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General climate and trends
General innovation climate
What is the general state of fintech innovation in your jurisdiction, including any notable trends, innovations, innovators and future prospects?
Many Israeli companies focus on fintech. Companies rely on ground-breaking Israeli technological advances in fields such as big data analytics, artificial intelligence, blockchain and computer vision. Israeli regulators – mainly the Bank of Israel and the Commissioner of the Capital Markets, Insurance and Savings (CMIS) – have expressed their view that technological progress is key to maintaining an efficient, consumer-friendly market. For example, the CMIS has indicated that it will provide certain regulatory advantages to companies that embrace technological solutions for the benefit of their consumers, and the Bank of Israel is working on launching an ‘open banking’ initiative, inspired in part by the EU Payment Services Directive. Many banks and other financial institutions have established internal innovation divisions or departments. One of Israel's largest banks has launched a mobile-only bank (a digital branch), using new technologies and specific branding. Other companies have considered launching ‘sandboxes’ for developers, offering application programming interfaces for certain services.
Have there been any particular developments – regulatory or commercial – in any of the following fintech sectors?
Distributed ledger technology and digital currencies (eg, blockchain, smart contracts and Bitcoin)?
Activities related to virtual tokens and cryptocurrency (including issuing, marketing, selling and buying, exchanging, storing, transferring and using cryptocurrency) are unregulated. However, on either 1 October 2018 or the date on which an order to prohibit money laundering is published (whichever is the earlier), services in relation to cryptocurrency (eg, sale, exchange and safekeeping) will be regulated under the new Supervision of Financial Services (Regulated Financial Services) Law 2016. Under this law, a licence is required in relation to provision of services in financial assets by way of business; the new definition of ‘financial assets’ under the law explicitly includes ‘virtual currencies’ (without further definition), and the term ‘service’ in a financial asset includes exchange, redemption, change, conversion, sale, transfer, management or safekeeping of financial assets.
Such services may also be regulated under the Israeli Securities Authority, as cryptocurrency may be considered securities. A committee established by the authority to examine the need for cryptocurrency regulation has published an interim report recommending that, as a general rule, cryptocurrencies that confer rights similar to the rights conferred by traditional securities (eg, shares, bonds and participation units) should be deemed securities. As part of the interim report, the committee recommended investigating the integration of issuances of cryptocurrencies using a regulatory ‘sandbox’ – a unique programme for early stage fintech companies, including close regulatory monitoring alongside regulatory easing for a limited period. However, to date no regulatory sandbox has been initiated.
The interim report does not reflect current law and indicates only possible regulatory adjustments that may be made in the future.
Alternative lending platforms?
As of February 2018, the operation of a ‘credit intermediation system’ requires the relevant licence from the CMIS and is regulated and supervised under the Regulated Financial Services Law. A ‘credit intermediation system’ is defined under the law as an online system operating through the Internet or by other technological means prescribed by the Ministry of Treasury, which is used to mediate between lenders and borrowers in order to execute transactions for granting credit and for operating such transactions. The credit intermediation system is used for individual borrowers and may be used only for incorporated borrowers under certain conditions specified under the law and for loans not exceeding NIS1 million.
Digital payments, remittances and foreign exchange?
Digital payments are currently unregulated. However, digital remittances and foreign exchange are regulated under the Prohibition on Money Laundering Law 2000. On either 1 October 2018 or the date on which an order to prohibit money laundering is published (whichever is the earlier), digital remittances and foreign exchange will be regarded as services in financial assets and will be regulated under the Regulated Financial Services Law.
Alternative financing (including crowdfunding)?
During 2017 new regulations were implemented in Israel to regulate the raising of equity and debt through crowdfunding.
The regulations enable online platforms to register with the Israeli Securities Authority as offering coordinators and license their activity as crowdfunding platforms. Licensed crowdfunding platforms offer public investors the opportunity to invest up to approximately $1 million to $1.5 million in certain companies, without limitation on the number of investors.
This equity-funding route is expected to materially grow over the next few years.
Investment, asset and wealth management?
The Israeli Securities Authority has issued the Directive on the Provision of Investment Services with the Use of Technological Means, defined as:
Providing Social/Mirror Trading services and Providing Investment Services online, or using an algorithm in order to make decisions, without interacting with a human factor, in any of the following:
(1) Conducting a “needs analysis” and engaging in an agreement;
(2) Determining the investment policy and the client’s risk tolerance level;
(3) Ongoing provision of Investment Services.
The directive states that this activity should be licensed under the Regulation of Investment Advice, Investment Marketing and Investment Portfolio Management Law 1995.
Robo-advice and artificial intelligence?
The Directive on the Provision of Investment Services with the Use of Technological Means covers robo-advice and artificial intelligence.
Any other technologies?
The Israeli Securities Law prohibits trading platforms that are operating in Israel from offering trades in binary options to clients that are in or outside Israel.
The law defines ‘binary options’ as agreements or arrangements, the value of which is derived from the value of currencies, commodities, interest rates, exchange rates, indexes or another financial instrument, which comply with all the following:
- the receipts and payments deriving from it have been determined in advance and are for a fixed sum or at a fixed percentage of a predetermined amount; and
- according to its conditions, its holder is entitled to receipts if a certain event occurs on its expiration date.
How would you describe the regulatory policy for fintech products and services in your jurisdiction?
There is a strong indication that regulators are willing to embrace new technologies and innovations. However, privacy concerns remain and regulations may delay such efforts.
Have any fintech-specific laws or regulations been enacted in your jurisdiction? Are any envisaged?
There are no fintech-specific laws or regulations in Israel. However, each fintech product may be regulated in accordance with the general laws in Israel on a case-by-case basis. For example, cryptocurrencies are soon to be regulated under the new Supervision of Financial Services (Regulated Financial Services) Law 2016 and may be regulated in accordance with the Israeli Securities Laws. Robo-advice services that provide investment advice will be regulated under the Investment Advice Law.
Which government authorities regulate the provision of fintech products and services?
There is no specific government authority that regulates the provisions of fintech products and services. Each type of fintech product may be regulated under a different authority, as applicable.
The main government authorities that can regulate fintech products include:
- the Israeli Securities Authority;
- the Commissioner of the Capital Markets, Insurance and Savings (CMIS);
- the Bank Supervision Department at the Bank of Israel; and
- the Israeli Money Laundering and Terror Financing Prohibition Authority.
Financial regulatory framework
Which laws and regulations governing the provision of financial services apply to fintech businesses?
There is no specific law that refers to fintech businesses. The fintech industry is regulated under general Israeli law, including:
- the Securities Law, for fintech that relates to securities;
- the Companies Law, for fintech entities that are companies incorporated in Israel;
- the Investment Advice Law, for fintech businesses that provide investment advisory services; and
- the Regulated Financial Services Law, for certain financial activities.
Under what conditions are fintech businesses subject to licensing requirements? Are there any exemptions?
There are no specific licensing requirements for fintech businesses. These requirements depend on the nature of the provisions of the services. For example, a fintech business that provides investment advice must have a licence in accordance with the Investment Advice Law. Fintech services offering securities (or cryptocurrencies which may be treated by the Israeli Securities Authority as securities) to the public in Israel (ie, offering of securities to more than 35 retail investors during a 12-month period) require a prospectus in accordance with the Securities Law.
Are any fintech products or services prohibited in your jurisdiction?
The Israeli Securities Law prohibits trading platforms operating in Israel offering trades in binary options to clients who are in or outside Israel.
Data protection and cybersecurity
What rules and regulations govern the processing and transfer (domestic and cross-border) of data relating to fintech products and services?
The main Israeli legislation relating to processing and transfer of data (in general) is the Israeli Protection of Privacy Law 5741-1981. This law defines, among other things, obligations regarding the registration and maintenance of databases containing personal information. Specific regulations promulgated under this law deal with transfer of personal data outside of Israel (the Protection of Privacy (Transfer of Data Abroad) 5761-2001). There is also an instruction issued by the Privacy Protection Authority regarding outsourcing services for personal data processing.
There are specific Proper Conduct of Banking Business Directives, issued by the Israeli Supervisor of Banks, which deal with processing and transfer of data by banks. For example, Directive 357 provides guidance on the management of information technology and specifically relates to outsourcing that may include processing of data by third parties. Directive 362 deals with cloud computing and limitations on storing data in a cloud environment. These directives apply to banks and other regulated entities, but may be significant for fintech operations offered to banking institutions.
Instructions have also been issued by the CMIS relating to the management of cyber-risks in institutional entities. The instructions relate to cybersecurity and data protection, specifically in regulated entities in the insurance and pension sector, and may be significant for fintech operations offered to companies in this sector.
What cybersecurity regulations or standards apply to fintech businesses?
Other than the aforementioned, there are currently no specific Israeli regulations or standards related to fintech businesses.
What anti-fraud, anti-money laundering or other financial crime regulations govern the provision of fintech products and services?
With respect to anti-money laundering, there is no specific anti-money laundering law or order that refers to fintech companies. Fintech companies are subject to the general prohibition on money laundering activity and terror financing, along with any entity in Israel. However, Israeli anti-money laundering legislation also imposes substantial identification, registration and reporting duties under anti-money laundering orders on certain business sectors (a closed list), including financial entities engaging in certain financial activities (including banking corporations, credit providers, money service business (including money or value transfer services), insurance companies and portfolio managers). Accordingly, if the fintech company’s activity falls within the closed list of the regulated activities under anti-money laundering law, it will be subject to the applicable anti-money laundering order.
In addition, two new drafts of anti-money laundering orders which are applicable to the fintech industry were published in early 2018. These draft orders are pursuant to the new Regulated Financial Services Law:
- an anti-money laundering order that applies to financial assets services providers (including virtual currencies and other financial assets); and
- an anti-money laundering order that applies to credit intermediation systems (including peer-to-peer).
These draft orders also include identification, registration and reporting requirements paying heed to the anti-money laundering complexity and challenges that these industries impose. The market anticipates the ratification of these orders as, among other things, their absence poses regulatory challenges for the financially-supervised entities complying with the anti-money laundering regime.
In addition, Israel plays a significant role in the fintech industry, and many companies in Israel are engaged in this field (eg, the Israeli Money Laundering and Terror Financing Prohibition Authority holds roundtables from time to time with fintech companies and virtual companies). Further, last year the Israeli Ministry of Finance issued a manifesto regarding its intention to consider establishing a regulatory sandbox with respect to fintech companies.
What precautions should fintech businesses take to ensure compliance with these provisions?
There is no strict rule for fintech businesses to adopt in order to ensure compliance with Israeli laws. Fintech businesses should seek legal advice before providing any services. The provision of fintech products may give rise to various issues (eg, securities and anti-money laundering issues), as well as licensing requirements (eg, investment advisory licence).
What consumer protection laws and regulations apply to the provision of fintech products and services?
The Consumer Protection Law 5741-1981 regulates the protection of consumers. ‘Consumer’ is defined as any person who purchases a product or service from a dealer within the framework of the dealer’s business, mainly for a personal, home or family use. The law does not apply to commercial activities as between two businesses. It sets out various principles and requirements which may be applicable to the offering of fintech products and services, including, among other things:
- the prohibition of misleading consumers with respect to the material aspects of a transaction;
- rules regarding ongoing transactions;
- transactions entered into remotely;
- indication of prices for services; and
- disclosure of payment requirements.
Does the provision of fintech products or services in your jurisdiction raise any particular competition regulatory concerns?
No, the Israeli Antitrust Authority is considering competition law aspects of digital platforms in general and has commenced a public hearing for that purpose. Nonetheless, there is currently no specific competition law regulation concerning fintech.
Are there any particular regulatory issues concerning the cross-border provision of fintech products and services (eg, operating jurisdiction rules and currency controls)?
There are no currency control limitations in Israel; however, in certain cases there may be reporting requirements.
Financing, investment and government support
Does the government provide any incentives or support programmes to promote fintech innovation in your jurisdiction (eg, tax incentives, grants and regulatory sandboxes)?
The government provides direct funding for research and development (R&D) in various fields of technology through the Israeli Innovation Authority (formerly the Office of the Chief Scientist at the Ministry of the Economy). Many of the programmes are available for companies looking to innovate in the fintech field (ranging from start-ups at various stages of growth, through to mature and well-established companies and financial institutions), as long as they meet the criteria set out in the various programmes. Additionally, for early stage start-ups the Israeli Innovation Authority also supports funding through technology incubators, a number of which are open to invest in fintech companies, depending on their internal investment committee's discretion. From time to time, the authority has also offered special funding programmes for multinational corporations to establish R&D centres or innovation labs in Israel.
Similarly, tax incentives for technology companies, in particular those operating in certain various geographic areas in Israel, may also be available to fintech companies or their investors (eg, reduced corporate tax rates, accelerated deduction of R&D expenses and tax benefits for angels investing in start-ups) so long as they meet the general criteria prescribed under the law.
Has the government concluded any international cooperation agreements to promote and facilitate the cross-border expansion of fintech businesses?
The government arranges delegations of Israeli companies for roadshows and meetings with relevant potential partners and investors. It also supports marketing and export activities and cooperation with non-Israeli corporations through various funding programmes. These opportunities may apply also to fintech companies.
Financing and investment
What private financing and investment schemes are available and commonly used for fintech start-ups in your jurisdiction?
Investment in fintech companies in Israel is generally available as part of the robust and sophisticated technology investment system operating in Israel. While some venture capital funds include fintech companies in their portfolio as part of diversifying investment strategy, others have been set up specifically for investment in the fintech field. Of those specifically targeting the fintech industry, while some target early-stage companies investing smaller amounts at a higher risk, others seek to invest in growth stages and subsequently invest significant amounts at later stages of the company's lifespan. Additionally, many of the international financial institutions operating in Israel have collaborated and taken part in supporting many local fintech start-ups, offering them collaborations and beta sites in addition to direct investments. This has contributed to the growth of the fintech industry in both available capital and expertise.
What forms of IP protection are available for fintech innovations?
The same forms of IP protection are available for fintech innovations as for other types of innovation:
- patents, where the innovation is a patentable invention;
- copyright, for various documents (eg, white papers) and software; and
- trade secret protection for innovations that fall within the ‘trade secret’ definition under Israeli law:
commercial information of any kind, which is not public knowledge and which cannot readily and legally be discovered by the public, the secrecy of which grants its owner an advantage over its competitors, provided that its owner takes reasonable steps to protect its secrecy.
What rules govern the ownership of IP rights to fintech innovations?
The general rules applicable to all intellectual property will apply to fintech innovations. The first rights holder in an invention or work is the inventor or creator, except where the inventor or creator is an employee, in which case the first rights holder is the employer (unless otherwise agreed); generally, this also applies to trade secrets. An exception to this rule is moral rights, which belong to the creator of the work and cannot be assigned, but as there are no moral rights in software this is usually not an issue. It is customary in Israel to require employees to waive moral rights in favour of their employers, although this practice has not been examined by the courts. Where an invention is created by an employee in the course of employment, this is known as a ‘service invention’ and it is customary in Israel for employers to require their employees to waive any right that they may have to receive royalties for any such service inventions. Where an inventor or creator of a work is contemporaneously engaged by an academic institution, hospital or the Israel Defence Forces, the rules governing intellectual property in those organisations must be considered and it is best to provide for questions of ownership in advance.
What immigration schemes are available for fintech businesses to recruit skilled staff from abroad? Are there any special regimes specific to the tech or financial sector?
What immigration schemes are available for foreign investors and entrepreneurs wishing to invest in or establish a fintech business in your jurisdiction?