Applicability of Payment Services and Initiation of Payment Law in Trust Frameworks

The Israel Securities Authority recently published a legal staff position aimed at clarifying the applicability of the Payment Services and Payment Initiation Regulation Law to activities conducted within trust/escrow accounts. The position outlines interpretative tools to differentiate between payment services that require licensing, and activities exempt from such requirements.

Normative Framework

The Payment Services Regulation Law was enacted to regulate the activities of non-banking entities offering various payment services, while protecting customer rights and ensuring proper and transparent conduct.

Before the Payment Services Regulation Law came into effect, trust services were regulated under the Supervision of Regulated Financial Services Law, under a financial asset service license, and many entities that engaged in trust services, benefited from exemptions under the law, or regulations established thereunder.

Trust as a Payment Service

It is important to note that the need for this position stems from the definition of payment services as including account management – specifically, holding funds on behalf of a third party and executing payment instructions from these funds.

Consequently, providers of trust services must assess whether their trust activities constitute a payment service.

The staff position establishes several subsidiary tests for conducting this examination.

Trust characteristics to be examined are:

• Payment services provided as an integral part of the core business activity of the service provider – which is not payment services – will not be considered an independent activity requiring a license. An example of a trust service that would not require a license is a lawyer holding funds until the completion of a transaction and then transferring them to the counterparty. This type of trust service would not be considered as performing an action requiring a payment services license.
• The staff position emphasizes the manner of service advertising and payment collection as an indicator. Where the service is presented as an independent and distinct service and an independent fee is collected for the trust service, the payment services are provided as a standalone service and are subject to licensing.
• Additionally, frequency of activity is a key consideration: one-time or temporary activity will not be considered as requiring a license, while continuous or serial activity such as monthly payments to authorities or suppliers, will require obtaining a license.
• Payment services performed under judicial authority, such as a court order, are not considered licensing-required activities.

Preparation and Timelines

The outlined criteria enable entities operating in this field to prepare appropriately, with a clear distinction between activities requiring a license and those exempt from licensing requirements.

If the activity meets the defined criteria – no payment services license is necessary. Conversely, activity not matching the criteria may require a payment services license.

Following the publication of the position, an extension was granted to entities currently operating within trust relationships who need to examine their activities according to the specified characteristics and criteria. Accordingly, the Israel Securities Authority has determined that these entities are granted an extension to submit a license application until 31.3.2025 and can benefit from the transitional provisions.

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The Regulatory Department is available for any questions on this matter.