The Tel Aviv District Court recently issued its ruling in a proceeding that has been underway for several months. The proceeding concerns a fintech company who filed a motion for an injunction that would prevent a bank from unilaterally modifying the terms and conditions for the fintech company’s bank account.
The background to the proceeding is an amendment to the terms and conditions for managing the bank account of a currency service provider that was managed at the bank for more than five years, prior to the imposition of the new terms and conditions. The bank’s requirements concerned the way in which the company executed transactions for its customers in its account. The purpose of such requirements are to enable the bank to examine the transactions on their merits, without relying on the control operations performed by the company, although the company is subject to the provisions of the Prohibition of Money Laundering Law, since it is a registered currency services provider.
This ruling is interesting on a number of levels.
In its ruling, the court emphasized that the bank’s action was based on its concern over the existence of a potential risk of money laundering. However, the court noted, the bank did not provide concrete proof that any particular transaction raised a specific concern. The court thus stated that, although it is true banks are tasked with public and enforcement responsibilities to prevent the use of bank accounts for money laundering and terror financing, and despite the fact banks have the option of refusing to provide banking service, nevertheless, banks must exercise judgment when implementing this authority. Banks are required to meet an evidentiary threshold and provide indications to an illegal activity in the account, prior to taking a particular action, and cannot take unilateral actions based solely on a theoretical concern.
In its ruling, the court also emphasized the anti-competitive aspect of the bank’s action vis-à-vis the company, which, in essence, is competing against the bank’s services.
At issue is an interim order. Insofar as the parties fail to reach an arrangement, the court will deliberate the material issues arising as detailed in the claim brought by the company against the bank. This may be the first case to address a series of important questions on the merits concerning the relations between fintech companies and banks. The core tension being that the banks, on the one hand, serve as a vital service provider to fintech companies, and, on the other hand, consider themselves as being competitors of fintech companies, who offer similar services to those of banks, and sometimes at lower prices.
Companies can draw several practical conclusions from the ruling: first, to adopt a mode of conduct that enables them to object to the banks’ demands on the merits, while holding an ongoing dialogue with the bank, so that the bank is unable to raise allegations that the account holder refused to cooperate; second, conduct themselves in an orderly and businesslike manner vis-à-vis the relevant regulatory authorities in the sector, so that they can rely on these communications in order to demonstrate that they conducted themselves in a reasonable and proper manner; and third; the company should adopt clear policies with regard to the prohibition of money laundering, even in instances whereby the relevant regulatory orders have not yet been issued.
It is important to note that attempts are being made to change the relationship between fintech companies and the banks. One example is the memorandum of understandings concerning the management of a p2p platform accounts in a banking corporation that was signed between the Bank of Israel and the Capital Market, Insurance and Savings Authority, following the amendment to the Regulated Financial Services Law. The effect of this MOU on the market remains to be seen.