New Lending Platform Regulations
Recently, the Knesset approved an amendment to the Supervision of Financial Services Law, which regulates the activities of online lending platforms that broker between people and businesses under a peer-to-peer (P2P) model.
Innovative fundraising models have emerged as part of the emerging crowd economy, including a P2P model that provides an online connection between borrowers and lenders for the purpose of engaging in a credit transaction. The platforms connecting borrowers with lenders are aiming to reduce the brokerage fees being charged by institutional financial institutions (such as banks and and institutional lenders), open opportunities for lenders to benefit from innovative investment alternatives, and provide opportunities for those in need of a loan to find alternative and often less expensive sources of credit. These platforms are essentially challenging and disrupting the institutionalized financial system.
Up until today, under Israeli law, the activities of these platforms were not being regulated or supervised. Although the absence of regulatory supervision provided flexibility to platforms when building their business model, this freedom also became an obstacle to their development. This was due both to investors’ concerns about the lack of regulatory supervision and because the lack of regulatory supervision served as grounds for blocking the platforms’ access to the regulated financial market, primarily banks.
The new amendment imposes a licensing obligation on operators of P2P lending platforms and subjects the platforms to the supervision by the Supervisor of Regulated Financial Services. Similarly to the licensing regime prescribed in the law with respect to other financial services, the P2P lending segment will also be divided into two licensing categories: a basic license, for a limited volume of activity (accumulated credit of up to NIS 25 million), and an expanded license, for a material volume of activity (accumulated credit exceeding NIS 25 million). Furthermore, the general provisions applying to financial service providers will apply to the licensees, the objectives being to ensure the proper operation of the platforms and to protect the interests of borrowers and lenders using them. Thus, for example, similarly to credit providers and financial asset service providers, the Supervisor will manage a register of platform-operator licensees.
Within the scope of the law, and in order to also enable small businesses to obtain loans being offered via P2P lending platforms, the Securities Law was also be amended so that companies can seek and obtain a loan of up to NIS 1 million through P2P platforms, provided they are not deemed reporting corporations.
Besides its brokerage activities, the amendment clarifies that a platform licensee constitutes an operating entity that must perform particular actions vis-à-vis borrowers and for the lenders in the system, such as debt collection. With the objectives of ensuring proper management and protection of the lenders’ funds being transferred, the amendment clarifies that a licensee will be required to manage a trust account for the funds of lenders and borrowers being transferred to it. A platform licensee will be allowed to charge commissions from both lenders and borrowers for the service it is providing, out of the funds being managed in the trust account.
The Supervisor is authorized to issue various instructions to platforms relating to their ability to offer loans (subject to the receipt of a credit service provider license by virtue of the law), inter alia, considering the potential conflict of interests that might arise between the licensee and the lenders. The Supervisor is also authorized to prescribe rules in relation to various operational concerns.
Licensees are expected to be subject to an anti-money laundering regime. The relevant order is anticipated to be promulgated in the near future.
During discussions of the law, a memorandum of understanding (MOU) was signed between the Supervisor of Financial Services and the Supervisor of Banks, the purpose of which is to ensure the banks do not undermine the platforms’ activities and, by doing so, basically thwart potential competition. The MOU includes provisions regarding the opening of bank accounts for the platforms and regarding the management of these accounts.
With the objective of providing optimal environmental conditions for growth to P2P lending platforms, the banks and the credit companies owned by them are prohibited from entering the P2P lending segment for three years after the inception date of the law.
To enable both the Supervisor and the platform operators to prepare themselves for compliance with the provisions of the law, the licensing obligation will come into effect on February 1, 2018. Platform operators currently operating, and who submit the requisite documents to obtain a license by the inception date, to the Supervisor’s satisfaction, will be able to continue operating even before the license is issued—while their license application is still pending.