Committee Chair: Mr. David Brodet, economic consultant, former Director-General of the Ministry of Finance
Committee members: Prof. Amir Barnea, Herzeliya Interdisciplinary Center
Dr. Hedva Ber, Supervisor of Capital Markets, Research Department of the Bank of Israel
Mr. David Granot, CEO, First International Bank
Dr. Arie Ovadia, Chairman of The Phoenix Assurance Co.
Mr. Meir Shavit, independent consultant, former Supervisor of Capital Markets
Research assistant: Mr. Hagai Feder
Summary of the recommendations:
The committee looked at ownership, asset management, marketing and consulting, as well as underwriting activities of financial intermediaries. The main goal of these spheres is to increase competition among financial intermediaries – particularly in terms of households – and to reduce the potential for misusing conflicts of interests. The way to achieve this goal is by building a capital market comprised of financial intermediaries outside the banking system, with extensive activity and the ability to compete with the traditional banking system.
The committee’s recommendations in these areas were formulated in an attempt to cope with complex dilemmas concerning ownership rights, stability of the financial system, and applications for Israel’s current economic reality.
Ownership and asset management – Two approaches were articulated regarding necessary solutions:
- Approach #1: Separating ownership from asset management (provident funds, mutual funds, education funds) held by the various financial intermediaries. Every financial body that holds these assets will have to choose between continuing to hold the majority of the ownership (80%) and waiving most of the asset management, and between relinquishing ownership, and managing the fund’s assets.
- Approach #2: Turning companies that operate provident funds and mutual funds into public companies, and requiring banks and insurance companies to transfer at least 80% of their ownership in the provident funds and educational funds, and 60% of their ownership in the mutual funds. Furthermore, their ability to manage the assets of the funds will be limited to a maximum of 20%, and the remaining assets will be transferred to outside investment management.
Marketing and distribution
- All financial intermediaries will be permitted to market all financial products, including insurance policies, provident funds and mutual funds.
- Rules will be defined that will enable financial intermediaries to charge distribution fees and generate an economic incentive for banks to distribute and market products of financial bodies outside the bank.
Consulting
- The law will be amended such that banks will be able to put together a basket that includes a limited number of products named in the recommendations made by their financial consultants, once clear criteria are set for defining those products to be included.
- The basket of financial products will have to meet minimum requirements with regard to scope and diversity, to be determined by the Regulator.
- The amended consulting law will ensure that financial advice is professional and objective.
Underwriting
The committee recommends that banks be prohibited from being involved in underwriting for companies in which they have an interest, either as owners or as credit providers.
Structure of the regulatory and supervisory system for financial markets and institutions
The committee recommends that a single supervisory body be established for all of Israel’s financial markets and institutions, which will combine and replace the three independent supervisory bodies presently functioning: the Banking Supervisor, the Supervisor for Insurance and Capital Markets, and the Israel Securities Authority. The need to consolidate these regulatory authorities stems from both the structure of the modern financial market, and the structural changes to the financial intermediary system as proposed by the committee.
- An authority will be established to supervise, regulate and enforce all the activities of the financial markets and institutions.
- The authority would coordinate consumer activities: public complaints, responding to enquiries and providing information to the public, and a public ombudsman will be appointed who will function through the authority.
- The supervisory authority will be an independent statutory authority.
One of the advantages of establishing a single supervisory authority in Israel is that it will provide a comprehensive perspective of the financial market, and not only the different units that operate within it, and thus it can promote the creation of a more competitive and more balanced financial and capital market.