Israel's Next Knesset Faces Major Financial Market Reforms

As Israel's 26th Knesset prepares to convene, it faces significant challenges in reforming the country's savings and investment landscape. Many crucial reforms stalled in the previous Knesset due to the ongoing war and a lack of interest from coalition leaders, particularly within the Finance Committee.

One key reform, championed by the Israel Securities Authority (ISA), is the establishment of a unified investment account. This initiative aims to simplify household savings by consolidating funds currently spread across various accounts like securities, study funds, and savings policies under a single umbrella. The goal is to reduce competitive barriers, facilitate easier comparison and switching between investment products, encourage medium-term savings beyond just pensions, and shift more power to savers from financial institutions. However, the Capital Markets Authority (CMA) expresses concern that this model could negatively impact the existing medium-term savings sector.

Another proposed reform by the ISA is the 'broker-dealer' legislation, intended to regulate non-bank stock exchange members and their services to investors. With an estimated 400,000 new self-directed trading accounts opened in recent years, Israel lacks comprehensive regulation for brokers, particularly concerning consumer aspects like account transfers, fee transparency, and client relationships. The proposed law seeks to close this regulatory gap.

The CMA, led by Amit Gal, is pushing for a critical reform concerning the future of long-term care insurance, which covers approximately 5.5 million Israelis. The current system, largely based on group insurance through health funds, is facing a deep crisis due to rising claims and instability. Gal believes a new, stable long-term model is essential, calling it the most significant financial reform for the incoming government, though it requires political decisions and legislation.

Additionally, the government must address the remuneration model for insurance agents, where commissions from insurance companies and institutional bodies can create conflicts of interest. A previous attempt by former ISA Chairman Moshe Barakat to implement an 'objective agent' reform, where agents would be paid directly by clients, failed to materialize. The article notes the political influence of insurance agents and their ties to the Likud party as a factor in blocking such changes.

Finally, a complex reform involves restructuring the oversight of Israel's financial system, currently divided among the ISA, the CMA, and the banking supervision. With blurring lines between regulated entities, such as insurance companies owning investment houses, there's a push to re-evaluate the separation of these regulatory bodies, potentially merging the ISA and CMA. The CMA is also seeking to extend oversight to the holding companies of large financial groups, which have become conglomerates with activities outside direct regulatory supervision. Implementing these structural changes, whether through mergers or expanded powers, will require legislation and political consensus. The article suggests establishing a dedicated Knesset committee for financial reforms to streamline the legislative process and ensure these long-delayed changes are enacted, potentially boosting state tax revenues.