The emerging risks in the financial services market and the inception of the Regulation of Payment Services and Payment Initiation Law prompted the Capital Market, Insurance and Savings Authority (CMISA) to amend a series of circulars that came into effect recently or that are likely to come into effect soon. These amendments expand the application of previous circulars to particular financial service providers and payment initiators.

In addition, CMISA finalized the circular dealing with own fund (nostro) investments by operators of credit brokerage systems (P2P) in such platforms.

The Key Circulars

1. Risk Management by Regulated Financial Service Providers (amendment)

In May 2022, CMISA’s Commissioner issued a circular on the subject of risk management by regulated financial service providers, with the goal of ensuring proper risk management by financial service providers.

Inter alia, this circular obligates financial service providers to implement policies, work processes, and reporting routines essential to identifying, measuring, monitoring, managing, and reporting the risks to which service providers are or may be exposed; to appoint a risk manager possessing expertise or experience in this field; and more.

The amendment extends the application of the risk management circular’s provisions to licensed credit providers, as a result of CMISA’s findings of inadequate risk management systems among licensed credit providers, and in order to facilitate growth in the nonbank credit market so that it can be an effective competitor against bank credit providers.

The circular comes into effect on July 1, 2024.

2. Payment Initiators and Risk Management

Considering the coming into force of the Regulation of Payment Services and Payment Initiation Law and the option of financial service providers to operate as payment initiators and connect to the open banking system, the risk management circular was also expanded to apply to licensed payment initiators, in view of the operational risks to which payment initiators are exposed. The expanded circular comes into effect on March 1, 2024.

3. Cyber Risk Management by Financial Service Providers

In February 2024, CMISA published an amendment to the cyber risk management circular, expanding its application to payment initiators. These are financial asset service providers who applied to CMISA for licenses to also provide payment initiation services by virtue of the Regulation of Payment Services and Payment Initiation Law.

The circular defines principles requiring such service providers to carry out cyber risk management effectively on an ongoing basis, based on appropriate principles of good corporate governance. These include, inter alia, reference to methods, processes, and controls, in a manner that enables them to effectively contend with cyber threats and manage cyber events, if they materialize.

Until the amendment’s publication, the circular applied to the following financial service providers:

1. Licensees to provide deposit and credit services.
2. Licensees to operate a credit brokerage system.
3. Licensees to provide financial asset services, which retain and manage financial assets in designated accounts managed for a particular customer, and which enable transfers of a financial asset to another account.
4. Financial service providers operating or applying for a license from the commissioner to operate as financial information service providers.
5. Any licensee to provide financial services not listed above that fulfills one of the following criteria:
6. It retains information online about its customers and their financial assets (such as a financial asset service involving virtual currencies or online savings of deposits).
7. It serves as a “source of information” or uses “credit data” as defined in the Credit Data Law, 2016. In this regard, we note that licensed credit providers that extend credit at an annual volume exceeding ILS 250 million are deemed a “source of information” for the purposes of the Credit Data Law.

As stated, the amendment extends its application to financial service providers seeking to operate as payment initiators, effective March 1, 2024.

4. Financial Investments by Operators of P2P Platforms and Related Parties Through the System

In February 2024, CMISA issued a circular on the subject of financial investments by operators of P2P lending platforms and related parties through the system.

Up until now, Section 38F of the Supervision of Financial Services Law prohibited operators of P2P platforms from engaging in the provision of credit, except with special permission from the Commissioner. This situation created an imbalance between the supply and demand for loans, difficulties in diversifying risks, and liquidity problems adversely affecting the platforms.

Thanks to this new circular, as of March 12, 2024, system operators may invest nostro funds in their systems, subject to particular conditions, inter alia, in order to promote loan underwriting processes and increase competition in the credit market.

However, CMISA imposed several restrictions on the permitted volume of nostro funds a system operator may invest, primarily by imposing a maximum sum of nostro funds that can be injected into the system. These restrictions stem, inter alia, from concern over conflicts of interest arising as a result of a financial service provider’s dual capacity as an operator of a credit brokerage system and a provider of credit, which could undermine the functioning of the entire system.

Consequently, operators of P2P platforms may invest own funds in their systems under particular conditions, mainly:

a. Corporate Governance

• The board of directors must outline a strategy for using nostro funds and discuss it annually.
• The board of directors must approve a policy for allocating nostro funds, which will include, inter alia, reference to the guidelines for allocating nostro funds, price-setting mechanisms for loans using nostro funds, the procedure for approving the provision of nostro funds, etc.
• The board of directors must oversee the implementation of the defined strategy, establish continuous monitoring processes, establish controls over policy implementation, etc.

b. Prevention of Conflicts of Interest

• Operators may not favor the system’s interests or those of its related party over external lenders.
• Operators must give priority to the provision of loans from external lenders.
• Operators must ensure that funds are automatically allocated (without human intervention).

c. Limits on Investments of Nostro Funds

• Up to 30% of the system’s total credit backlog (50% for social systems).
• Up to 50% of the sum of an initial single loan, with temporary deviations allowed.

d. Obligation to Sell Rights

Operators must sell rights in loans financed by nostro funds to interested external lenders.

e. Limited flexibility

• Possibility of allocating more than 50% for a period of up to 20 days, with an option to extend the period under particular conditions.

In light of the above, operators of credit brokerage systems looking to invest nostro funds in their systems must take the following measures to ensure they comply with the circular’s provisions:

• Prepare a strategy, policy documents, and procedures regarding the investment of nostro funds.
• Adapt systems and work processes.
• Examine the implications on the investment strategy and on operations.

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