Background to licensing requirements and exemptions
Adoption of new permanent exemption regulations
Main exemptions for credit extension
Additional temporary exemption for payment service providers


Background to licensing requirements and exemptions

Since 2017, the extension of credit in Israel has been a regulated activity that triggers a licensing requirement under the Supervision of Financial Services (Regulated Financial Services) Law 2016. "Credit extension" is defined very broadly in the Financial Services Law, in that it essentially includes any engagement in credit extension by way of business in Israel.

Until recently, foreign financial institutions (eg, banks, insurance companies and broker-dealers) who engaged in credit extension to Israeli residents, as well as some other types of entities, could rely on various exemptions that were available under temporary regulations (known as the "Exemption Regulations"). However, these regulations expired on 31 December 2021, and in order to avoid a regulatory gap, the Israeli regulator issued a no-action letter, allowing parties to continue to rely on the exemptions under the expired regulations, until new regulations are enacted and enter into force.

Adoption of new permanent exemption regulations

On 26 October 2022, after finalising long legislative procedures, new regulations were officially published and entered into force: the Supervision of Financial Services Regulations (Regulated Financial Services) (Exemption from Licensing)-2022 (the New Exemption Regulations).

The New Exemption Regulations replace the former exemption regulations and were enacted as permanent regulations, with no expiry date. Therefore, they provide much greater certainty to the market players engaging in this field of business.

Main exemptions for credit extension

The New Exemption Regulations are largly similar to the former exemption regulations.

Below is a summary of the main exemptions that are generally applicable to foreign (non-Israeli) financial institutions under the New Exemption Regulations:

  • foreign banks – a bank based, licensed and supervised, including in terms of anti-money laundering (AML) obligations, in an Organisation for Economic Co-operation and Development (OECD) country (excluding a bank which is subject to the licensing requirements under the Israeli Banking (Licensing) Law – 1981);
  • foreign entities controlled by banks – a corporate entity controlled by, or under the same control as, the bank set forth above, 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 obligations) in an OECD country, which does not provide consumer credit in Israel;
  • broker-dealers – a corporation engaging in derivatives activity, repurchase of securities, securities lending or provision of brokerage services (to its own account or accounts of others) that is incorporated in, and is supervised by, an OECD country and that is permitted to extend credit (with respect to a credit extended in connection with such trading activities). This exemption is a result of essentially "combining" two separate exemptions which were included in the former exemption regulations;
  • 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 Israeli shekels. In the draft of the new regulations, it was proposed to discontinue this exemption and replace it with a new exemption that is essentially based on the nature of the borrower and the concept of "sophisticated clients". However, following strong criticism and lobbying, this proposal was eventually rejected, and the large business loan exemption remains unchanged; and
  • 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.

Additional temporary exemption for payment service providers

As the field of payment services in Israel, including regulation of payment service providers, is currently undergoing a comprehensive regulatory reform (which is not yet concluded), and in order to provide regulatory certainty to foreign entities engaging in the provision of payment services to Israeli residents, a specific (and temporary) exemption was added under the New Exemption Regulations.

This exemption applies to foreign payment services providers based, licensed and supervised in a "recognised country" (ie, the United States, an EU country or the United Kingdom), which are:

  • permitted under their foreign licence to provide payment services; and
  • subject to AML regulations in a recognised country (including with respect to its activity in Israel).

This exemption provides that such services will be limited to the scope of services permitted under the foreign licence and that services with respect to virtual currencies will not be included.

In addition, this exemption also applies to credit extended by foreign payment service providers, provided that the foreign payment service provider:

  • is permitted under its foreign licence to extend credit in connection with its payment services; and
  • has an address in Israel to accept service of process.

It should be noted that this exemption applies only with respect to credit extended in connection with a payment, as defined in the law of the applicable "recognised country".

Further, the New Exemption Regulations clarify that the extension of credit by a foreign payment services provider remains subject to the Fair Credit Law 1993 (an Israeli consumer law that regulates the terms of credit extended to individuals and non-business borrowers).

This specific exemption will remain in force until 1 January 2024 and, thereafter, will be revisited.

For further information on this topic please contact Shiri Shaham or Moshe Pasker 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.