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The Banking Supervision Department of Israel has introduced new regulatory policies intended to enhance the stability and transparency of payment service providers (PSPs) deemed critical to financial stability.
The new policies, which are effective immediately, establish strict guidelines for ownership and influence within PSPs.
The intention is to mitigate risks posed by concentrated control and ensure compliance with international financial standards.
"The granting of holding permits is another significant tool at the disposal of the Bank of Israel for maintaining the stability of the banking system. In the framework of granting holding permits, the applicant's suitability to hold the means of control is examined,” said Amir Yaron, governor of the Bank of Israel.
“The policy also takes into account aspects of increasing competition in the banking system through the facilitations we have granted regarding the granting of holding permits in a small bank."
Under the updated framework, any entity that is seeking to hold more than 5 percent ownership in a PSP of importance to financial stability must obtain a permit from the governor of the Bank of Israel after consultation with the Licensing Committee.
Ownership exceeding 10 percent has been generally prohibited, unless exceptional conditions warrant explicit approval from the central bank.
Applicants for such permits will need to demonstrate financial stability, ethical business practices, and adherence to anti-money laundering (AML) and counter-terrorist financing laws.
To prevent undue influence, permit holders are prohibited from interfering in PSP operations or voting decisions without prior authorisation.
In addition, the regulator has strictly forbidden joint arrangements or undisclosed agreements to control PSP activities.
The central bank has committed to permit applications being reviewed within four months of submission, provided all required documentation (including financial structures and details of significant shareholders) have been submitted.
Managing control
The policy also extends to banking corporations, and seeks to limit the influence of minority shareholders, particularly in institutions without controlling stakeholders.
For example, in banks with controlling shareholders and no public securities issuance, holding permits will be capped at 10 percent of any type of control.
In smaller banks, permits may allow up to 20 percent ownership of profit participation and liquidation rights, while voting and director appointment rights will remain limited to 10 percent for a period of ten years.
"The policy we are publishing is aligned with the principles by which the Supervisor of Banks has operated in recent years in granting holding permits and is consistent with various types of corporations requiring a permit — public corporations, with or without a controlling core, as well as non-public corporations,” commented Daniel Hahiashvili, the banking supervisor for the country.
He added that “in light of the importance we see in supporting and encouraging the establishment of new banks, we have allowed for a relaxation in our policy regarding the granting of holding permits for a small bank, which is limited in time and scope".
The Israeli government has left the door open to deviations from these rules, which it says may be granted at the discretion of the governor of the Bank of Israel, particularly in cases where legal rights predate the policy’s implementation.
A tough approach
The new policy is comparatively strict compared with those in place in jurisdictions such as the UK, EU and US, where ownership changes typically trigger reviews, but not uniform caps like those that are being imposed in Israel.
Regionally, Israel has also diverged from countries with burgeoning financial sectors, including the United Arab Emirates and Saudi Arabia.
The new rules resemble more closely the policies on ownership of countries such as China and India.
China imposes strict ownership limits for foreign investors in financial services, while the Reserve Bank of India (RBI) caps ownership at 40 percent for private entities in systemically important payment systems to ensure diverse control is maintained.
Israel’s framework seeks to mitigate risks from concentrated control, but could also deter investment due to the increased regulatory hurdles that companies will now need to overcome.
