Introduction
Role of information service provider
Requirements for information service providers
Comment
In recent years, the Israeli government and the Bank of Israel have been initiating various actions that are intended to implement the open banking reform. The primary aim of the reform is to increase competition in the Israeli financial services market, which is currently rather concentrated and consists of a relatively small number of players.
One of the key steps of the reform is the recent adoption in November 2021 of new legislation – namely, the Financial Information Service Law 2021. The new law regulates the access to be granted to customers, through certain regulated entities, to information regarding the financial services provided to them. The hope is that once customers can easily access well-processed information about their own consumption of financial services, they will be better equipped to:
- search for alternative service providers;
- consider the proposals they receive on a more informed basis; and
- negotiate better terms.
Role of information service provider
The new law contemplates the entry of new players to the market – namely, entities that will be licensed or authorised to act as "information service providers". Such entities will be entitled, with the consent of the customer, to obtain online access to information about that customer held by financial services providers, which are defined as "information sources". The information sources – which include banks, credit cards companies, brokers, insurance companies, pension funds and portfolio managers – will be required to supply information service providers with all of the information regarding the activities of the customer with the information source, including the services provided and the fees charged.
Following receipt of the information and subject to the consent of the customer, the information service provider may share the information with other financial services providers, so that they can come up with improved proposals to send to the customer, based on such information.
In the explanatory notes to the new law, the government expresses its hope that this flow of information will help to remove two main barriers currently restricting customers' ability to move their business to alternative financial services providers, and hence restricting competition – namely:
- the challenges faced by the customer when comparing the various financial services and products offered, given their complexity; and
- the inherent advantage of the financial service provider that already holds the relevant information about the customer. The financial service provider's competitors cannot efficiently propose competitive offers without this information, which may be relevant to tailoring the services to the customer and coming up with attractive pricing offers.
In addition to their roles regarding the flow of information, information service providers may assist the customer in negotiating with alternative service providers and generally advise the customer regarding the consumption of various financial services. An information service provider is also permitted to propose its own financial services to the customer.
Requirements for information service providers
Information service providers must obtain a licence for the provision of these services from the Israeli Securities Authority. Applicants will be required to demonstrate:
- that they implement appropriate information security and risk management mechanisms;
- their ability to provide the services in accordance with the law; and
- the integrity of their officers and controlling shareholders.
The controlling shareholders will also be required to obtain permits for holding control in an information service provider. Providers of financial services that are already licensed to provide various services (eg, banks and other credit providers, credit card companies, pension funds and insurance companies) are exempted from the licensing requirement. Instead, they must receive an authorisation from the regulator that granted the licence to them, as applicable, to act as information service providers in addition to the activities that they are already permitted to undertake under their current licence.
The new law contains elaborate consumer protection measures that are aimed at ensuring the protection of customers' rights, their privacy and the security of their information. Additional provisions are further aimed at ensuring that customers are properly, and on an informed and ongoing basis, providing their consent to the various flows of information. Other provisions are aimed at avoiding potential conflicts of interest by the information service providers and undue influence on customers by existing financial services providers that are the source of the information. For example, information service providers are not generally permitted to receive any benefits from any third party (other than the customer) in connection with the services or the information.
The new law will, for the most part, enter into force in June 2022, with some provisions entering into force at a later date.
It is hard to assess whether independent market players that are not already providers of financial services will view the new information service provider position as sufficiently attractive to motivate them to undertake the complex process of obtaining a licence and building a new information technology and client infrastructure. Similarly, it is hard to assess whether existing players will want to seek the authorisation required in order to provide the information services. It appears that the scope of entry of such players will be one of the key factors for the success of the new law.
Another unknown is the level of confidence that consumers will have in this process, and whether they will view the potential advantages as balancing their natural reluctance to share private financial information with other parties. These, as well as other factors, will definitely affect the prospects of achieving the objectives of the new law, and in particular the prospects of accomplishing the expected significant increase in competition in the financial services market for the benefit of consumers.
The Bank of Israel has declared that the new law is a major step forward in the open banking reform, with the next contemplated stage expected to be legislation regulating the provision of payment services, generally on the basis of the principles of the EU Payment Services Directive. It remains to be seen, however, when this next stage will be implemented.
For further information on this topic please contact Shiri Shaham or Adi Attar at Yigal Arnon & Co by telephone (+972 3 608 7777) or by email ([email protected] or [email protected]). The Yigal Arnon & Co website can be accessed at www.arnon.co.il.