Extension of credit in Israel – changes in licensing exemption regulations

Since 2017, engaging in the extension of credit in Israel has been subject to a licensing requirement under the Supervision of Financial Services (Regulated Financial Services) Law 2016 (the Financial Services Law). The regulator in charge of the Financial Services Law is the Capital Markets, Insurance and Saving Authority at the Ministry of Finance.

Given the fact that “credit extension” is defined very broadly in the Financial Services Law – in the sense that it essentially includes any engagement in credit extension by way of business in Israel – certain exemptions from the licensing requirement have been available under the Supervision of Financial Services Regulations (Regulated Financial Services) (Exemption from Licensing) (Temporary Order) 2018 (the “Exemption Regulations”).

The Exemption Regulations were enacted under a temporary order and, after one extension, they were in effect until 31 December 2021. At the time of writing, they have not yet been extended. The regulator has, however, issued a no-action letter, allowing parties to continue to rely on the exemptions under the regulations that just expired.

Main exemptions

Below are the main exemptions which are generally applicable to foreign (non-Israeli) financial institutions under the Exemption Regulations:

foreign banks – a bank based, licensed and supervised (including in terms of anti-money laundering (AML)) in an Organisation for Economic Co-operation and Development (OECD) country;
foreign entities controlled by banks – a corporate entity controlled by a bank as set forth in the previous bullet point, whose credit extension activity and AML obligations are subject to supervision in an OECD country, and which does not provide consumer credit in Israel (ie, credit that is aimed primarily for personal, domestic or family needs);
foreign insurance companies – an insurance company based, licensed and supervised (including in terms of AML) in an OECD country, which does not provide consumer credit in Israel;
foreign broker-dealers – a corporate entity whose main business is the provision of securities-trading services, for others or for its own account, which is based, licensed and supervised (including in terms of AML) in an OECD country, and that is permitted to extend credit in connection with such trading activity;
large business loans – a corporate entity engaging in extension of credit solely to business corporations, where the amount of any single credit transaction is not less than 3 million new Israeli shekels;
venture credit – engaging in extension of credit solely to companies whose main business is research and development or manufacturing of novel high-tech products or processes, where the investment in such a company is a high-risk investment in comparison with other investments; and
derivatives activity – where the credit is provided in connection with derivatives or securities repurchase transactions by entities engaging in the business of such transactions.

New proposed exemption regulations

On 29 November 2021, the Israeli Ministry of Finance published a draft for public comments of new regulations, intended to replace and amend the current Exemption Regulations. It is proposed that the new exemption regulations will be enacted as permanent regulations (as opposed to a temporary order).

According to the draft for comments, the majority of the current exemptions from the licensing requirement will remain unchanged. However, there are some proposed changes, including the discontinuation of some exemptions and changes to the nature or criteria of other existing exemptions.

The main proposed changes in the draft that may be relevant to cross-border activities are as follows.

Derivatives activity exemption
It is proposed to make the existing exemption applicable to credit extended in connection with derivatives or securities repurchase transactions similar to the broker-dealer exemption, such that an entity which engages in such derivatives activity and extends credit in connection therewith shall be exempted from the licensing requirement only if:

such entity is incorporated and supervised in an OECD country; and
it is permitted under the laws of such OECD country to extend credit in connection with such derivatives activity.

Large business loans exemption

It is proposed to discontinue the current exemption which allows the provision of large business loans (ie, not less than 3 million new Israeli shekels per loan) and replace it with a new exemption that is essentially based on the nature of the borrower and the concept of “sophisticated clients”.

According to the draft, it is proposed to exempt a corporation that extends credit, regardless of the amount, only to individuals or corporations deemed to be “qualified clients” according to items 11 and 12 of the First Addendum to the Securities Law 1968.

This includes large corporations with shareholders’ equity exceeding 50 million new Israeli shekels, and high net-worth individuals with income or liquid assets in the threshold amounts set forth in the Securities Law.

This second change has triggered strong criticism, which is probably reflected in the comments that have already been filed with the Ministry of Finance and which the Ministry of Finance probably anticipated, since many lenders used to act under this exemption without having to bear the efforts and costs associated with a licence application and the licensed status.

It is argued that the cancellation of the large business loan exemption will prejudice business borrowers, who will now have fewer credit sources available. It is yet to be seen whether this change will remain as proposed in the draft, or whether it will be revised.

Transitional provision

The draft proposes to set out a transitional arrangement, according to which lenders that engaged in an exempted activity under the Exemption Regulations that were in force until 31 December 2021 may continue their current activities without a licence, provided that they apply for a licence within 60 days of the effective date of the new Exemption Regulations, and for as long as their application is pending a response from the regulator.

Next steps

The draft was open for public comments until 20 December 2021. After reviewing all public comments, the draft should be scheduled for a discussion and approval by the finance committee of the Knesset (the Israeli parliament), which is likely to occur in the near future.

No-action letter

On 30 December 2021, just before the expiry date of the Exemption Regulations, the Capital Markets, Insurance and Savings Authority published a no-action letter, confirming that it does not intend to take enforcement actions against entities that were exempted under the expired Exemption Regulations until: