It follows that while banking legislation does not prohibit competition in the extension of credit, only a bank or other banking corporation is entitled to provide credit against receiving deposits from the public.

Contemporaneous with the enactment of the Banking (Licensing) Law, the Banking (Customer Service) Law was also enacted. While the Banking (Licensing) Law deals with aspects of licensing, permitted activities and control, the Banking (Customer Service) Law focuses on aspects of bank–customer relations. Among other things, it imposes obligations to provide certain services, such as receiving deposits, opening and managing a checking account and selling bank checks. Notwithstanding the aforesaid, a banking corporation is not obligated to provide a service that extends credit to the customer.

The Banking (Customer Service) Law also establishes:

• prohibitions on deception by act or omission, in writing or orally;
• general obligations of proper disclosure and publication of information (eg, on fees);
• a prohibition on conditioning services; and
• general provisions regarding the supervision of fees that a bank may charge its customers, including the governor’s authority to monitor fee amounts or their rates.

By virtue of the Banking (Customer Service) Law, two main regulations have been enacted:

• the Rules of Banking (Customer Service) (Proper Disclosure and Delivery of Documents) 1992, which expand on the general obligations stipulated in the Banking (Customer Service) Law and set forth obligations such as:
  • the obligation to make written agreements (a provision later moderated in a circular from the Supervisor of Banks that fixes several types of agreements that do not require customer signatures);
  • the obligation to provide customers with copies of agreements and to notify them about various changes in their account management terms; and
  • specific provisions concerning the proper disclosure required in credit and financial leasing (eg, the details that are required to appear in the credit agreement and the obligation to provide the customer with a payment schedule); and
• the Rules of Banking (Customer Services) (Fees) 2008, which detail the general obligations listed in the Banking (Customer Service) Law concerning fees, fix fee rates and enumerate the types of fees that a banking corporation may charge its customers, along with the conditions for collecting them.

The Supervisor of Banks has general supervision and audit powers over every banking corporation. By virtue of this, the Supervisor of Banks has the authority to require banking corporations – as well as directors, employees or accountants of banking corporations – to provide information and documents in their possession that relate to the transactions of the banking corporation and to any corporation under its control. Furthermore, the Supervisor of Banks is entitled to give instructions (proper banking management directives) that relate to the methods of operation and administration of the banking corporation, of an officer in it and of anyone employed by it to ensure its proper management and to protect the interests of its customers.

Banking legislation in Israel developed over several decades, starting from the Banking Ordinance 1941 from the period of the British Mandate, which authorised the governor of the Bank of Israel to appoint a Supervisor of Banks. This ordinance was almost entirely replaced by the Banking (Licensing) Law 1981.

The Bank of Israel Law of 1954 established a central bank. This law was later completely replaced by the Bank of Israel Law 2010.

Any banking corporation (bank, foreign bank, mortgage bank, investment finance bank, etc) interested in operating in Israel requires a licence from the governor of the Bank of Israel. The examination of whether to grant a licence under the Banking (Licensing) Law – conducted by the Licensing Committee (composed of five members of the Advisory Committee of the Bank of Israel) – takes into account the following considerations, among other things:

• the plan of action of the applicant and the chances of its success;
• the suitability of the applicant’s controlling shareholders, directors and managers for their position;
• the contribution of granting the licence to competition in the capital market and, in particular, to competition in the banking system and the levels of service therein;
• the economic policy of the government; and
• public policy.

These considerations complement other threshold requirements listed in the Banking (Licensing) Law, including the obligation to hold minimum equity as detailed in the First Addition to the Banking (Licensing) Law. 

The most basic and fundamental principle in the activity of the Bank of Israel (and the Banking Supervision Department) is the stability value of a banking corporation. The Israeli banking system is highly centralised and consists of a number of players. Furthermore, only recently has a new digital bank been granted approval to begin its operations. Likewise, it is only recently that a merger between Bank Mizrahi and the Union Bank was approved (generally speaking, as the Bank of Israel prioritises stability over competition or multiplicity of players in the market).

The Banking (Licensing) Law fixes the areas of activity in which a bank is permitted to engage. It also, among other things, imposes restrictions on the holding of a means of control by a banking corporation or its controlling shareholder, pursuant to various reforms that were required to increase competition in the banking and financial systems in Israel.

The Banking (Customer Service) Law focuses on aspects of bank–customer relations. Among other things, it imposes obligations to provide certain services, such as receiving deposits, opening and managing a checking account and selling bank checks. Notwithstanding the aforesaid, a banking corporation is not obligated to provide a service that extends credit to the customer.

The Banking (Customer Service) Law also establishes:

• prohibitions on deception by act or omission, in writing or orally;
• general obligations of proper disclosure and publication of information (eg, on fees);
• a prohibition on conditioning services; and
• general provisions regarding the supervision of fees that a bank may charge its customers, including the governor’s authority to monitor fee amounts or their rates.

The Supervisor of Banks has general supervision and audit powers over every banking corporation. By virtue of this, the Supervisor of Banks has the authority to require banking corporations – as well as directors, employees or accountants of banking corporations – to provide information and documents in their possession that relate to the transactions of the banking corporation and to any corporation under its control. Furthermore, the Supervisor of Banks is entitled to give instructions (proper banking management directives) that relate to the methods of operation and administration of the banking corporation, of an officer in it and of anyone employed by it to ensure its proper management and to protect the interests of its customers.

In recent decades, the Supervisors of Banks have published many assorted proper banking management directives that deal with various areas under their trust supervision, including: 

• directives concerning capital measurement and adequacy (eg, requirements concerning supervisory capital; and the methods for calculating credit risks, operational risks, market risks and leverage ratio or liquidity coverage ratios);
• directives concerning management and control (eg, directives relating to the board of directors of a banking corporation and its methods of operation; directives concerning the remuneration policy, the auditor and chief accountant; and provisions relating to the internal audit function, the compliance function, the handling of public complaints and risk management);
• directives that relate to credit and investments (eg, provisions concerning the management of credit risk; the banking corporation’s transactions with related persons; limitations on the liability of a borrower and a group of borrowers; proper assessment of credit risks and proper measurement of debt; capital market activity; financing the acquisition of means of control in corporations; financial support; and restrictions on granting housing loans);
• directives that relate to financial risk (eg, directives concerning dividend distribution and self-acquisition; interest rate risk management; activity in the futures market; and market risk management and liquidity);
• directives concerning management risks (eg, provisions that relate to banking insurance; business continuity management; information technology management; cybersecurity; cloud computing; and communications banking);
• directives that relate to the relationship between the bank and the customer (eg, directives on the provision of benefits to customers; the management of anti-money laundering risks and terrorist financing; and fees, reduction or increase in interest rates); and
• specific directives that relate to customer accounts, loans, securities and debit cards.

In addition to the collection of proper banking management directives that apply to various aspects of the day-to-day operations of banking corporations, there is a profusion of directives published by the Supervisor of Banks that deal with reporting obligations to the public and reporting obligations to the Supervisor of Banks. By virtue of these directives, a banking corporation is required to present an annual financial report and publish it. Specific instructions have been determined for the structure of the various reports, their appendices, the annotations required to appear in them, etc. In addition, the Supervisor of Banks has determined a variety of directives concerning the reporting a banking corporation is required to submit to the Supervisor of Banks, including:

• libra and off-balance sheet data;
• profit and loss and business results;
• reports concerning credit cards and risk management;
• costs and interest rates;
• borrowers and related persons;
• means of control and investee companies; and
• administrative and operational data.

Two pieces of legislation that apply to the activities of banking corporations in Israel are the Anti-Money Laundering Law 2000 and the Prohibition of Terrorist Financing Law 2005. The general provisions determined by these laws are:

• the general offence of taking action on property (derived from an offence, used to commit an offence, that enabled the execution of an offence or on which an offence was executed) for the purpose of concealing or disguising its origin, the identity of its right holders, its location, its movements or the action taken on it; and
• the offence of taking action on prohibited property or property serving terrorist purposes and an act on terrorist property.

Including the Anti-Money Laundering Order Obligations to Identify Reporting and Manage Listings 2001, banking corporations are subject to specific provisions of the Anti-Money Laundering Order, enacted by virtue of the Anti-Money Laundering Law, and which determine the anti-money laundering regime that applies to banking corporations in its activities.

Similar to other provisions around the world in the area of anti-money laundering, the Anti-Money Laundering Order that applies to banking corporations generally determines obligations on the following levels:

• identification obligations of anyone wishing to open an account in a banking corporation (its owner, authorised signers and the applicant);
• performing know-your-customer obligations (inter alia, clarifying the source of the funds; the occupation of the applicant interested in opening an account; the purpose for opening the account or performing the action; and the planned activity for the account);
• verification of details and documentation requirements;
• obtaining a statement on the beneficiary and controlling shareholder of the account;
• performing face-to-face identification according to the identification document of the account holder and the authorised signers;
• ongoing reporting obligations and reporting obligations concerning ‘extraordinary’ actions;
• the obligation to check the identification details provided to the banking corporation against ‘the List’ (a centralised list of declared terrorist organisations and of persons who have been declared terrorist operatives by the Anti-Money Laundering Authority); and
• a question-and-answer file that is updated periodically by the Supervisor of Banks and includes additional clarifications to what is stated in the directive.

In addition to the provisions in legislation and the Anti-Money Laundering Order is the Proper Banking Management Directive No. 411 on preventing money laundering and terrorist financing, published by the Supervisor of Banks. This directive adds to the obligations determined therein (eg, concerning the obligation to formulate a policy on know-your-customer; the connection required with internal auditing; instructions concerning risk management; customer identification; conducting ongoing monitoring; directives concerning accounts of high-risk customers; and reporting obligations to the Supervisor of Banks). 

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

Any banking corporation (bank, foreign bank, mortgage bank, investment finance bank, etc) interested in operating in Israel requires a licence from the governor of the Bank of Israel. The regulator appointed over these entities (including credit card companies and entities engaged in clearing debit card transactions) is the Supervisor of Banks of the Bank of Israel.

In addition, the Bank of Israel’s Payment and Clearing Systems Department oversees the payment and clearing systems in Israel.

Non-bank financial entities (eg, non-bank credit providers and financial asset service providers) require a licence from the Capital Market, Insurance and Savings Authority. The regulator appointed over these entities is the Supervisor of Financial Services of the Capital Market, Insurance and Savings Authority.

On 10 January 2022, a memorandum was published for the Law Regulating the Occupation of Payment Services 5722-2022, which seeks to subject entities that provide payment services to a different authority. Such entities are defined in the memorandum as those engaged in, among other things, payment account management, issuance of payment means, acquisition of payment operations and initiation of payment instructions. In accordance with the current wording of the memorandum, certain financial asset service providers currently supervised under the Capital Market, Insurance and Savings Authority (as well as small acquirers that are currently supervised by the Supervisor of Banks at the Bank of Israel) will be transferred to the supervision of the Securities Authority.

In addition to the aforementioned regulators, certain aspects of the activities of banks and non-bank entities are supervised by additional regulators (every regulator in the field under its trust) such as the Anti-Money Laundering and Terrorism Financing Authority, the Privacy Protection Authority and the Competition Authority.

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

From 2004 to 2007, a comprehensive reform of the payment and clearing systems was conducted that included the Stock Exchange Clearing House, the Check Clearing House and the Bank Clearing House. In July 2007, a new payment system was implemented. The Zahav system (real-time credits and transfers) meets international standards and has brought the Israeli financial infrastructure to an advanced international level.

Israel’s financial infrastructure includes interbank payment and clearing systems used to transfer and clear payments, communication systems and means of making payments. The participants in the various payment systems are primarily commercial banks and large institutional entities. The general public makes direct use of the various means of payment and requires the interbank payment systems to transfer funds from bank to bank. Transfer of funds from one account to another account within the same bank does not require the use of an interbank payment system.

The Zahav system significantly contributes to reducing the level of risks inherent in payment systems. The system effectively eliminates credit and liquidity risks (credit risk: that one of the parties to the transaction will not meet its full obligations at the time of the transaction or afterwards; liquidity risk: that one of the parties to the transaction will not meet its full obligations on the set date) as, immediately upon the completion of the transaction, the payment becomes final, and the receiving bank can credit its customer without concern for cancellation of the payment. The Zahav system also reduces each participant’s dependence on the other participants in clearing – a fact that greatly reduces the systemic risk of participating banks. 

The construction of backup systems for various components of the Zahav system and the construction of a comprehensive backup site for the Zahav system reduce the operational risk (operational risk: that may result in unexpected loss due to deficiencies in systems or their environments, such as human error, technical failure in hardware or software and communication failures). The existence of the Payment Systems Law 2008 reduces the legal risk (legal risk: that one of the parties to the transaction will incur losses because the payment and clearing systems are not supported by clear laws and regulations) inherent in activity in the payment and clearing arrangement in Israel.

In addition to the reliability, security and efficiency involved in the clearing method, the Zahav system provides banks with an additional advantage. The immediacy and finality of the payment instructions allow banks to know at any given moment exactly how much money passes through their accounts and each bank can decide on immediate steps to improve its liquidity status in shekels. At the same time, the aforementioned clearing method requires banks to disclose greater responsibility for managing liquidity in their accounts. The bank’s liquidity should be sufficient to perform any processing that reaches the system throughout the daily hours of operation. Temporary liquidity shortages may impair clearing work, starting with delays in processing individual payments and ending in blocking a set of payment instructions.

To minimise these situations and allow the Zahav system to operate smoothly, the Bank of Israel provides banks participating in credit clearing with intraday credit, which can be used by the bank according to its needs throughout the operating hours of the system. Credit is provided to banks without interest, against full collateral for the day of activity only and must be repaid by the closing time of the Zahav system.

The collateral required against intraday credit is comprised of government bonds and bank deposits in the Bank of Israel. The debentures used as collateral for credit must be deposited by banks in a special account at the Stock Exchange Clearing House, where a sub-account is allocated for the collateral of each participant. The TASE Clearing House has developed a unique system for the Bank of Israel for managing collateral taken against intraday credit – the ICS Intraday Credit System – so that system participants can dynamically change the amount of intraday credit that flows into their accounts over the course of the day. The system performs an automatic calculation of the amount of intraday credit based on the amount and type of collateral the participant deposits.

Recently, the Bank of Israel has been working on a settlement outline for failures in the various payment systems, including the debit card services system operated by SHVA. The purpose of the outline is to implement the directives of the Bank of Israel’s Payment Systems and Clearing Systems Department that impose an obligation on the operator of a controlled system (as defined in the Payment Systems Law 2008) to formulate rules that will ensure the stability, efficiency and proper functioning of the system, including the continued participation in the system of a participant against whom liquidation procedures are being conducted, in accordance with the Principles for the Financial Market Infrastructures .

While not etched in stone, past experience in the Israeli capital market (whether during the banking crisis in the 1980s or during the embezzlement episode in the Bank of Commerce) has proven that the government and the Bank of Israel do not hesitate to intervene and mobilise to ensure that no bank operating in Israel collapses, whether through nationalisation (in the 1980s) or by injecting funds to ensure that the interest of the depositors is not harmed.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

The Supervisor of Banks published a proper banking management directive concerning transactions of banking corporations with related persons. The aim of the directive is to minimise risks that derive from transactions a corporation makes with related persons by limiting the scope of liability of the related person to prompt the parties to conduct such transactions under strict corporate governance rules, in accordance with business considerations and under terms that do not deviate from the accepted terms of similar transactions with non-related persons. These directives enhance and do not detract from the provisions of general law (the Companies Law 1999).

A ‘related party’ is defined most broadly by the directive, as follows:

1. anyone who has a controlling interest in the banking corporation, a candidate and a relative of either of these;
2. a corporation in which those listed in point (1) control or hold more than 10 per cent of any means of control and a corporation in which the foregoing corporation holds more than 50 per cent of any means of control;
3. the holder of more than 5 per cent of any means of control in the banking corporation or in a banking corporation that controls said banking corporation, and his or her relative;
4. an officer of the banking corporation or of one of the following:
   • a corporation that holds the means of control of the banking corporation’s controlling group, as defined in section 5; or
   • a corporation that holds the means of control of a corporation, and his or her relative;
5. a corporation controlled by those listed in points (3) to (4);
6. a corporation that the banking corporation controls or in which it holds more than 10 per cent of any means of control and a corporation controlled by a corporation noted in the beginning section;
7. a party that holds 10 per cent or more of any type of means of control in a corporation controlled by the banking corporation and his or her relative; and
8. any party whom the Supervisor of Banks defines as a related party, generally or in a specific case.

The directive sets forth various restrictions on transactions with related persons and on the liability of related persons, including:

• a prohibition for a banking corporation to make a transaction with a related person on more favourable terms than are accepted for its similar transactions with others;
• a prohibition for a banking corporation to accept as collateral for the liability of a related person’s securities issued by the banking corporation; and
• a limitation of the total liabilities of all related persons to the banking corporation to the rate of 10 per cent of the banking corporation’s capital, at any moment.

In addition, the directive establishes:

• mechanisms for approving transactions with related persons that are incumbent on the board of directors;
• provisions regarding an officer’s personal conflict of interests;
• instructions regarding a related person who is an employee; and
• reporting obligations to the Supervisor of Banks, which include an obligation to submit a list of all related persons and designate the liability of each related person and an obligation to immediately report any deviation that occurs therein.

This directive, like any other Proper Banking Management Directive, is updated periodically by the Supervisor of Banks.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

The banking system is subject to a broad and comprehensive set of legal and regulatory provisions that regulate broad aspects of its activities. This regulatory system does not change often, and the regulator at times has difficulties making the necessary adjustments to create an empowering regulatory system that helps supervised entities offer advanced services, including remote banking services (e-banking), an efficient recruitment process (onboarding) and facilitations on identification and verification obligations, know-your-customer provisions, etc, when providing payment services (eg, offering payment apps), among other things.

Several regulatory developments in recent years have impacted the activity of the banking system and have posed (or will pose) challenges, including the following.

• Amendment No. 5 to the Non-Bank Loans Regulation Law was enacted in 1992. While formally an amendment to an existing law, it is such a significant amendment that it even changed the name of the existing law to the Fair Credit Law. In the framework of the amendment, the interest ceiling mechanism was updated (which, prior to the amendment, applied exclusively to non-bank entities), the application of the law was extended to banking corporations, and provisions were made to ensure adequate protection for consumers in the credit market. To promote competitiveness in the retail credit market, the law equates the norms that apply to non-institutional lenders to those that apply to institutional lenders, including the banking system.
• In 2016, the Credit Data Law 2016 was published. The law repealed and replaced the Credit Data Service Law from 2002 and revolutionised the world of credit data collected and accumulated about private individuals. Under the old regime, most financial information accumulated about customers focused on ‘negative data’ – negative indications involving customer non-compliance with loan repayments and negative data from other public lists. Under the new regime, which integrates and complements the change in the industry that occurred with the enactment of the Fair Credit Law, a central credit database has been set up under the responsibility of the Bank of Israel, which includes negative data as well as positive data (eg, compliance with repayment of credit) on private individuals (households and small businesses). These data are provided to the database by various financial bodies and public bodies such as the Execution Bureau, the Official Receiver of Assets and the court system. Along with the enrichment of financial information accessible to the banking system, various restrictions were imposed on its access (for reasons of privacy protection. Further, under the new regime, before applying to the database (through a credit bureau), the credit provider is required to disclose this application to the customer or obtain the customer’s express consent (as the case may be, depending on the scope of information requested), in contrast with the regulatory situation prior to the enactment of the aforementioned law.
• The Payment Services Law, published in 2019, was designed to revolutionise all matters concerning the regulation of the provision of services that are related to Israel through payment. It is based, in part, on the European Payment Service Directive II. The Debit Card Law 1986 only regulates debit card issuance activity: its application is limited to debit cards (including credit cards, rechargeable cards and ATM cards) and to cards with a physical dimension (a plate or object). As such, the Debit Card Law did not regulate activities involving electronic wallets (an activity that also requires a licence under the Financial Services Supervision (Regulated Financial Services) Law or a banking licence) or even virtual debit cards. The Payment Services Law, by contrast, includes the broadest definitions and applies to each activity related to making payments, from the issuance of the means of payment (including virtual currencies) and acquiring them to managing digital wallet, etc. It imposes various obligations on payment service providers (whether to the payer or the beneficiary) and regulates the liability of payment service providers to customers (eg, when the payment method is misused).
• On 10 January 2022, a memorandum was published for the Law Regulating the Occupation of Payment Services 5722-2022, which seeks to subject entities that provide payment services to a different authority. Such entities are defined in the memorandum as those engaged in, among other things, payment account management, issuance of payment means, acquisition of payment operations and initiation of payment instructions. In accordance with the current wording of the memorandum, certain financial asset service providers currently supervised under the Capital Market, Insurance and Savings Authority (as well as small acquirers that are currently supervised by the Supervisor of Banks at the Bank of Israel) will be transferred to the supervision of the Securities Authority. 
• The Insolvency and Economic Rehabilitation Law, published in 2018, implemented a comprehensive reform in the field of insolvency to provide the Israeli economy with modern legislation in this area by codifying insolvency rules. The main purpose of the law is to bring about the economic rehabilitation of the debtor, from the perspective that failure to repay credit and insolvency constitute an ‘economic accident’ rather than a moral defect. At the same time, the goals of the law include efforts to increase the rate of debt that is repaid to creditors, increase the certainty and stability of the rules, shorten proceedings and reduce the bureaucratic burden. The Insolvency and Economic Rehabilitation Law is expected to impair the solvency of banks in situations of insolvency of the debtor (individual and corporation alike).
• An open banking system is beginning to operate in Israel. In recent years, in-depth regulation has developed throughout the world that regulates the field of open banking. Open banking enables bank customers and credit card companies to share financial information with third parties. New players, not banks necessarily, are able to access a customer’s bank accounts upon obtaining consent and offer banking services tailored to the customer’s needs. The Bank of Israel is working towards implementing open banking in Israel, in recognition of its importance to all customers and financial players. It has, therefore, formulated a uniform standard for open banking in Israel. The standard also regulates the protection of customer information and the risk management of banking corporations. The technological standard is based on the working framework of NextGenPSD2, while making the necessary adjustments to suit the financial system in Israel. The Proper Conduct of Banking Business Directive No. 368, issued by the Supervisor of Banks, imposes an obligation on the banking system to act in accordance with this technological standard and to disclose assorted information to various players (in its first stage, only within the banking system). On 28 September 2022, the Securities Authority granted the first licences to fintech companies operating in financial information services (open banking), which will join the banking system (banking corporations and credit card companies) as entities authorised to provide financial information services in accordance with the Financial Information Service Law 2021.
• On 4 November 2021, the Financial Information Services Law 2021, was published, which seeks to apply the open banking reform to entities outside the banking system. This law includes provisions regarding the supervision of entities wishing to provide financial information services to their clients (including the supervision of these entities, insofar as they are not already under the supervision of a financial regulator) under the Securities Authority. In addition, the memorandum of the Law Regulating the Occupation of Payment Services includes, among other things, provisions regarding the initiation of payments and the provision of payment instructions through open banking.

Consumer protection

Are banks subject to consumer protection rules?

While the Banking (Licensing) Law deals with aspects of licensing, permitted activities and control, the Banking (Customer Service) Law focuses on aspects of bank–customer relations. Among other things, it imposes obligations to provide certain services, such as receiving deposits, opening and managing a checking account and selling bank checks. Notwithstanding the aforesaid, a banking corporation is not obligated to provide a service that extends credit to the customer.

The Banking (Customer Service) Law also establishes:

• prohibitions on deception by act or omission, in writing or orally;
• general obligations of proper disclosure and publication of information (eg, on fees);
• a prohibition on conditioning services; and
• general provisions regarding the supervision of fees that a bank may charge its customers, including the governor’s authority to monitor fee amounts or their rates.

By virtue of the Banking (Customer Service) Law, two main regulations have been enacted:

• the Rules of Banking (Customer Service) (Proper Disclosure and Delivery of Documents) 1992, which expand on the general obligations stipulated in the Banking (Customer Service) Law and set forth obligations such as:
  • the obligation to make written agreements (a provision later moderated in a circular from the Supervisor of Banks that fixes several types of agreements that do not require customer signatures);
  • the obligation to provide customers with copies of agreements and to notify them about various changes in their account management terms; and
  • specific provisions concerning the proper disclosure required in credit and financial leasing (eg, the details that are required to appear in the credit agreement and the obligation to provide the customer with a payment schedule); and
• the Rules of Banking (Customer Services) (Fees) 2008, which detail the general obligations listed in the Banking (Customer Service) Law concerning fees, fix fee rates and enumerate the types of fees that a banking corporation may charge its customers, along with the conditions for collecting them.

In recent decades, the Supervisors of Banks have issued numerous and varied proper banking management directives, dealing with various areas under their trust, including directives concerning bank–customer relations (eg, directives concerning the provision of benefits to customers; risk management; anti-money laundering and terrorist financing; and procedures concerning commissions, reduction or increase in interest rates), as well as specific directives concerning customer accounts relating to loans, securities and debit cards. These directives include:

• directives concerning the opening days of banking corporation offices;
• directives that relate to providing banking services to new immigrants;
• directives that relate to billing clients with attorney’s fees;
• procedures concerning fees and cost disclosures;
• directives concerning the accounts of minors;
• directives concerning maintaining documents; and
• directives concerning sending messages in the media and providing a professional human telephone answering service.

The Payment Services Law, published in 2019, was designed to revolutionise all matters concerning the regulation of the provision of services that are related to Israel through payment. It is based, in part, on the European Payment Service Directive II. The Payment Services Law includes the broadest definitions and applies to each activity related to making payments, from the issuance of the means of payment (including virtual currencies) and acquiring them to managing digital wallet, etc. It imposes various obligations on payment service providers (whether to the payer or the beneficiary) and regulates the liability of payment service providers to customers (eg, when the payment method is misused).

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

We anticipate that supervisory emphasis in the coming years will be given to the following issues:

• continued efforts to implement open banking in Israel in recognition of its importance to all customers and financial players, and to expand this activity beyond the banking system (so that fintech companies and other non-bank entities subject to proper regulation will be able to access banking information in order to provide various services, such as cost comparison services) – on 28 September 2022, the Securities Authority granted the first licences to fintech companies operating in financial information services (open banking), which will join the banking system (banking corporations and credit card companies) as entities authorised to provide financial information services in accordance with the Financial Information Service Law 2021;
• continued efforts by the Bank of Israel to make the necessary adjustments for creating an empowering regulatory system that helps supervised entities offer advanced services, including remote banking services (e-banking), an efficient recruitment process (onboarding) and facilitations on identification and verification obligations, know-your-customer provisions, etc, when providing payment services (eg, offering payment apps), among other things;
• continued emphasis on protecting the interests of customers of the banking system (eg, access to information and expansion of the services that a banking corporation may provide remotely (e-banking)); and
• changes concerning the supervision and structure of payment services and payment systems in Israel – with regard to payment service providers – through the unification of regulation or financial regulators to reduce the regulatory arbitrage, and with respect to payment systems, whether by increasing the supervision of existing payment systems (eg, by declaring that additional payment systems are controlled payment systems) or by introducing competitors (local and international) into the Israeli market (which, in turn, could be a catalyst for establishing an Israeli central ‘switch’).

On 9 August 2022, the governor of the Bank of Israel announced the EMV ASHRAIT Protocol system, operated by the non-profit organisation for the management of the EMV Terminal Protocol in Israel as a controlled system, in accordance with the Payment Systems Law 2008. The protocol includes a collection of rules that define the method of requesting and receiving the data and the method of transferring and executing payment instructions between its participants. The announcement gives the Bank of Israel’s Supervision on Payment Systems and Clearing Systems Department powers over the system to ensure equal access of all relevant parties in the Israeli market to the payment systems.

The Bank of Israel’s Payment Systems and Clearing Systems Department also intends to declare other systems as controlled systems, including the debit card agreement (ie, the local agreement or the operating agreement), which regulates operational and other aspects regarding the operation of the interface between the acquirers and the issuers in relation to debit card activity in Israel. These systems will be added to the list of systems that have already been declared as controlled systems, namely the debit, credit and payment transfers system operated by Masav, and the debit card services and automatic bank machines systems operated by SHVA.