We would like to bring to your attention that on November 25, 2024, the Israel Securities Authority (the “Authority”) published a legal staff position regarding activities in the Reseller business model that do not require a license under the Payment Services and Payment Initiation Law, 2023 (the “Law” and the “Staff Position,” respectively). Additionally, on December 1, 2024, the Authority published a Directive for payment companies and holders of a basic initiation license or approval regarding reporting to the Authority (the “Reporting Directive” or the “Directive“).

Staff Position

The staff position addresses the characterization of the activities of service providers operating an online platform for purchasing products and services, namely a marketplace platform. The marketplace activity can be conducted in a buy-sell or reseller model as known in Europe (the “Reseller Model“). Under this model the service provided does not constitute a payment service as defined by the Law and therefore does not require a license.

The purpose of the staff position is to outline the criteria used to characterize the business model of a reseller operating in a marketplace, which does not require licensing under the Law.

The staff position defines a “reseller” as one who is the beneficiary of the payment for the sale or supply of products or services, after purchasing them from a third party (the “Supplier“). The reseller buys services or products from the Supplier to resell them to an end customer. This activity should be distinguished from an intermediary in payment, whose services involve transferring payment from the Supplier to the end customer without purchasing the products themselves. This model is based on the formation of (at least) two separate and independent contractual engagements: the first between the Supplier and the reseller, and the second between the reseller and the end customer, without dependency between them.

The Authority detailed in its position the characteristics of the engagements, the existence of which generally indicates that the activity model is a reseller model, exempt from licensing requirements under the Law:

Supplier-Reseller Relationship:

• An independent and distinct contractual engagement between the reseller and the Supplier, where the reseller purchases products or services from the Supplier under defined conditions and for a detailed contractual consideration. In this engagement, ownership of the product is transferred to the reseller, or the

reseller acquires the right to receive the service from the Supplier.

• The reseller’s obligation to pay the consideration is not conditional on collecting it from the end customer. The reseller undertakes to pay the agreed contractual consideration to the Supplier regardless of and separate from collecting the payment from the end customer for the product or service.

Reseller-End Customer Relationship:

• An independent and distinct contractual engagement between the reseller and the end customer, similar to the Supplier-reseller relationship. Additionally, there is generally a clear representation to the end customer that

their dealings are solely with the reseller.

• The reseller is the beneficiary of the payment. As the reseller is the seller, it alone is entitled to the consideration from the end customer.
• The responsibility for supplying the product or service lies with the reseller. Consequently, the reseller assumes responsibility for supplying the product or service, including the obligation to refund or compensate the end customer in case of any failure (in supply or in the product or service itself).
• Providing customer service to handle inquiries, complaints, and clarifications, to meet the obligations assumed by the reseller in the engagement with the end customer.

The existence of these characteristics will be examined in light of the actual business activity of the service provider as reflected in its business model and commercial agreements with the Supplier and the end customer, including the terms and conditions published to the public.

Following the publication of the staff position, the Authority calls on currently operating entities to examine the need for licensing concerning their activities and the criteria detailed in the staff position to determine whether their activities are in the reseller model.

For entities that require additional time to examine whether their activities are in the reseller model or need to submit a license application under Section 2 of the Law, the deadline for submitting the license application will be extended until March 31, 2025. During this period, these entities will be subject to the provisions of Section 81(a) of the Law and the conditions stipulated therein regarding their eligibility to continue their activities.

It should be noted that the Authority clarified that determining a service provider as a reseller does not exempt them from the licensing requirement under Section 2 of the Law if it provides another payment service as part of its business.

Additionally, the Authority clarified that it will re-examine its position in accordance with the evolving reality and changes in business models and technological means in the payment services sector.

To view the Staff Position (in Hebrew) >> Click  here

Reporting Directive

Section 25(b) of the Law regulates the requirement for a license holder or approval holder to submit reports, notices, and data on their activities to the Authority. Accordingly, the Reporting Directive regulates these reporting obligations.

It should be noted that on September 9, 2024, the Authority published a draft of the Reporting Directive for public comments. The final version of the Directive adopted some of the public comments, some of which were submitted via our office.

The Reporting Directive largely relies on the reporting obligations set under the European Banking Authority (EBA) and the UK’s Financial Conduct Authority (FCA). However, in certain aspects, the Directive deviates from the European regulation and sets reporting obligations for areas not regulated in Europe, for which the Draft proposes adopting the reporting principles used by the corresponding supervisory authority responsible for these areas – the Capital Market, Insurance, and Savings Authority.

Below are the main changes compared to the draft Directive and important highlights in the final version of the Reporting Directive:

• The Authority clarified that no public reporting obligations will be established under the Directive at this stage, without prejudice to other public reporting obligations established by law.
• Section 10 was added, allowing a license holder who is a foreign service provider that received exemptions under Sections 21 and 26 of the Law, to apply to the Authority for the exemptions to also apply to the reporting obligations under the Reporting Directive. The Authority may approve this request while keeping the interests of the customers and after considering public interest.
• The quarterly reporting requirement was reduced to only include the assets in which customer funds are held and the custodians with whom the license holder has contracted.
• The reduction in the quarterly reporting requirement does not apply to a license holder with significant activity.[1] Such a license holder will be required, in addition to the above reporting, and for the first, second, and third quarters of the reporting year, to submit a report on its compliance with the capital, insurance, or other security requirements under Sections 13(a)-(d) of the Directive. This report will be based on a capital adequacy compliance report prepared by the license holder’s accountant according to generally accepted accounting principles and submitted as part of the report (instead of the draft Directive’s requirement to submit a quarterly reviewed report on which the report would be based).
• The definition of “misuse” was changed to match the definition of this term in the Payment Services Law, 2019. However, the Authority emphasized that in its view, the broad definition existing in the Payment Services Law already includes the cases decided to be deleted from the definition as it appeared in the draft Directive.
• Section 15 of the Directive addresses a license holder who has not yet completed a sufficient period of activity to calculate the amount of capital, and states that instead, it will submit a reasoned estimate based on its expected activity data according to the business plan and its declaration regarding the financial means submitted in the license application. This applies unless other provisions have been established regarding the license holder (and it was clarified that this addition refers, among other things, to a foreign service provider).
• The Authority clarified that regarding the outsourcing arrangements report required to be submitted under Sections 24-26 of the Directive, if no changes have occurred, the license holder may suffice with a “no change” declaration.
• Regarding the timelines for submitting immediate reports under Chapter VI of the Directive, although the default remains submitting an immediate report within one business day, longer timelines were set in certain contexts. For example, reports on notifications of denial of access and removal of access denial under Sections 36(c)(2) and 36(c)(3) of the Law will be submitted within three business days; reports on the appointment or termination of a senior officer in the controlling entity will be submitted within seven business days; reports on board decisions to approve the operation of a new service or product will be submitted within five business days from the decision date (but at least 60 days before the decision takes effect).
• The provisions regarding the obligation to immediately report changes in the framework or risk management policy of the license holder and the receipt of a materially significant audit report were omitted.

To view the Reporting Directive (in Hebrew) >> Click here.

To review the summary of public comments and the Authority’s response (in Hebrew) >> Click here.

To read our previous client update regarding the draft Reporting Directive >> Click here.

[1] A license holder classified as having level D activity under the Regulation of Payment Services, Payment Initiation, and Financial Information Service (Fees) Regulations, 2024 (the “Fees Regulations”), i.e., whose volume of activity, as defined in the Fees Regulations, exceeds NIS 100 million, or NIS 150 million for payment account management services. The reporting obligation will apply to a license holder with a large volume of activity starting from the reporting year following the determination of their volume of activity as level D.

Our firm has extensive expertise and many years of experience in the financial services sector in all its aspects. We monitor and follow all regulatory developments in this field, assist, and advise leading financial entities in Israel and worldwide.

We would be happy to assist you with any issues in these areas, including in connection with the above publications, as well as any questions or clarifications.