Applicability of Payment Services and Initiation of Payment Law in Trust Frameworks
The Israel Securities Authority recently published a legal staff position clarifying the applicability of the Payment Services and Payment Initiation Regulation Law to activities conducted through trust or escrow accounts. The position sets out interpretative tools for distinguishing between payment services that require a license and activities that do not.
Normative Framework
The Payment Services Regulation Law was enacted to regulate non-bank 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 and required a financial asset service license. Many entities engaged in trust services benefited from exemptions under that law or its regulations.
Trust as a Payment Service
The need for this position stems from the definition of payment services, which includes account management, specifically, holding funds on behalf of a third party and executing payment instructions using those funds.
Consequently, providers of trust services must assess whether their trust activities constitute a payment service.
The staff position establishes several subsidiary tests to guide this assessments.
The characteristics to be examined include:
- Payment services provided as an integral part of a service provider’s core business activity, where that activity is not payment services, will not be considered an independent activity requiring a license. For example, a lawyer holding funds until a transaction is completed and then transferring them to the counterparty would not be considered to be performing an activity requiring a payment services license.
- The staff position also identifies the manner in which the service is advertised and fees are collected as an indicator. Where a trust service is presented as independent and distinct and a separate fee is charged for it, the payment services are provided as a standalone service and are subject to licensing.
- Frequency of activity is another key consideration: one-time or temporary activity will not be considered to require a license, while continuous or recurring activity, such as monthly payments to authorities or suppliers, will require a license.
- Payment services performed under judicial authority, such as pursuant to a court order, are not considered activities requiring a license.
Preparation and Timelines
The criteria enable entities operating in this field to prepare appropriately by distinguishing between activities that require a license and those that do not.
If an activity meets the criteria for exemption, no payment services license is necessary. Conversely, an activity that does not meet those criteria may require a license.
Following publication of the position, the Israel Securities Authority granted entities currently operating within trust relationships an extension to examine their activities against the specified characteristics and criteria. These entities have until March 31, 2025, to submit a license application and benefit from the transitional provisions.
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The Regulation Department is available for any questions on this matter.