The Bachar Committee is planning a revolution in financial consulting services that banks offer their customers: It will recommend that the banks be paid by their clients for these services, instead of by the provident, pension and mutual funds or life insurance companies whose products they market, as they are today.
The reform, which is in line with one currently being implemented by the U.S. Securities and Exchange Commission, is meant to ensure that the banks have no conflicts of interest when they advise a client.
The draft recommendations would turn the banks into "super-consultants" that advise customers on every aspect of their savings portfolios, whereas currently, they offer a much narrower range of advice. This in turn would require them to perform an in-depth analysis of the customer's financial situation and needs. The customer would then pay the banks for this advice. But the banks would be forbidden to receive any form of payment from the purveyors of the products they market.
Until now, the assumption had been that the banks would continue to receive a commission from the product provider on every product they sold. However, that creates a potential conflict of interest: Should one mutual fund offer the bank a higher commission, the bank would have an incentive to sell the client that product, even if he would be better off with a different fund.
With regard to the effort to end the duopoly of the two largest banks, Leumi and Hapoalim, the committee has apparently adopted a compromise: Its recommendations will apply equally to all the banks, with one exception - the recommendation that banks be permitted to sell and consult on life insurance. In this field, the smaller banks - including Israel Discount Bank, which is the third largest - will receive priority: they will be allowed to begin selling life insurance immediately, while the two largest banks will have to wait two to five years. Additionally, the smaller banks will be able to sell insurance before they finish divesting themselves of their mutual and provident funds, whereas the large banks will have to sell off all their funds before they can enter the insurance market.
Both of these factors will give the smaller banks an edge that will hopefully enable them to expand their market share at the big banks' expense. Today, Hapoalim and Leumi have almost ironclad dominance of the banking sector.
But even the smaller banks are unlikely to enter the insurance market immediately, since they will need time to train their people as consultants. Thus if the big banks are required to wait only two years, the small banks will have little time in which to benefit from their exclusivity. Therefore, the committee is likely to decide on a longer waiting period - probably three years.
Some members of the committee wanted to give the small banks even more preferential treatment - for instance, by requiring only the two largest banks to divest themselves of their provident and mutual funds. But the panel eventually decided against this, partly for fear that excessive discrimination in favor of the smaller banks would not survive a challenge in the High Court of Justice.
The committee also had to deal with another problem: fear that the insurance companies will simply replace the banks as the dominant financial players, since they will be permitted to purchase both the provident funds sold by the banks and the pension funds that the Finance Ministry is currently selling. If the companies take advantage of this opportunity, as they almost certainly will, they would then have control of all available long-term savings alternatives: pension funds, provident funds and life insurance.
Therefore, the committee is also expected to recommend a cap on how much of the long-term savings market any one company is allowed to control.
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