The Regulation of Payment and Payment Initiation Services Bill has been Approved by the Knesset in the First Reading
30 March 2023
Dear clients and colleagues,
We would like to bring to your attention that on 27 March 2023, the Economic Plan (Legislation Amendments for the Implementation of the Economic Policy for the Budget Years 2023 and 2024) Law, 2023 Bill (the “Economic Plan Bill“), was approved by the Knesset in the first reading and is expected to be prepared by the relevant Knesset committees for the second and third readings.
As part of the Economic Plan Bill, it is suggested to enact the Regulation of Payment and Payment Initiation Services Law, 2023 Bill (the “Bill“), aimed to encompass the licensing and supervision of payment and payment initiation services by non-banking entities. The Bill is expected to be approved in a fast-track legislation process ancillary to Israel’s annual budget, by the end of May 2023 and is expected to enter into effect a year after its publication.
The services that are suggested to be regulated under the Bill include the following: management of a payment account; issuance of a mean of payment; acquiring of a payment transaction; and payment initiation (in broad terms – the initiation of a payment related order, in a payment account managed by a payment account manager, at the request of the customer) (the “Payment and Payment Initiation Services“).
Please see below a very high-level summary of some of the main provisions of the Bill:
° A licensing or approval requirement. As a general rule, entities providing Payment or Payment Initiation Services will be supervised by the Israel Securities Authority (the “ISA“) and will be required to obtain a Payment Company License or a Basic Initiation License/Approval (as applicable) for the provision of the services.
Certain types of Israeli licensed financial entities, who wish to engage in Basic Initiation Services (as this term is defined under the Bill), will be required to obtain an approval from their relevant financial regulator and will be supervised in accordance with the provisions of the Bill by their relevant financial regulator (“Approval Holders“).
° Exemptions. In general, the licensing requirement, does not apply to a list of specific types of entities. These, inter-alia, include Banking Corporations as well as holders of a “Payment Company with Stability Importance” License under the Banking (Licensing) Law, 1981 (the “Banking Law“). This last category de-facto includes the three major Israeli Credit Card Companies (Isracard, Max and ICC) that shall remain under the supervision of the Bank of Israel (the “BOI“) under a new “Payment Company with Stability Importance” license that shall replace their existing Merchant Acquirer license.
Additionally, it is suggested to authorize the Minister of Finance to determine other types of entities that the licensing or approval requirements shall not apply to them.
° Control permit. Controlling a holder of a Payment Company License (“Payment Company” of “Licensee“) will require a Control permit from the ISA.
• Activity of a Licensee and Approval Holders from the ISA
° Additional activities of a Payment Company. A Payment Company will be allowed to provide ATM services, currency exchange services incidental to a Payment Service or credit incidental to a payment transaction, without the need to obtain an additional Provision of Credit or Financial Asset Services Provision license (as applicable) under the Supervision of Financial Services (Regulated Financial Services) Law, 2016 (the “RFS Law“). The provision of credit incidental to a payment transaction shall be subject to certain conditions as set out in the Bill.
Notwithstanding the above, if a Payment Company holds a Provision of Credit License under the RFS Law, the provisions of the RFS Law shall apply also in respect of the provision of credit ancillary to a payment transaction.
° Mechanisms required to be established. The Bill requires Licensees and Approval Holders from the ISA, to establish and to ensure the existence of adequate and advanced mechanisms for information security, risk management and cyber protection, and in respect of a Payment Company – also business continuity.
° Safeguarding of funds. Generally speaking, a Payment Company will be required to hold the funds received from its customers or for them in a segregated account, for the benefit of its customers.
° Requirements regarding Capital. The Bill determines that a Licensee or Approval Holder from the ISA, will be required to meet capital requirements as will be determined by the ISA; as well as other requirements regarding insurance or other form of guarantee, if the ISA determines such additional requirements.
° Instructions and rules by the ISA. The ISA is authorized to determine, in regulatory orders, provisions that shall apply to a Licensee or Approval Holder by the ISA, for implementing their obligations under the Bill, including regarding customer complaints care and its documentation; document retention; conflict of interests; and in relation to a Payment Company – provisions relating to the board of directors. Additionally, the ISA is authorized to determine rules regarding types of commissions that may be collected by a Payment Company or a Basic Initiation license holder, their rates and scope.
• Provisions regarding engagement between acquirers and issuers
° The adoption of existing provisions that apply to acquirers and issuers under the banking legislation. It is suggested to adopt various provisions that currently apply to acquirers and issuers of charge cards, pursuant to the banking legislation, such that they would apply to Large Acquirers of Charge Cards or Acquirers or Issuers with a Wide-Scope of Activity (as appliable and as these terms are defined under the Bill). It is also suggested to authorize the Minister of Finance to determine similar provisions in relation to other means of payment (that are not charge cards).
° P2P Service. It is suggested to obligate providers of P2P Services with a Wide-Scope of Activity (as this term is defined in the Bill) to allow their customers to receive funds from a payer that is a customer of another P2P Service provider; and to transfer funds to a beneficiary that is a customer of another P2P Service provide; all, based on an identifying detail. The list of Providers of P2P Services with a Wide-Scope of Activity will be published by each relevant financial regulator in relation to the entities under its supervision.
• Initiation Services
The Bill determines that, in general, a manager of a payment account for a payer, is required to allow a Payment Initiator access to the payment account of the payer, for the purpose of the initiation service. This is, via an Interface System for the Provision of Payment Orders, that is characteristics will be determined by the regulator of the manager of the payment account.
• Additional Provisions
° Foreign companies. The Bill allows for foreign entities to apply for a Payment Services or Basic Initiation Licenses (and does not require the establishment of an Israeli subsidiary). Additionally, in general, the ISA will be authorized to grant a license to a foreign payment service provider even if it does not meet the conditions for receiving a license; and to exempt a controlling shareholder from the control permit obligation, if it is convinced that the foreign law regulating the activities of the foreign service provider and the supervision of its activities provides sufficient protection in relation to certain matters regulated under relevant provisions of the Bill.
The Bill also authorizes the ISA to exempt a license holder from the following requirements as set out in the Bill: permission for the payment service provider to engage in additional activities, other than the provision of payment services or payment initiation; the ISA’s provisions, as shall be determined, with regard risk management, cyber protection, business continuity and the board of directors; exemption from submitting certain reports to the regulator; exemption from requirements regarding insurance, minimum equity or other collateral, etc.
The ISA may exempt the foreign applicant from all of the requirements mentioned above or part of them, and to condition such exemption on conditions specified in the Licensee’s license, as applicable. Such exemptions will be granted if the ISA finds that it is right to do so due to the applicability of the relevant foreign law provisions, and while maintaining the interests of customers and considering the public’s best interest.
° Commencement day. In general, the commencement of the law is one year from the date of its publication (“Commencement Day“). However, in respect of Basic Initiation services, the relevant law provisions shall apply starting from the end of 6 months from the Commencement Day; and in respect of the obligation to grant access to a payment account for a payer, the relevant law provisions shall apply (inter-alia and as applicable) in respect of a manager of a payment account that is a Payment Company – starting from the end of 24 months from the Commencement Day.
It should be noted that there is an obligation to publish exemption regulations (from the Payment Company licensing requirement), that shall apply to entities engaging in payment services in a narrow scope, limited sums, to a small number of clients or in a small number of transactions, as determined by the Minister of Finance (in consultation as detailed in the Bill), 45 days prior to the Commencement Day.
° Transitional provisions. It is proposed to establish a transitional provision for veteran service providers that will allow them to apply for a license within 3 months from Commencement Day and to continue their activity as long as the ISA’s decision on their application has not been made.
Veteran service providers who held on the eve of the Commencement Day a Provider of Credit License or a Financial Asset Service Provider License under the RFS Law or a Merchant Acquirer License under the Banking Law, will be allowed to continue their activity for 24 months from the Commencement Day, provided they have notified the ISA in the format, manner, and dates prescribed by it, and apply for a license under the proposed law up to 18 months from the Commencement Day. The continuation of such activity is conditional on receiving the authority’s approval of the application.
° Virtual Currencies. The Bill only deals with payment services performed in FIAT (both New Israeli Shekel and foreign currencies) and not in virtual currencies to which the emerging legislation is expected not to apply. In this regard, we note that certain financial services performed in virtual currencies may require a Financial Asset Services Provision License under the RFS Law.