Control or Substantial Non-Controlling Interest in Non-Bank Financial Corporations

Israel
The Supervisor of Banks
Policy Department

Jerusalem, 5 August 2013
Circular No. 2392 - 06-H

To:
Banking Corporations

Subject: Control or Substantial Non-Controlling Interest in Non-Bank Financial Corporations

Directive No. 306 'Management Standards for Banking Corporations'

Introduction

1. In the context of adapting to the Basel Committee on Banking Supervision recommendations, the need has arisen to update the Management Standards for Banking Supervision and to expand their application to the subject of control or substantial non-controlling interest in non-bank financial corporations.

2. This directive is based on the Core Principles for Effective Banking Supervision published by the Basel Committee in 2006, which was adopted under the Banking (Regulation) Law, 5741-1981, and by many supervisory authorities worldwide.

3. The directive is intended to regulate the rules/criteria for delaying/approving requests for the establishment/acquisition of control/substantial non-controlling interest in non-bank financial corporations in Israel and abroad.

4. The Supervisor shall approve, delay, or deny the request after conducting an evaluation process in which, inter alia, the impact of the establishment/acquisition of the corporation on the stability of the banking corporation is examined, the ability to manage and supervise the risks of the banking corporation is examined, and the unique risks inherent in holding each corporation separately are examined, even if the scope of its activity is not substantial, in relation to the total activity of the banking group on a consolidated basis.

5. It is the duty of the banking corporation submitting the request for approval to attach the data specified below for the purpose of its execution. The decision is made after consultation with the Advisory Committee on Matters Relating to Banking and with the approval of the Governor.

6. It is clarified that with the issuance of this updated directive, parts of the sections that remained unchanged are similar in substance to the previous version, even if their numbering has changed.

Amendments to the Directive

1. The word "non-bank" was deleted from the heading of the directive and from sections 1 and 2.

2. The word "non-bank" was added.

Explanatory Notes

The change was made to adapt the directive to the changes in the Banking (Regulation) Law, pursuant to the conditions specified in section 11 of the Banking Law, regarding the holding of a specific corporation or auxiliary corporation by a banking corporation.

3. A new section 7 was added: "Control or Substantial Non-Controlling Interest in Non-Bank Corporations".
   The purpose of this directive is to enable the Supervisor to determine criteria for examining significant investments/acquisitions by banking corporations (whether directly or through subsidiaries/affiliates) to ensure that the new group structure does not expose the banking corporation to excessive risk that prevents effective supervision, or to the stability of the domestic corporation, inter alia.

Explanatory Notes

The directive focuses on the criteria and rules that form the basis for the Supervisor's assessment of requests for approval of the establishment/acquisition of control/substantial non-controlling interest in banks.

4. The aforementioned sections 3(a) and 3(b) shall become sections 4(a) and 4(b), respectively.

5. A new section 9 was added: "Definition of Holder of Interest" as defined in the Banking (Regulation) Law, 5741-1981.

Explanatory Notes

There are additional definitions of "holder of interest" in existing legislation (e.g., Securities Law or Companies Law) that differ from the definition in the Banking (Regulation) Law in their characteristics.

6. The aforementioned sections 4(a)(1), 4(a)(2), 4(b), 6(a)(1), 6(a)(2), and 6(b) shall become sections 4(a)(1), 4(a)(2), 4(b), 6(a)(1), 6(a)(2), and 6(b), respectively.

7. The reference to "non-bank" corporations is now also applicable to corporations in Israel.

8. Section 4(c) was deleted, and the instructions specified in sections 7 and 8 were incorporated into the directive.

9. Sections 7 and 8 were added to the directive, requiring the Supervisor to attach information regarding the banking corporation required to report on matters of control/substantial non-controlling interest.

Explanatory Notes

Section 7 lists the details required from a banking corporation wishing to become a holder of interest or to control a banking corporation, both in Israel and abroad. Section 8 is dedicated to additional details required from the banking corporation to report to the Supervisor when the request for approval is for a "non-bank" corporation.

10. Section 9 will be added regarding the considerations of the Supervisor's decision to approve or delay the request.

Explanatory Notes

The directive is intended to provide transparency in the process of assessing requests for the establishment/acquisition of control/substantial non-controlling interest in non-bank financial corporations in Israel and abroad. The considerations brought into account are also presented in the evaluation process alongside the parameters examined in this process.

11. A new section 10 titled "Reports" will be added.

12. The banking corporation required to update the Supervisor in advance or as soon as possible after the following changes occurred in it:
    (a) A material change in the scope of its holdings in corporations in which it is a holder of interest or controller; (b) A material acquisition of another corporation that does not confer control or substantial non-controlling interest; However, the banking corporation with control or substantial non-controlling interest must also report on material influence on its business strategy, financial status, management of its sources, or its reputation.

(08/13) (2) Supervisor of Banks: Management Standards for Banking Corporations Directive 306 - 1 'Control or Substantial Non-Controlling Interest in Non-Bank Financial Corporations

Control or Substantial Non-Controlling Interest in Non-Bank Financial Corporations

Introduction

1. Banking corporations wishing to become holders of interest or controllers of non-bank corporations or auxiliary corporations (including their establishment, hereinafter "the Corporation") shall act in accordance with this directive.

2. In many countries, guidelines adopted from the Basel Committee have been implemented, imposing supervision on corporations in Israel, ensuring the existence of procedures for monitoring and controlling the banking corporation's supervision and control over each of the corporations, including those abroad.

3. Control or substantial non-controlling interest in non-bank corporations may involve risks. The purpose of this directive is to enable the Supervisor to determine criteria for examining significant investments/acquisitions by banking corporations (whether directly or through subsidiaries/affiliates) to ensure that the new group structure does not expose the banking corporation to excessive risk that prevents effective supervision, or to the stability of the domestic corporation, inter alia.

Application

4. (a) This directive applies to all banking corporations.
   (b) This directive does not apply to holdings in a corporation or banking corporation referred to in section 31, except for holdings in a real corporation or under the Banking (Regulation) Law, 5741-1981.

Definitions

5. "Holder of Interest" - as defined in the Banking (Regulation) Law, 5741-1981.

Giving Notice

6. (1) (a) A banking corporation wishing to become a holder of interest or controller of a corporation in Israel or abroad shall notify the Supervisor in writing at least 45 days before the date of acquisition of control, including its establishment, whether directly or indirectly (control or substantial non-controlling interest) in preparation for this activity, to ensure that it is ready to hold the corporation.
   (2) The aforementioned paragraph 1 does not detract from the need to obtain specific approval from the Supervisor, provided that the Supervisor ensures that within this period the banking corporation meets the conditions and means determined, and the Supervisor has notified the corporation that it does not meet the requirements as specified in sections 7 and 8 of this directive, and the banking corporation shall adjust its preparation to acquire control or substantial non-controlling interest as required.

7. The banking corporation shall specify in its notice:
   (a) The name of the established/acquired corporation and its place of incorporation; (b) The purpose of the establishment/acquisition of the corporation; (c) The percentage of intended holdings of the banking corporation in the corporation; (d) Information about the partners in the holding of the corporation (holdings below 100% of control and chart); (e) The cost of establishment/acquisition and sources of financing for the transaction; (f) The main synergy to be achieved with the corporation (whether with other companies in the group or otherwise); (g) Expected business relations between the corporation and the banking corporation (e.g., guarantees); (h) The banking corporation's compliance with regulatory requirements before and after the acquisition, including capital requirements, liquidity, risk management, internal control, corporate governance, and exposure limits; (i) Existence of trust or management agreements with corporations or branches in which it has control or ownership, and details of the corporation's interest; (j) The scope of the established/acquired corporation's activities and risks, including:
   (1) The business plan and goals for the next three years and its strategy; (2) Mapping of all risks arising from its activity (e.g., interest rate, legal, operational, credit, liquidity, market); (3) Financial data about it for the last three years, including audited financial statements; (4) Its strategic financing plan, including the manner of support from the corporation; (k) The management, monitoring, and control systems in the corporation, including:
   (1) Organizational and managerial structure; (2) Composition and roles of the Board of Directors and its central committees, and appointment methods; (3) Procedures governing the division of roles and authorities of senior management regarding the corporation and the types of activities and risks determined for it; (4) Internal audit framework; (5) Risk management and control framework; (6) External auditor and the appointing body; (7) IT framework; (8) Information security framework; (9) Human resources framework and its competence; (l) Supervision and control of the banking corporation over the corporation, including:
   (1) The means taken by the banking corporation to ensure the adequacy of the monitoring and control systems, including those listed in section 7(k) above; (2) The adequacy of the monitoring and control mechanisms to be applied to the controlled corporation as required in section 10; (3) Policies and limitations on risk exposures of the corporation.

Notwithstanding the above, when there is no control interest, the banking corporation shall indicate in the notice that it does not have access to certain private information from the list.

8. The banking corporation shall also attach, in the case of establishment/acquisition of control/substantial non-controlling interest in non-bank corporations abroad:
   (a) An assessment and analysis of the risk of the country in which the corporation is located, including the impact of monetary, supervisory, and other limitations existing in the country on the corporation's activity and the group as a whole, in particular; (b) The existence and constraints of information transfer and/or limitations imposed by the supervisory authorities to which the corporation is subject, and other factors affecting the ability to supervise and control the corporation and its group companies (e.g., transfer of information on customers, credit, audits, etc.) in the country of the Supervisor; (c) Regulated procedures for separation between the body performing the corporation's activities abroad and the body responsible for registration, reporting, supervision, and control.

Decision

9. The Supervisor's decision to approve or delay the banking corporation's request shall be conditional on, inter alia:
   (a) The impact of the establishment/acquisition on the financial resilience of the corporation and the entire group, including capital adequacy; (b) The managerial ability of the banking corporation to ensure that the corporation's activities are managed in a prudent manner and do not harm the reputation of the banking corporation; (c) The corporation's activity is consistent with the risk appetite of the banking corporation; (d) The public interest; (e) The impact of the permit on the development of competition, prevention of concentration, and the level of services; (f) The degree of cooperation with supervisors in the host country.

Reports

10. The banking corporation required to update the Supervisor in advance or as soon as possible after the following changes occurred in it:
    (a) A material change in the scope of its holdings in corporations in which it is a holder of interest or controller, in the areas of activity or in which it is a holder of interest or controller; (b) A material acquisition by the banking corporation of another corporation through means of control that does not confer control or substantial non-controlling interest, which has a material impact on its business strategy, financial status, management of its sources, or its reputation.

Examples of transactions to which the aforementioned paragraph (b) applies include:
When the banking corporation holds shares constituting:

• Significant participation in another financial company (in Israel or abroad) requiring consent of a supervisory authority;
• When the scope of the transaction is 1% or more of the banking corporation's capital base or ₪200 million, whichever is lower.

11. The banking corporation shall transmit to the Supervisor periodic reports or any other information about the corporation in the frequency and manner determined by the Supervisor.

General

12. The Supervisor may add requirements to these listed ones, exempting them in whole or in part, according to the interest.

---

Updates

Version No. | Details | Date
1 | Original Directive | 6/12/00 2017
2 | Update | 05/08/13 2392