In a move that could deprive the country's banks of major revenue from security trading commissions, the Israel Securities Authority is working on plans to increase the competition for individual brokerage customers between the banks and the brokerage firms.
The ISA's plans, which are being developed in cooperation with David Zaken, the supervisor of banks at the Bank of Israel, are designed to make it easier for individuals to switch their brokerage business from the banks to other brokerage firms owned by investment firms and insurance companies.
A key aspect of the plan is to allow individuals to switch their securities accounts via the Internet, without even leaving home, unlike the current situation in which the customer must be physically present at the financial firm's office or branch. Securities trading by individual customers in Israel is currently conducted almost exclusively by the banks, and in making it easier to move brokerage accounts, the ISA seeking to increase the investment firms' brokerage business from individuals.
The brokerage business the banks currently get from individuals - and small businesses - as opposed to major businesses, is among the most lucrative sectors in the banking business. The banks benefit from the low level of competition in the field to charge vastly higher fees than generally prevail among the brokerage firms.
In the first nine months of this year, the country's five largest banks racked up revenues of NIS 1.6 billion from their securities businesses from individual and small business customers, which on an annualized basis translates into about NIS 2.2 billion.
Beyond the financial hit the banks could suffer from the policy the ISA is pursuing, the banks are already being required by the banking commission to lower their securities trading fees to individual customers by March 1 of next year. So it is already clear that the gold mine that security trading services to individuals have provided will be waning in importance.
As a prelude to the larger reform, Zaken informed the banks two weeks ago that as of the first of January, his office will begin to oversee the fees banks charge for transferring securities portfolios to non-bank entities, and will limit the commission the banks charge to NIS 5 per transit. The step is being taken to head off any attempt by the banks to impose high fees for the transfer of business to the non-bank brokerage firms.
The full reform is expected to be in place by the end of March. The plan cannot be fully implemented, however, without an amendment to anti-money laundering provisions that currently ban the opening of brokerage accounts on the Internet. As it stands now, financial institutions must carry out specific procedures verifying the identity of customers when they open new accounts, to prevent the accounts from being used to either launder money or finance terrorist activities. As a result, new brokerage firm customers are currently required to physically appear at the firm's office to sign the necessary forms.
Unlike banks, however, brokerage firms don't have the same extensive branch network, so customers do not have the same ease of access to brokerage firms' offices as they would with a major bank. Many customers therefore currently prefer to pay high commissions to a nearby bank for the convenience rather than going to a distant brokerage firm office to open an account.
The amended anti-money laundering procedure would allow the brokerage firm to rely on the verification of the customer's identity that was carried out at a bank when the customer opened a regular bank account. To head off the risk that the new brokerage account at the non-bank entity would be used for money laundering, such customers would be required to withdraw and deposit funds from brokerage firms via their bank accounts.
The reform was proposed by the group representing non-bank members of the Tel Aviv Stock Exchange, which argued that they could not properly compete with the banks and the nationwide network of bank branches due to the current requirement that new customers apply for accounts in person. They pleaded their case before a committee headed by Zaken that was empowered to look for ways to increase competition in the banking sector.
The panel was sympathetic to the non-bank brokers' case and recommended that the group work with the ISA to remove the impediments that individuals face in transferring securities accounts from banks to other brokerage firms. The non-bank securities trading group has said it intends to launch a promotional campaign once the reform is in place advising the public that they can transfer their securities trading business via the Internet. The group says many of its members currently refrain from any major effort to recruit individual clients, due to the disadvantage the brokers are at as a result of their lack of a major branch network.
A co-chair of the group, Anat Frumkes of Migdal Capital Markets, told TheMarker in May that if regulatory changes were not soon in the offing, non-bank brokerage firms would simply "disappear from the map." Her remarks came against the backdrop of changes in regulations in recent years that actually shifted brokerage business from other financial institutions to the banks.