ISA Published for Public Comments a Draft Directive for Payment Companies and Basic Initiation Providers Regarding Reporting; and Published a Directive to Payment Companies regarding Ancillary Services

Dear Clients and Friends,   We would like to bring to your attention that on September 9, 2024, the Israel Securities Authority (the “Authority”) published for public comments a draft directive for payment companies and holders of a basic initiation license or approval regarding reporting to the Israel Securities Authority (the “Draft Reporting Directive”). Additionally, on September 11, 2024, the Authority published a directive for payment companies regarding ancillary services (the “Ancillary Services Directive”).   Draft Reporting Directive Section 25(b) of the Regulation of Payment Services and Payment Initiation Law, 2023 (the “Law”) regulates the requirement for a license holder or approval holder to submit reports, notices, and data on their activities to the Authority. The Draft Reporting Directive aims to regulate these reporting obligations. The Draft 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 Draft Reporting Directive deviates from 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.  

1. General Provisions

• The Draft Reporting Directive proposes that the first reporting period for which a license holder will submit periodic reports will be the reporting period following the license issuance date.
• It is proposed that all the reports detailed below be submitted on the reporting website in a non-public manner. However, it is emphasized that the Authority intends to re-examine this determination as the market develops and the necessary insights are gained.
• It is clarified that failure to submit reports, notices, and data required under the Draft Reporting Directive will constitute a violation of the Law, incurring a financial penalty.

 

2. Periodic Reports

The Draft Reporting Directive proposes establishing an obligation to submit periodic reports as follows:

• An annual report to be submitted no later than March 31 each year, including the information detailed in Chapter C of the Draft Directive, concerning: activity data report, including audited annual financial statements prepared according to generally accepted accounting principles for the reporting year; report on compliance with capital adequacy, insurance, or other guarantee requirements; report on technological means and information security (including an external auditor’s opinion); report on corporate governance; report on compliance and risk management; report on outsourcing and third-party arrangements; and report on customer complaints.
• A semi-annual report to be submitted no later than the last day of the month following the end of the reporting period, concerning misuse of payment instruments. This report will include, among other things, details on the number of payment instructions executed through misuse; their relative share of the total number of payment instructions executed; their financial value; their relative financial value out of the total financial value of payment instructions executed; and the total losses incurred by the license holder due to the misuse event for which the payment instruction was executed (Chapter D of the Draft Directive).
• A quarterly report to be submitted no later than the last day of the month following the end of the reporting period, and to include an activity data report and a report on the license holder’s compliance with capital adequacy, insurance, or other guarantee requirements (both as detailed in Chapter C of the Draft Directive), as well as certain details regarding the assets in which customer funds are safeguarded. Additionally, a license holder providing credit or interest, and a license holder with a large volume of activity[1] will submit, no later than two months after the end of each quarter, a report on compliance with capital adequacy, insurance, or other guarantee requirements, based on quarterly reviewed financial statements, and will also submit the reviewed financial statements used to prepare the report.

 

3. Immediate Reports

In addition to periodic reports, it is proposed that a license holder will be required to submit an immediate report to the Authority by the end of the first business day after the occurrence of any of the events listed in Section 34 of the Draft Reporting Directive, including, among others (the list is not exhaustive):

1. An event or matter with a material impact on the license holder, its customers, or the payment services it provides;
2. A material change in the license holder’s business (including a decision to change or update the types of services offered);
3. Rejection of a license application of the license holder or another entity in its group, in Israel or abroad (including a process for cancellation, suspension, or freezing of a license or permit), and if a penalty or fine was imposed on the license holder concerning its supervised activity;
4. A change or occurrence of one of the circumstances for examining a defect in the reliability of the license holder, the controlling shareholder, or a senior officer in any of them;
5. A change in any of the details provided by a license holder who is a foreign service provider, for which they received an exemption from one of the requirements listed in Section 21 of the Law (including any change in the foreign law regulating their activity);
6. Appointment or termination of a senior officer in the license holder or the controlling shareholder (including an appointment to a position according to the Authority’s provisions);
7. A change in the scope or manner of the controlling shareholder’s holdings or a person becoming a license holder without receiving the Authority’s approval;
8. A material error discovered in a financial statement submitted by the license holder as required under the Draft Directive;
9. The occurrence or expected occurrence of a failure event, operational event, or information security event (as these terms are defined in the Authority’s Directive for Payment Companies Regarding Technological Measures and Information Security). It is noted that upon the occurrence of such events, it is proposed that the license holder submit an initial report to the Authority via a phone call or email to the head of the supervision unit, their representative, or the license holder’s contact person in the supervision unit, no later than two hours after identifying the event as requiring reporting, and submit a supplementary report no later than 8 hours from the initial report.

 

4. Questions for the Public’s Position

Given the gaps between the proposed regulation and the existing regulation in Europe and the UK, mainly concerning the obligation to submit audited financial statements and the determination of quarterly reporting obligations regarding specific albeit significant issues, and considering the novelty of the regulation and the need to ensure the development and establishment of the payment market in Israel, the Authority invites the public to express their positions and opinions, including on the specific questions at the end of the Draft Reporting Directive, mainly concerning the frequency of reports, the obligation to submit financial statements, and the publicity of the reports (in relation to Sections 11(h), 30, and 31 of the Draft Directive, and section D(3) of the Regulatory Impact Assessment Report (RIA)).   Ancillary Services Directive Section 22(c) of the Law allows a payment company, alongside its main regulated activity, to engage in providing ancillary services, including ATM services, currency conversion ancillary to a payment service, provision of credit ancillary to a payment transaction, or a service listed in Part B of the Seventh Schedule to the Law (“Ancillary Service”), all without requiring an additional license for this. Accordingly, Section 22(e) authorizes the Authority to set provisions regarding Ancillary Services to ensure the protection of customers’ interests in all aspects arising from the provision of the Ancillary Services. It should be noted that on May 20, 2024, the Authority published for public comments a draft of the Ancillary Services Directive. The final version of the directive adopted some of the public comments, many of which were submitted via our firm. The Directive addresses three main topics: protecting the interests of payment companies’ customers; corporate governance regarding consumer credit; and disclosure obligations. Below are the main changes compared to the draft directive and important highlights in the final version of the Ancillary Services Directive:

1. Definition of “Consumer Credit” and Policy Setting

• The Directive added a definition for the term “Consumer Credit”, which is “credit” that meets all the following conditions:[2]
  • Credit provided to a “borrower” as defined in the Fair Credit Law, 1993, except for credit provided to a licensed dealer, as defined in the Value Added Tax Law, 1975, not for personal, household, or family use;
  • The amount of credit the borrower actually received in a single credit transaction does not exceed the amount specified in Section 15(b)(1) of the Fair Credit Law;
  • The aggregate credit of the borrower with the payment company does not exceed NIS 5 million.
• The obligation of the payment company’s Board of Directors to set a policy regarding the provision of credit ancillary to a payment transaction was narrowed to apply only to consumer credit.

 

2. Disclosure Obligations

• The Directive imposes an obligation on a payment company to disclose to the customer relevant details regarding the scope of the Ancillary Service provided by it, including the terms and price of the transaction, the possibility of canceling it, and the ways to do so.
• Regarding the provision of credit ancillary to a payment transaction, the disclosure obligation was limited to the provision of consumer credit only. It is clarified that providing credit to businesses to which the Fair Credit Law does not apply is not included in this obligation.
• It is clarified that there is no requirement to provide a physical agreement, and presenting the draft agreement in digital media and allowing the borrower to print it meets the requirement to provide a copy of the draft agreement. The Authority also clarified that if the loan agreement is written in English, English can also be used in the disclosure form.

 

3. Prohibition on Conditioning a Service with Another Service

• A payment company is prohibited from conditioning the provision of a service to a customer, primary or ancillary, with the purchase of another asset or service from it or from another person specified by the company, unless there is a reasonable business connection between the requested service and the condition.
• Despite the above, a payment company may approach the Authority’s staff to determine whether a policy of conditioning a service with another service will be considered as having a reasonable business connection as mentioned.

 

4. Additional Provisions

• A payment company must provide an appropriate response to a customer’s inquiries regarding an Ancillary Service provided to them, without limiting it to a specific matter, including inquiries about the service provided or termination of the engagement.
• A payment company engaged in providing credit ancillary to a payment transaction shall not enter into a transaction with a minor, either personally or through their parent or guardian.
• The Directive will take effect 30 days from the date of publication of the notice of the Directive in the Official Gazette.

    To view the Ancillary Services Directive (in Hebrew) >> Click here. To review the summary of public comments and the Authority’s response >> Click here. To read the previous client update regarding the draft Ancillary Services Directive >> Click here.     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 and providing comments on the Draft Reporting Directive, as well as any questions or clarifications.     [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.   [2] The definition is essentially similar to the definitions in the corresponding directives of the Capital Market Authority and the Bank of Israel which regulate the provision of consumer credit.