Israeli Capital Market Authority Opposes Treasury's Savings Reform Citing Price Hikes and Market Distortion
The Israeli Ministry of Finance released the full arbitration committee report on its proposed savings reform, unveiled yesterday. The reform, initiated two years ago, aims to unify tax treatment across various savings products including provident funds, mutual funds, and savings policies. It proposes creating a centralized investment account to consolidate savings and extends current tax benefits, capping tax-exempt savings at 200,000 shekels per saver. This new framework would allow tax deferral on investment transactions within the account, with tax payable only upon withdrawal, and full tax exemption on pension withdrawals after age 60, subject to the cap.
However, the Capital Market Authority (CMA), led by Amit Gal who was notably absent from the announcement due to illness, strongly opposes the reform. The CMA warns the changes could structurally disadvantage certain products, particularly provident funds, leading to fewer providers, reduced product variety, and ultimately higher costs for consumers. The CMA highlights that management fees for provident funds average 0.6%, significantly lower than the 1.5% typical for mutual funds, suggesting the reform could push provident funds out of the market.
The CMA also criticizes the reform for failing to achieve true tax neutrality. It points out that the proposed elimination of tax deferral for amounts above the cap in provident funds and savings policies disadvantages many savers whose balances exceed this threshold. Meanwhile, mutual funds retain the ability to offset losses for tax purposes, creating an ongoing tax advantage. The report states that full fiscal parity is not feasible, preserving a significant tax arbitrage favoring certain products.
Additional concerns include the mandatory connection to the new investment account platform, which may increase costs for savers, and the complexity of comparing investment options due to the broader and more variable range of mutual fund tracks compared to provident funds. The CMA suggests standardizing investment options across products to improve consumer decision-making. It also warns of potential conflicts of interest in advisory services linked to the investment account operators, who often have ties to financial product manufacturers, raising questions about the objectivity of advice provided.
The Treasury maintains that only about 10% of savers currently use provident funds and that the reform encourages shifting idle bank account funds into productive investments. The debate highlights tensions between regulatory goals of tax fairness and market competition, with significant implications for Israel's savings landscape and consumer costs going forward.
