Fintech landscape and initiativesGeneral innovation climate
What is the general state of fintech innovation in your jurisdiction?
The Israeli fintech industry has experienced considerable growth since the early 2010s. According to some estimations, there are more than 320 fintech companies with research and development teams in Israel or at least one Israeli founder, firmly positioning Israel as a world leader in terms of number of fintech companies relative to population size. Israeli fintech companies rely on groundbreaking domestic technological advances in fields such as Big Data analytics, AI, blockchain and computer vision.
Israeli regulators – mainly the Bank of Israel and the Capital Market, Insurance and Savings Authority (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.
In addition, an interministerial team appointed by the minister of finance (which also included representatives of the relevant Israeli regulators) recently published recommendations aimed at establishing a more lenient and adjusted regulatory regime for fintech companies.Government and regulatory support
Do government bodies or regulators provide any support specific to financial innovation? If so, what are the key benefits of such support?
Yes. The Israeli government and various financial regulators have taken several steps to encourage the activity of fintech companies in Israel, including as follows.
Creation of more lenient and adjusted regulatory regimeAn interministerial team appointed by the minister of finance, which included representatives of the relevant financial regulators, was established to examine the creation of a more lenient and adjusted regulatory regime for fintech companies. The recommendations published in January 2019 included:
- authorising the financial regulators to adjust the regulatory regime as it applies to the early stages of fintech companies' activity;
- establishing a regulatory sandbox and a joint regulatory committee to serve as a one-stop shop for fintech companies participating in the programme; and
- creating a specific, more lenient anti-money laundering order applicable to certain fintech companies.
Leniencies in granting licences to digital banks and insurersThe Bank of Israel recently published its new policy for the establishment of new banks in Israel, aimed at, among other things, making it easier for entrepreneurs to establish digital banks. Similarly, the Capital Market, Insurance and Savings Authority (CMIS) has relaxed the threshold conditions for applying for an insurer's licence and indicated that it will provide certain regulatory advantages to companies that embrace technological solutions.
Leniencies in insurtech investmentsThe CMIS recently published a consultation paper regarding regulation leniencies for investments in insurtech initiatives by insurers, in which it suggested several proposals for such leniencies (relating to their solvency regime and investment limitations, among other things). The public has been encouraged to respond and suggest additional steps to support the Israeli insurtech industry.
Establishment of new innovation lab in fintech-cyber fieldThe Ministry of Finance, the National Cyber Directorate and the Innovation Authority are leading the establishment of an innovation lab in the fintech-cyber field. The lab will host international and local financial institutions, regulators, academia and governmental agencies, enabling them to work with private market players to develop new services and products in this field.
Encouragement of fintech activityThe Israeli Securities Authority (ISA) has taken steps to encourage fintech activity. In this regard, a committee established to examine the need for cryptocurrency regulation has published its final report recommending that, as a general rule, cryptocurrencies that confer rights similar to those conferred by traditional securities (eg, shares, bonds and participation units) should be deemed securities. As part of the report, the committee recommended investigating the integration of issuances of cryptocurrencies using a regulatory ‘sandbox’ – a unique programme for early stage fintech companies, featuring close regulatory monitoring alongside regulatory easing for a limited period.
The report does not reflect current law and indicates only possible regulatory adjustments that may be made in future.
Together with other regulators from around the world, the ISA has launched the Global Financial Innovation Network (GFIN). The initiative for the international network was developed by the UK Financial Conduct Authority and other organisations with the aim of establishing an international sandbox and a forum in which leading regulators worldwide can share practical and innovative information. The international sandbox is designed for firms that wish to test innovative products, services or business models concurrently in multiple jurisdictions.
Together with the other financial regulators, the ISA defined the conditions of membership in the GFIN, its structure and the modes of activity of its members. The following goals were defined as a result of the discussions:
- to act as a network of regulators to collaborate and share experience in the field of financial innovation, including with regard to emerging technologies and business models;
- to provide a forum for joint policy work in the RegTech field, based on shared experience and knowledge; and
- to create an international environment for firms interested in performing cross-border trials.
The GFIN also permitted local fintech firms to participate in the international sandbox.
In July 2018 the ISA established the regulatory Innovation Hub for fintech initiatives. In view of the fintech field’s potential and actual contribution to the Israeli capital market and economy, the ISA publicly invited firms to engage in dialogue based on a shared language for the ISA and the relevant stakeholders in this field. As a result, the ISA worked with several fintech firms in various contexts to help them understand their relevant regulatory requirements and adapt their activities to the relevant regulatory framework.
Financial regulationRegulatory bodies
Which bodies regulate the provision of fintech products and services?
No specific government authority regulates the provision of fintech products and services. Each type of fintech product may be regulated by 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 Authority;
- the Bank of Israel bank supervision department; and
- the Israeli Money Laundering and Terror Financing Prohibition Authority.
Which activities trigger a licensing requirement in your jurisdiction?
Public offering of securitiesAs a general rule, cryptocurrencies that confer rights similar to those conferred by traditional securities (eg, shares, bonds and participation units) should be deemed securities. In Israel, the offering of securities to the public triggers obligations under local public offering rules – in particular, the obligation to publish a locally compliant prospectus. The prospectus must be in Hebrew, prepared in accordance with the Securities Law and approved by the Israeli Securities Authority (ISA).
If the Israeli offering is conducted on a private placement basis, no local filing or registration need be undertaken and no locally compliant prospectus need be prepared. The Israeli offering will be considered a private placement only if it is made (both offered and sold) to less than 35 Israeli investors in any 12-month period.
Investors mentioned in Section 15A(b)(1) of the Securities Law (ie, sophisticated investors) are disregarded for the purpose of the 35 investors count. Accordingly, an offer or sale of financial products to any amount of sophisticated investors will not trigger the registration requirements.
Investment marketing activitiesPursuant to the Israeli Regulation of Investment Advice, Investment Marketing and Portfolio Management Law 1995 (Investment Advice Law), any person providing investment advice or investment marketing and portfolio management services (as defined below) must hold a licence, with the exception of persons that provide such services only to ‘qualified clients’ (as defined in the Investment Advice Law).
The Investment Advice Law defines ‘investment advice’ as the provision of advice to others regarding the advisability of an investment, holding, purchase or sale of ‘securities’ and ‘financial assets’ (as such terms are defined in the Investment Advice Law). For this purpose, ‘advice’ may be given directly or indirectly, including by way of advertising, circulars, opinions, mail, fax or any other means, except advertising by the state or a corporation fulfilling a function under law.
‘Investment marketing’ is defined as the provision of investment advice with respect to a financial asset to which the investment adviser has an affinity (known collectively with investment advice as ‘advisory services’).
‘Portfolio management’ is defined under the Investment Advice Law as “the performance of transactions, at the performer's discretion, for the accounts of others”.
Notably, portfolio managers cannot, at their discretion, purchase assets that do not fall under the law's definition of such for a client's portfolio. This includes cryptocurrencies that are not a listed security or financial asset. Portfolio managers can provide investment advice or marketing services regarding such an asset (ie, they can provide advice or marketing services regarding cryptocurrencies only as a part of portfolio management services pursuant to the law and alongside purchasing assets that fall under the application of the law). Thus, a portfolio manager may not manage a portfolio of cryptocurrencies (that are not tradable securities) for customers.
Brokerage activities and referral to exchangesAccording to the Securities Law, it is illegal to offer securities trading services (including brokerage services) to Israeli clients through a securities trading system that is not licensed in Israel.
‘Securities trading services’ are defined as any referral of Israeli investors to trade or execute securities (including financial instruments) on a system for trading in securities outside Israel.
‘Financial instruments’ include:
- ‘securities’, as defined in Section 1 of the Securities Law;
- securities issued by the government or the Bank of Israel;
- ‘closed fund units’, as defined in the Joint Investment Trusts Law;
- agreements or arrangements, the value of which is derived from the value of currencies, commodities, interest rates, exchange rates, indexes or another financial instrument; and
- any other financial instrument designated by the minister of finance.
Alongside this prohibition, the Securities Law authorises the chair of the ISA to issue permits to entities to offer said services. On 30 December 2018 the ISA published the conditions under which it will examine applications for such permits. Under these general permit conditions, entities may be granted a permit if all of the following conditions apply:
- the entity is under the supervision and regulation as a broker-dealer in the United States or the European Union;
- the entity does not act on behalf of a foreign exchange in which the securities transactions will be performed; and
- the entity will not market a specific foreign exchange or specific market.
As a general rule, entities that meet the above conditions will be granted a permit. Entities that do not meet these conditions are still entitled to apply for a permit and their applications will likely be examined on a case-by-case basis.
According to a recent amendment to the general permit conditions dated 10 June 2019, entities that offer brokerage services only to sophisticated investors are permitted to provide said services without applying to the ISA for a permit, provided that they agree to comply with certain disclosure obligations set out in the general permit conditions.
Managing an exchange from IsraelSection 45(a) of the Securities Law provides that the opening or management of a system for trading securities requires a licence from the minister of finance. The Securities Law defines an ‘exchange’ as a company that has been granted such a licence.
However, the ISA has stated in numerous publications that the applicability of the Securities Law is territorial (ie, it applies exclusively to activities that are regarded as being conducted in Israel). A report published by the ISA (the Crypto-Committee Interim Report (March 2018) and the Crypto-Committee Final Report (March 2019), pages 41-42) specifically addressed the applicability of the Securities Law to exchanges from a territorial perspective. In this regard, the report states that whether an exchange operates ‘in Israel’ (and is therefore subject to the Securities Law) is determined by examining the affiliation of the exchange to Israel (or to Israeli investors). Accordingly, the report specifically states that an exchange might be regarded as operating in Israel even if it has no physical presence in Israel and is regulated by a foreign regulator (although a certain level of affiliation to Israel must exist in order for the Securities Law to apply).
Lending, factoring, invoice discounting and secondary market loan tradingEngaging in these activities in Israel by way of a business requires a licence for the provision of credit under the Supervision of Financial Services (Regulated Financial Services) Law 2016 (Regulated Financial Services Law) and, if conducted together with the provision of deposit taking services, a banking licence under the Banking (Licensing) Law 1981 (Banking Law).
Deposit takingEngaging by way of a business in deposit taking in Israel requires a financial asset services licence under the Regulated Financial Services Law, and – if conducted together with the provision of credit – a banking licence under the Banking Law.
Foreign exchange tradingEngaging by way of a business in foreign exchange trading in Israel requires a financial asset services licence under the Regulated Financial Services Law.
Payment servicesEngaging in merchant acquiring in Israel requires a merchant acquiring licence under the Banking Law, while the issuance of a credit card in Israel requires a licence for the issuance of a credit card under the Regulated Financial Services Law.
To date, no other payment services activities are regulated in Israel as such; however, a proposed amendment to the Regulated Financial Services Law is expected to set out in legislation the regulation of all activities of payment services providers. The amendment would encompass the licensing and supervision of all payment services providers and payment institutions. This draft amendment joins the recently published Payments Services Law 2019, generally modelled on the EU Revised Payment Services Directive, which regulates the commercial and consumer-related aspects of payment services.Consumer lending
Is consumer lending regulated in your jurisdiction?
In addition to the licensing requirement that applies to the provision of credit in general, as specified in “Regulated activities”, there are certain limitations with respect to consumer lending.
The Non-bank Loans Arrangement Law regulates the relationship between lenders and borrowers in connection to consumer loans. On 25 August 2019 the Fair Lending Law came into effect and replaced the Non-bank Loans Arrangement Law.
The Fair Lending Law aims to:
- increase competition;
- protect borrowers' rights; and
- create uniformity for all lenders.
The law applies only to individual borrowers, although the minister of justice may enact regulations that would extend the interest restrictions to certain corporate entities. However, such regulations have yet to be enacted and there is no indication when this is likely to occur.
The law determines the required contract form (ie, written) and the required disclosure to be provided by the lender. It also specifies limitations on consumer and default interest that may be charged. A violation of these provisions may carry financial penalties and, in certain circumstances, criminal penalties.Secondary market loan trading
Are there restrictions on trading loans in the secondary market in your jurisdiction?
There are no additional requirements specific to secondary market loan trading. All regulatory requirements applicable to the provision of credit in general, including licensing requirements, also apply to secondary market loan trading.Collective investment schemes
Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.
The Joint Investment Trust Law 1994 (Mutual Funds Law) applies to any arrangement whose purpose is joint investment in securities and the joint making of profits from the holding of such securities, or from making any transaction in such securities, which is not governed by any other law (except for an arrangement whose number of participants does not exceed 50 and which was made without a public offering).
With regard to the public offering of fund units, the Mutual Funds Law refers to the Securities Law and adopts the sophisticated investors and 35-person exceptions (please see “Public Offering of Securities” under “Regulated activities”).
In practice, a mutual fund cannot directly invest in a cryptocurrency of any kind due to various restrictions imposed on the management of a fund pursuant to the Mutual Funds Law. The main restriction is the directive specifying which assets may be purchased and held in a fund, which provides the following closed list of assets that fund managers may hold:
- securities and foreign securities listed on a stock exchange (subject to a few exceptions);
- futures contracts;
- ‘foreign currencies’ (defined as currencies that are legal tender in a certain country and not Israeli currency);
- cash; and
- any other asset that the minister of finance has specified in the regulations.
A ‘stock exchange’ is defined as “a stock exchange as defined in the Securities Law" (ie, a licensed stock exchange in Israel) or "a stock exchange outside Israel that has been given permission by a competent authority pursuant to the law of the country in which it is operating”.
According to the list, including the list set by the minister as per their authority under the law, commodities cannot be held directly. This list does not currently include any item in which a cryptocurrency could be included.Alternative investment funds
Are managers of alternative investment funds regulated?
Please see “Collective investment schemes”.Peer-to-peer and marketplace lending
Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.
As of February 2018, the operation of a credit intermediation system requires the relevant licence from the Capital Market, Insurance and Savings Authority (CMIS) and is regulated and supervised under the Supervision of Financial Services (Regulated Financial Services) Law 2016. 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 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.Crowdfunding
Describe any specific regulation of crowdfunding in your jurisdiction.
In 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, with no limitations on the number of investors.
This equity-funding route is expected to grow materially over the next few years.
In addition, please see “Peer-to-peer and marketplace lending”.Invoice trading
Describe any specific regulation of invoice trading in your jurisdiction.
In Israel, invoice trading is structured as a financing transaction secured by the invoices (contrary to factoring transactions that are considered true sale transactions). As such, the security interest must be duly registered in order to be perfected.Payment services
Are payment services regulated in your jurisdiction?
Yes. Engaging in merchant acquiring in Israel requires a merchant acquiring licence under the Banking (Licensing) Law 1981. The issuance of a credit card requires a licence for the issuance of a credit card under the Supervision of Financial Services (Regulated Financial Services) Law 2016 (Regulated Financial Services Law).
To date, no other payment services activities are regulated as such in Israel; however, a proposed amendment to the Regulated Financial Services Law is expected to set out in legislation the regulation of all activities of payment services providers. The amendment would encompass the licensing and supervision of all payment services providers and payment institutions. Notably, this draft amendment joins the recently published Payment Services Law 2019 – generally modelled on the EU Revised Payment Services Directive – which regulates the commercial or consumer-related aspects of payment services.
The Payment Services Law will apply from January 2020 to all payment services providers, including non-licensed ones, as well as foreign payment services providers which aim their services at Israeli residents.Open banking
Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?
The Bank of Israel is working on launching an open banking initiative, inspired in part by the EU Payment Services Directive.
In addition, under the Credit Data Law, certain lending institutions must report customers' data to a database maintained by the Bank of Israel. The Bank of Israel collects credit data from data sources (eg, credit providers and government authorities) and transfers it (with the customer’s consent) via credit bureaus to credit providers authorised to use the information (lenders) and to the customers themselves (borrowers).
The purpose of the database is to enhance competition in the credit sphere – both within the banking system and for non-bank entities. The system will enable customers to receive credit at the most beneficial terms available to them and is expected to change the current retail credit market rules.Insurance products
Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?
Yes – the sale or marketing of insurance products in Israel are regulated activities, requiring (depending on the specific circumstances) an insurer's licence or an insurance agent's licence from the Capital Market, Insurance and Savings Authority (CMIS) under the Supervision of Financial Services (Insurance) Law 1981. This obligation also applies to fintech companies.
However, the CMIS has indicated that it is willing to provide certain regulatory advantages to companies that embrace technological solutions for the benefit of their consumers.
In this regard, the CMIS recently published a consultation paper regarding regulation leniencies for investments by insurers in insurtech initiatives, in which it suggested several proposals for such leniencies (eg, relating to their solvency regime and investment limitations). The public has been encouraged to respond and suggest additional steps to support the Israeli insurtech industry.Credit references
Are there any restrictions on providing credit references or credit information services in your jurisdiction?
Yes – under the Credit Data Law, only credit bureaus licensed by the Bank of Israel can maintain and provide credit information to third parties.
Can regulated activities be passported into your jurisdiction?
Unless otherwise indicated under Israeli law, as a general rule, Israeli financial regulation has territorial applicability. As such, the provision of regulated activities in Israel or into Israel cannot be passported into Israel based on foreign regulation and would require a local licence.
The Israeli Securities Authority (ISA) may permit certain entities to provide services in Israel if they are regulated in their home country. For example
- entities that are supervised and regulated as broker-dealers in the United States, or as an investment firm or credit institution under the EU Markets in Financial Instruments Directive 2004, may be granted a permit to provide brokerage services in Israel; and
- funds that are regulated under the EU Directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (2009/65/EU) or the Investment Company Act 1940 may be offered or sold to the public in Israel, pursuant to a permit granted by the ISA.
Can fintech companies obtain a licence to provide financial services in your jurisdiction without establishing a local presence?
Establishing a local subsidiary or maintaining a local presence in Israel is generally a precondition for obtaining a licence to provide financial services regulated by the main financial regulators (ie, the Bank of Israel, the Israeli Securities Authority (ISA) and the Capital Market, Insurance and Savings Authority (CMIS)). In general, this precondition applies in respect of the following types of entity (among others):
- those licensed under the Banking (Licensing) Law 1981 (regulated by the Bank of Israel);
- those licensed under the Supervision of Financial Services (Regulated Financial Services) Law 2016, the Insurance Law and the Supervision of Financial Services (Provident Funds) Law 2005 (regulated by the CMIS); and
- those licensed under the Investment Advice Law (regulated by the ISA).
Sales and marketingRestrictions
What restrictions apply to the sales and marketing of financial services and products in your jurisdiction?
See “Regulated activities”.
Change of controlNotification and consent
Describe any rules relating to notification or consent requirements if a regulated business changes control.
As a general rule, a change of control event in respect of a financial entity licensed by any of the main financial regulators (ie, the Bank of Israel, the Israeli Securities Authority (ISA) and the Capital Market, Insurance and Savings Authority (CMIS)) requires the prior consent of the relevant regulator (in respect of certain financial entities, notifying the regulator may suffice).
In this regard, a change of control event in respect of the following types of licensed entity generally requires the prior consent of the relevant regulator:
- entities licensed under the Banking (Licensing) Law 1981 (regulated by the Bank of Israel);
- entities licensed under the Supervision of Financial Services (Regulated Financial Services) Law 2016, the Insurance Law and the Supervision of Financial Services (Provident Funds) Law 2005 (regulated by the CMIS); and
- entities licensed under the Investment Advice Law (regulated by the ISA).
Licensed entities under the Investment Advice Law must notify the ISA of any change of control.
Specific limitations may apply in respect of certain ‘sensitive’ industries (eg, oil refineries, military industries and telecoms).
A change of control event will usually subject the applicant to strict fit-and-proper tests and examinations of the controlling party by the relevant regulator.
Financial crimeAnti-bribery and anti-money laundering procedures
Are fintech companies required by law or regulation to have procedures to combat bribery or money laundering?
No specific anti-money laundering law or order refers to fintech companies. Fintech companies are subject to the same general prohibition on money laundering activity and terror financing as any other 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 (eg, banking corporations, credit providers, money service business, insurers and portfolio managers). Accordingly, if the fintech company’s activity falls within the closed list of the regulated activities under the Anti-money Laundering Law, it will be subject to the applicable anti-money laundering order.
In addition, a new anti-money laundering order which may be relevant to the fintech industry was published in April 2019. It applies to credit intermediation systems (including peer-to-peer). Another draft anti-money laundering order which may also be relevant to the fintech industry applies to financial assets services providers (including virtual currencies and other financial assets). These (draft) orders are pursuant to the Supervision of Services (Regulated Financial Services) Law 2016.
The (draft) orders include identification, registration and reporting requirements which pay heed to the anti-money laundering complexity and challenges that these industries pose. The market anticipates the ratification of the draft order applicable to financial assets services providers as, among other things, its 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 occasionally holds roundtables with fintech and virtual companies). Further, in January 2019 a governmental report was published recommending the establishment of a regulatory sandbox for fintech companies and outlining suggested methods for implementation, including reference to anti-money laundering aspects.Guidance
Is there regulatory or industry anti-financial crime guidance for fintech companies?
Peer-to-peer and marketplace lendingExecution and enforceability of loan agreements
What are the requirements for executing loan agreements or security agreements? Is there a risk that loan agreements or security agreements entered into on a peer-to-peer or marketplace lending platform will not be enforceable?
In general, loan agreements and security agreements must be documented.
There are no additional execution requirements with respect to loan or security agreements that are specific to peer-to-peer lending, nor are there any special risks regarding enforceability of such agreements.
Security will be registered in favour of peer-to-peer lending platforms licensed under the Supervision of Services (Regulated Financial Services) Law 2016 to the benefit of the lender. A borrower’s name can be disclosed to the relevant lender only where the lending platform is unable to collect.Assignment of loans
What steps are required to perfect an assignment of loans originated on a peer-to-peer or marketplace lending platform? What are the implications for the purchaser if the assignment is not perfected? Is it possible to assign these loans without informing the borrower?
There are no additional requirements regarding the assignment of loans originated on a peer-to-peer or marketplace lending platform and all requirements regarding the assignment of loans under Israeli law also apply in this regard. As a general rule, the borrower need not consent to an assignment of the lender's rights unless otherwise provided for in the loan agreement.
In general, notice of the assignment to the borrower is not statutorily required for enforceability, unless otherwise specified contractually. However, if the borrower does not receive notice of the assignment and proceeds to pay the assignor, the borrower’s obligation to pay under the loan agreement will be satisfied. The assignee will have no claim against the borrower. However, it may still claim against the assignor under the agreement between them.
Further, as is the case with lending platforms under the Supervision of Services (Regulated Financial Services) Law 2016, borrowers do not know the identity of lenders; as such, all payments will be made to the platform. If assignment is permitted under the agreement, the lender should provide notice of the assignment to the platform.Securitisation risk retention requirements
Are securitisation transactions subject to risk retention requirements?
This depends on the entity securitising and the type of securitised asset. Entities that are not Israeli banks are not subject to retention requirements. Banks in Israel may be subject to a regulatory retention requirement of 10% of the securitised assets. A draft securitisation law which was published in 2014 and is still pending suggested that the responsible minister will determine the retention requirements that will apply to other securitising parties (ie, not banks).Securitisation confidentiality and data protection requirements
Is a special purpose company used to purchase and securitise peer-to-peer or marketplace loans subject to a duty of confidentiality or data protection laws regarding information relating to the borrowers?
This depends on the identity of the entity that is used to purchase and securitise peer-to-peer or marketplace loans. Israeli privacy laws have no specific reference to their territorial scope. To date, the matter of whether Israeli privacy laws apply to foreign entities with no presence in Israel has not yet been formally addressed by the Israeli courts or the Israeli data protection regulator. However, the common perception is that they likely apply based on certain links between the contemplated activity and Israel, including if:
- servers containing personal data are located in Israel;
- processing activities are conducted in Israel;
- the personal data is being controlled from Israel; and
- there are Israeli data subjects.
To the extent that Israeli privacy laws apply to a special purchase vehicle (SPV) used for the purchase and securitisation of peer-to-peer or marketplace loans, such SPV will be subject to certain obligations under laws relating to the borrowers' personal data, including:
- registering a database with the Israeli Registrar of Databases;
- providing a notice to data subjects (ie, the borrowers) with information regarding the SPV's data practices;
- ensuring the confidentiality of the personal data; and
- safeguarding the personal data shared with third parties (including outside Israel).
The personal data of borrowers will not be available to peer-to-peer lending platforms licensed under the Regulated Financial Services Law unless the platform was unable to collect the debt and the data is required to enable the lender to take legal action in relation to debt collection.
Artificial intelligence, distributed ledger technology and crypto-assetsArtificial intelligence
Are there rules or regulations governing the use of artificial intelligence, including in relation to robo-advice?
The use of AI, including in relation to algo-trading and robo-advice, is mainly governed with regard to the provision of investment advisory and portfolio management services, which are regulated under the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law 1995 (Investment Advice Law).
On 23 August 2016 the Israeli Securities Autority (ISA) issued a directive instructing entities that hold a portfolio management licence or investment advising on how to implement the Investment Advice Law where the investment service is provided with the use of ‘technological means’, including using an algorithm to make decisions without interacting with a human.
In addition, on 24 June 2019 a district court issued a judgment regarding the legal question of when the provision of a service that includes the possibility of performing a trading operation using algorithms requires a licence under the Investment Advice Law. However, the law includes certain exemptions to the licensing requirement. For example, the provision of investment services to ‘qualified clients’ (defined in the law as the entities listed in the first schedule of the Investment Advice Law) does not require a licence (although it is subject to other provisions of the Investment Advice Law).
The ISA has made another reference to algorithmic trading in the context of ‘trading platforms’ (as defined under the Securities Law). In this ‘staff position’, the ISA described the terms under which a trading platform will not be deemed to provide investment advisory or portfolio management services, despite the fact that it allows clients to trade on the platform using algorithmic trading systems.
Finally, the Securities Law 1968 requires Israeli-licensed exchanges to set out in its rules and regulations certain provisions that will ensure the fairness and propriety of the exchange’s operation. As a consequence of this requirement, the Tel-Aviv Stock Exchange‘s rules and regulations include various provisions that aim to regulate the use of algorithmic and high-frequency trading.Distributed ledger technology
Are there rules or regulations governing the use of distributed ledger technology or blockchains?
No regulations specifically address the use of the technology.Crypto-assets
Are there rules or regulations governing the use of cryptoassets, including digital currencies, digital wallets and e-money?
The provision of financial asset services through a business requires a licence under the Supervision of Financial Services (Regulated Financial Services) Law 2016 (Regulated Financial Services Law).
The definition of a ‘financial asset’ provided for in the Regulated Financial Services Law is broad and includes virtual currencies, cash and monetary deposits. Thus, under the Regulated Financial Services Law, crypto-assets are regarded as financial assets and any exchange thereof for another financial asset (including redemption, separation, conversion, sale or transfer) and any managing or safekeeping thereof (also by means of a safe) requires a licence under the Regulated Financial Services Law.
The transfer and safekeeping of funds in connection with e-wallets are regarded as financial asset services. Accordingly, e-wallets (and other electronic applications) must apply for a licence under the Regulated Financial Services Law.Digital currency exchanges
Are there rules or regulations governing the operation of digital currency exchanges or brokerages?
See “Brokerage Activities and Referral to Exchanges” under “Regulated activities”.Initial coin offerings
Are there rules or regulations governing initial coin offerings (ICOs) or token generation events?
An ICO may also be regarded as a financial asset service under the Supervision of Financial Services (Regulated Financial Services) Law 2016 (see “Brokerage Activities and Referral to Exchanges” under “Regulated activities”).
Data protection and cybersecurityData protection
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 the general processing and transfer of data is the Protection of Privacy Law (5741-1981). Among other things, this law defines obligations regarding the registration and maintenance of databases containing personal information. Specific regulations promulgated under the law deal with the transfer of personal data outside Israel (the Protection of Privacy (Transfer of Data Abroad) Regulations (5761-2001)). The Privacy Protection Authority has also issued an instruction regarding outsourcing services for personal data processing. Additional regulations address the issue of data protection by establishing a broad and comprehensive arrangement regarding the physical and logical protection of databases and their management (the Protection of Privacy (Data Security) Regulations (5777-2017)). These regulations establish rules and mechanisms which aim to prevent the misuse of personal information – both by entities within an organisation and by outside parties.
Specific proper conduct of banking business directives, issued by the Israeli Supervisor of Banks, deal with the 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 third-party processing of data. 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 also be significant for fintech operations offered to banking institutions.
The Capital Market, Insurance and Savings Authority has also issued instructions relating to the management of cyber-risks in institutional entities. The instructions relate to cybersecurity and data protection – specifically at regulated entities in the insurance and pension sector – and may be significant for fintech operations offered to companies in this sector.Cybersecurity
What cybersecurity regulations or standards apply to fintech businesses?
Other than those set out in “Data protection and cybersecurity”, no specific Israeli regulations or standards relate to fintech businesses.
Outsourcing and cloud computingOutsourcing
Are there legal requirements or regulatory guidance with respect to the outsourcing by a financial services company of a material aspect of its business?
Several regulatory guidelines address outsourcing by financial service companies (mainly banks and institutional entities (eg, insurers and management companies of pension or provident funds)).
The Israeli Supervisor of Banks issues directives on the proper conduct of banking business. These directives mainly apply to banks and other bodies that are regulated under the applicable legislation. Directive 359A deals specifically with outsourcing and mandates certain provisions regarding (among other things):
- operations that cannot be outsourced;
- issues to be considered in an engagement with a service provider; and
- required reporting to the regulator.
For example, a bank cannot outsource the duties of its top management or certain decisions that require the bank’s discretion.
Directive 357 deals with IT management and contains specific provisions regarding outsourcing operations relating to these issues. The directive:
- mandates that the outsourcing of core systems requires a notification to the Israeli Supervisor of Banks (which can decline the specific outsourcing operation); and
- sets out which provisions should be included in an outsourcing agreement, such as provisions relating to:
- the service level agreement;
- confidentiality; and
- audit rights.
There is some difference between ‘regular’ and ‘significant’ outsourcing (the latter imposes additional restrictions and provisions).
Similarly, the Capital Market, Insurance and Savings Authority has issued a circular pertaining to obligations that apply to Israeli institutional entities (insurers and management companies of pension or provident funds) when they outsource a process, service or activity included in their core business to a third party.
These include provisions pertaining to (among other things):
- the inability of the institutional entity to transfer its obligations or responsibilities by law to a third party;
- certain processes that must take place in the institutional entity in relation to the outsourcing;
- an obligation to determine an outsourcing policy;
- specific obligations in relation to the outsourcing of a material activity; and
- reporting to the regulator.
The Private Protection Authority had also issued guidelines regarding outsourcing. The principles set out in these guidelines apply to public and private sector organisations and their purpose is to ensure that obtaining data processing services from a third party will not diminish an individuals' right to privacy. The principles include:
- the preliminary examination of the legitimacy and appropriateness of outsourcing the intended processing activity;
- the definition of data security and confidentiality provisions to prevent data leakage; and
- procedures regarding the fulfilment of the data subjects' review and rectification rights.
Financial bodies may be partially exempt from the provisions of these guidelines, provided that they are bound by and comply with the directives on the proper conduct of banking business.Cloud computing
Are there legal requirements or regulatory guidance with respect to the use of cloud computing in the financial services industry?
The Israeli Supervisor of Banks issued Directive 362 on the proper conduct of banking business, which deals with cloud computing. The directive mandates that banks cannot use cloud computing to operate core systems or operations. They also cannot use cloud services located outside Israel for sensitive information unless they ascertain that the cloud service provider maintains a level of protection that complies with the EU Data Protection Directive (the directive was not updated following the entry into force of the EU General Data Protection Regulation). The directive also contains guidance on:
- certain provisions that should be included in commercial agreements with cloud service providers; and
- banks’ obligation to:
- perform risk assessments and due diligence on each cloud service provider; and
- provide an annual report on their use of cloud computing services to the Israeli Supervisor of Banks.
The directive also emphasises that cloud computing is a specific type of outsourcing; as such, all applicable provisions regarding outsourcing also apply to cloud services.
Intellectual property rightsIP protection for software
Which intellectual property rights are available to protect software, and how do you obtain those rights?
Software can be protected by a copyright or patent or as a trade secret. In appropriate circumstances, it can also be protected by claims for unjust enrichment.
CopyrightSoftware is considered a literary work under the Copyright Act 2007, although there is no moral right in software (the moral right consists of the author’s rights of attribution and non-distortion). According to Section 4(a) of the Copyright Act, copyright subsists in any original literary, dramatic, musical or artistic work if it is fixed in any form. Copyright subsists automatically on creation and there is no registration of copyright in Israel.
The author of a literary work (including software) is the first owner of copyright in the work. The employer is the first owner of copyright in a work created by an employee during and as a result of their employment.
Under Section 38 of the Copyright Act, copyright protection endures for the life of the author plus 70 years after their death, subject to certain exceptions. In the case of a joint work, copyright subsists throughout the life of its longest-surviving joint author plus 70 years after their death.
PatentsPatent protection is available when software is part of a patentable invention; most technological inventions include some form of software. As a general rule, standalone software is not patentable, but according to court and patent commissioner jurisprudence, the fact that an invention contains software will not prevent its registration as a patent. It is questionable whether software combined with a business system is patentable.
The Patents Law 1967 governs patents in Israel. Patents afford protection only once they are registered. The commissioner of patents, trademarks and designs is responsible for the Patent Registry. Patents have a term of 20 years from application, subject to certain exceptions.
A patent holder is entitled to prevent any third party from exploiting the invention for which the patent has been granted without their permission – either in the manner defined in the claims or in a similar manner.
During the registration term, patent owners have the right to:
- produce, use, offer for sale, sell or import for one of these purposes the patented invention (where the invention is a product); or
- use the patented invention (where it is a process).
As with copyright, the basic rule is that the inventor is the owner of patent rights. In the absence of an agreement to the contrary, the employer is the owner of patent rights over inventions made by employees during and in the course of their service), although in some circumstances the employee may be entitled to royalties from the commercialisation of any such invention.
Patents can be licensed. However, in order for a licence to be binding on third parties, it must be recorded with the Israeli Patent Office.
Trade secretsSoftware – mainly source code – that falls within the definition of a ‘trade secret’ under the Commercial Torts Law 1999 is protected as a trade secret.
Trade secrets are defined as any business information which is not publicly known 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 the owner takes reasonable steps to protect its confidentiality. In theory, there is no limit on the duration of such a right. Information can remain protected as a trade secret as long as it remains confidential and does not enter the public domain.
The owner of the protected information usually owns the trade secret; in an employment relationship, the trade secret will belong to the employer. Patent applications that have yet to be published also constitute trade secrets.
Trade secrets can be licensed and there is no need to record the grant.IP developed by employees and contractors
Who owns new intellectual property developed by an employee during the course of employment? Do the same rules apply to new intellectual property developed by contractors or consultants?
As a basic principle under Israeli law, intellectual property created by an employee as a result of employment belongs to the employer (in the absence of a written agreement to the contrary). Specific laws and ordinances deal with the employer’s ownership of the various rights (including true inventions created by employees during and in the course of their service under the Patent Law (service inventions), works protected under the Copyright Act and layout designs protected under the Integrated Circuits (Protection) Law 1999). There are no legal provisions regarding this issue in connection with trademarks and trade secrets. Notwithstanding the foregoing, case law recognises an obligation on the part of employees to preserve their employer’s trade secrets as a result of their duties of good faith towards their employer.
Despite the various legal provisions, it is customary to include a general covenant in an employment agreement in which the employee assigns all of their IP rights to the employer (expressly including any service inventions).
A series of cases since 2010 have considered the question of employees’ right to royalties on service inventions separately to the question of ownership of such rights (which vests in the employer).
A contractor or consultant who is not an employee is the first owner of rights created in the course of providing services, unless otherwise agreed with the client or principal. The consultant or author is the first owner of the copyright in a commissioned work unless the parties agree otherwise – either expressly or implicitly (this is not the case where the commissioned work is a design). The consultant inventor is the first owner of the rights in a commissioned invention (an interesting question is whether they are the first owner of trade secret rights in a commissioned work, although this would almost invariably be determined by contract). Therefore, agreements with consultants or contractors should include a covenant in which the consultant or contractor assigns all of their IP rights to the principle or client.
The state is the first owner of a work made by or commissioned for the state or by an employee of the state in the course of and during their period of service.Joint ownership
Are there any restrictions on a joint owner of intellectual property’s right to use, license, charge or assign its right in intellectual property?
There are no express restrictions on joint ownership. The joint owners of a work, whether co-creators or by assignment, share all of the rights to the work or invention, including the rights to use, license or assign it. However, various aspects of the relationship between the joint owners and their duties to each other remain unregulated, which has raised doubt and uncertainty. The terms applying to joint ownership of a work or an invention may be agreed between the parties by contract. As with works or inventions that are not jointly owned, the assignment of copyright or rights in a patent or application require a written instrument and any changes in the ownership of a patent or patent application must be recorded in the patent registry.Trade secrets
How are trade secrets protected? Are trade secrets kept confidential during court proceedings?
Trade secrets are protected under the Commercial Torts Law 1999 and trade secret information under that law can remain protected as a trade secret as long as it remains confidential. The Commercial Torts Law grants the courts various powers to prevent the publication of trade secrets disclosed in the course of civil proceedings. The courts also have discretion to order closed hearings in order to protect trade secrets (among other reasons).Branding
What intellectual property rights are available to protect branding and how do you obtain those rights? How can fintech businesses ensure they do not infringe existing brands?
Brand protection primarily relies on trademarks. Copyrights – and to a lesser extent designs – also protect brand elements. A well-managed domain-name portfolio can make an important contribution to brand protection, particularly where the business has a significant online presence.
The Trademarks Ordinance [New Version] 1972 defines a ‘trademark’ as a sign comprised of letters, numerals, words, devices or other signs or combinations thereof, whether 2D or 3D, which is used to identify and distinguish the source of the goods or services of one party from those of others. Israeli law protects registered trademarks and unregistered well-known trademarks by means of the Trademarks Ordinance and certain unregistered trademarks by means of the passing-off tort under the Commercial Torts Law.
Graphics, artwork, photographs, web layouts and other artistic works, as well as jingles, theme songs and other musical works, may be protected by copyright. Logos and jingles may be protected by both the copyright and trademark regimes.
In certain limited circumstances, various branding aspects, such as unique screen designs, may also be protectable as registered or unregistered designs under the Designs Law 2018.Remedies for infringement of IP
What remedies are available to individuals or companies whose intellectual property rights have been infringed?
TrademarksInjunctive and monetary relief are both available for trademark infringement. In addition, statutory damages for passing off under the Commercial Torts Law can serve as a complementary claim to trademark infringement.
The infringement of a copyright or the violation of moral rights is a tort (although there are no moral rights in software, so this may be moot with regard to fintech). In principle, in actions regarding such rights, remedies under the law of torts apply. Remedies include injunctions, monetary awards, statutory damages (ie, compensation without the need to prove actual damage) of up to NIS100,000 (approximately $27,500) at the court’s discretion and the seizure and disposal of infringing materials.
PatentsInjunctive and monetary relief for patent infringement is available (there are no statutory damages for patent infringement).
Trade secretsMisappropriation of a trade secret is a civil tort and, as with copyright infringement, the remedies available include injunctions, monetary awards and statutory damages of up to NIS100,000 (approximately $27,500) at the court’s discretion.
Are there any specific competition issues that exist with respect to fintech companies in your jurisdiction?
No – the Competition 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 tax incentives available for fintech companies and investors to encourage innovation and investment in the fintech sector in your jurisdiction?
Tax incentives for technology companies, particularly 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.
A law that came into effect on 1 January 2017 introduced a new IP regime in Israel applicable to technology and high-tech companies that develop their intellectual property in Israel. Companies that qualify under this regime benefit from a reduced preferential corporate tax rate of 12% on qualifying income (this rate is reduced to 7.5% in certain specified development zones) as opposed to the standard 23% corporate income tax rate. In certain cases concerning multinationals (generally where the company’s turnover is higher than NIS10 billion), the applicable tax rate can be further reduced to 6%.In order to be entitled to these benefits, the law sets out certain convoluted conditions whose purpose is to ensure that the benefits will be provided only when the intellectual property is actually developed in Israel.Increased tax burden
Are there any new or proposed tax laws or guidance that could significantly increase tax or administrative costs for fintech companies in your jurisdiction?
What immigration schemes are available for fintech businesses to recruit skilled staff from abroad? Are there any special regimes specific to the technology or financial sectors?
There are no special regimes specific to the technology or financial sectors. Employees may be employed in Israel under the foreign expert visa or the 45-day visa.
The foreign expert visa requires unique qualifying elements: the foreign national must demonstrate a high level of expertise or unique and essential knowledge to the service provided by the applicant, which does not exist in Israel. Further, their monthly salary cannot be less than twice the average salary in Israel (approximately NIS20,278 ($5,650) a month in 2019).
There is broad legislation which applies specifically to the employment of foreign employees and which regulates different aspects of such employment. This legislation imposes additional obligations on employers of foreign experts – for example, the obligation to provide the foreign expert with appropriate medical insurance as specifically detailed in the applicable regulations.
The application procedure to obtain a foreign expert work permit in Israel comprises two stages:
- First, an application should be submitted to the Permits Unit, which is entrusted with granting permits to employers wanting to employ foreign employees.
- Once the Permits Unit issues the visa, a separate application must be submitted to the relevant Population and Immigration Authority branch, determined by geographical locale, which is authorised to issue the requested permit.
In addition, an expedited procedure (to be processed within six working days) allows entities to apply for a foreign expert to come to Israel for up to 45 days per calendar year, commencing from the date of the expert’s entry into Israel.
This type of work permit and visa is suitable only for foreign experts from a country which is exempted from the requirement to obtain a visa to Israel before their arrival (including Japan).
Foreign expert visas are limited to a period of 45 days a year. They are non-transferable and non-extendable and can be changed only on re-entry into Israel. This type of visa is suitable for foreign experts tasked with completing a specialised temporary role.
Update and trendsCurrent developments
Are there any other current developments or emerging trends to note?
In 2018 a new procedure was published, establishing more lenient arrangements for regulating the employment of foreign experts in high-tech and cyber companies which may also apply to the fintech industry.The new arrangements apply to companies recognised as technological knowledge-intensive corporations by the Israel Innovation Authority.
High-tech companies may submit an application in line with the expedited procedure for a work permit for up to one year at a time. Applications should be handled within six working days.
High-tech companies may submit an application to employ a foreign national who has completed a full academic degree in an institute of higher education in Israel in one of the following professions:
- electrical engineering;
- computers (including software engineering);
- information systems; or
- computer science.
The permit will be valid for one year and is not subject to a remuneration package of twice the average wage in the economy.
The spouse of a foreign expert whose employment has been approved as stated above will be entitled to receive a B/1 work permit. This will allow them to work for any employer in Israel without obtaining a work permit and fulfilling all of the accompanying requirements.
Law stated dateCorrect on:
Give the date on which the above content is accurate.
22 September 2019.