The Money Market Reform in Israel is Underway
Increasing competition in the money market
The Knesset approved a series of legislative amendments this past July designed to promote competition in the money market – money market mutual funds, deposits and government bonds (short-term loans maturing in less than one year) – and to enable the general public to achieve higher returns on its short-term savings.
The Knesset amended, inter alia, the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law with the goal of increasing competition surrounding interest rates offered on bank deposits and current accounts. Currently, any investment advice about mutual funds being provided by banks (including money market mutual funds) must be carried out solely by licensed investment advisers holding an appropriate license under the Advice Law, while any bank clerk may provide advice about bank deposits. The purpose of the amendment is to bridge this gap by enabling the provision of advice about money market mutual funds (with redemption dates of up to one year) not only by licensed investment advisors.
The amendment also adds another activity to the Advice Law that will not require a license, which includes one of the following three alternatives:
- investment advice or marketing in relation to money market mutual funds – without a license – by one of the following: fund managers; financial information service-providers; basic payment initiators and payment companies; TASE members; banking corporations and auxiliary corporations; other entities engaging in a financial field whose activities in that field are supervised by law (the “Supervised Entities”); or
- by a person employed by an entity engaging in investment advice or marketing in relation to money market mutual funds – without a license (such person and the Supervised Entities are referred to jointly as “Unlicensed Dealers”); or
- by a licensee whose license is limited to engaging in investment advice or marketing solely in relation to money market mutual funds (“Limited Licensee” and, jointly with Unlicensed Dealers are referred to as “Money Market Mutual Fund Service-Providers”).
The amendment imposes particular provisions of the Advice Law on Money Market Mutual Fund Service-Providers, including: fiduciary duties; the obligation to provide due disclosure to customers; the prohibition of prioritizing the dealer’s financial assets or those of a related corporation; the prohibition of issuing incentives in relation to investment advice or marketing apart from a salary and reimbursement of expenses from the customer; and a duty of care.
The amendment also obligates Money Market Mutual Fund Service-Providers to disclose minimum information when providing money market mutual fund advice or marketing or consummation of transactions, such as the fund’s identifying details; characteristics of the assets being held in the fund; the offering and redemption dates of fund units; the fund manager’s salary and the trustee’s fee; and the fund’s yield. The amendment exempts Limited Licensees from the obligation to comply with particular provisions of the Advice Law (that are imposed on “regular” licensees), which include customizing the service to the customer’s needs; the requirement of a written agreement; disclosing special risks to customers; the duty of confidentiality; and maintaining records and minutes.
Obligation to notify the Israel Securities Authority about an intention to engage in investment advice or marketing in relation to money market mutual funds
The ISA’s draft rules regulating the engagement in investment advice or investment marketing prescribe that whenever any of the Supervised Entities intends to engage in investment advice or marketing in relation to money market mutual funds under a license exemption, they must notify the ISA prior to commencing this activity.
Obligation to disclose conflicts of interest
Similar to the existing obligation in the Advice Law, which obligates licensees to inform their customers of conflicts of interest, the amendment imposes a similar obligation on Money Market Mutual Fund Service-Providers. The ISA published “Draft Rules regulating the engagement in investment advice or investment marketing” in July, with the goal of prescribing rules to prevent conflicts of interest by Money Market Mutual Fund Service-Providers. The draft rules on conflicts of interest will apply to Money Market Mutual Fund Service-Providers engaging in the marketing of investments in money market mutual funds in which they have an interest.
The draft rules on conflicts of interest propose that Money Market Mutual Fund Service-Providers engaging in investment marketing of money market mutual funds in which they have an interest would be obligated to perform the following actions: implement procedures; maintain periodic controls; and issue disclosures to customers regarding the consideration they receive from third parties.
Draft directive regarding investment advice or marketing in relation to money market mutual funds
The ISA also published the “Draft directive regarding investment advice or investment marketing in relation to money market mutual funds,” which proposes to prescribe several provisions and obligations that will apply to Money Market Mutual Fund Service-Providers, including:
Disclosure of the characteristics of money market mutual funds and the money market
- Money Market Mutual Fund Service-Providers must provide information to their customers about money market mutual funds and explain that these mutual funds are one of the products of the money market.
- Ordering and redemption dates – Money Market Mutual Fund Service-Providers must present possible dates to customers for submitting orders for fund units, instructions regarding their redemption and the date when the instructions will be executed. Service- providers must also explain to customers that their holdings of fund units are automatically renewed until such time as they issue redemption instructions.
- Banking corporations (being Supervised Entities) that announce their intention to engage in investment advice in relation to money market mutual funds may do so through unlicensed employees. These employees – who provide information about bank deposits to customers – are obligated to inform customers at that instance that an alternative exists of their investing in money market mutual funds as an alternative to investing in a deposit of up to one year and, at the very least, must refer them to the list of money market mutual funds on the bank’s website or app.
Reporting obligations – immediate and quarterly reports to the ISA
The draft directive also proposes to impose on Limited Licensees similar reporting obligations as some of those imposed on licensees by virtue of the Advice Law and its regulations.
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Barnea Jaffa Lande’s Financial Regulation team provides counsel to Israeli and global banks, insurance companies, large investment firms, and many more on all applicable regulation to their financial operations in Israel and overseas.