The Knesset to the Rescue / Lawmakers Try to Tame the Multi-headed Capital Market Monster

Since the the so-called haircuts bill passed its preliminary reading, MK Zahava Gal-On (Meretz) has been approached by figures in the financial sector asking for a meeting to persuade her to drop it.

"When institutions designed to represent the ordinary citizen abandon him, it is the job of the lawmaker to intervene," said MK Zahava Gal-On (Meretz) two weeks ago, shortly after the Knesset approved the preliminary reading of the so-called haircuts bill that she submitted together with MK Yitzhak Vaknin (Shas). The bill passed unanimously, with the support of 25 Knesset members.

Such broad mobilization of legislators on a specialized financial matter related to the capital market isn't a routine occurrence in the Knesset. The 2008 world economic crisis and Israel's social protests have made Knesset members attentive - not just to the price of cottage cheese, but also to the issue of pension savings. Legislators who barely knew what bonds are and who the financial institutions are became experts on capital market "haircuts."

Netanyahu, Steinitz
Emil Salman

Legislation is reliant on government approval, but the government has opposed any bill connected with the capital market. Just one - the haircuts bill - hasn't been frozen.

"Enacting the bill will change the bond market from a Turkish bazaar, where everyone collaborates to promote speculative leveraging, to a place where the public's funds are protected," said Gal-On.

The Finance and Justice ministries support the bill. Meanwhile, however, since the bill passed its preliminary reading, Gal-On has been approached by figures in the financial sector asking for a meeting to persuade her to drop the bill. Gal-On refuses to specify who is pressuring her.

"The campaign against the haircuts bill just proves how much it's needed and the influence tycoons have in determining their own regulation," says Gal-On. "The bill protects consumer interests, so it inevitably harms practices serving the economy's strong elements - those trying to discredit it and prevent its passage."

Legislative dynamite

In the wake of plans by Yitzhak Tshuva and Ilan Ben-Dov to arrive at debt settlements for their respective companies, Delek Real Estate and Tao Tsuot, MK Meir Sheetrit (Kadima ) submitted a bill preventing any business baron shearing his bondholders from raising any more money in the capital market.

"The financial system doesn't serve who it's intended to serve, and the government does nothing on this matter," said Sheetrit, a former finance minister well versed in economic matters, in explaining the need for a private-member bill on the issue.

Sheetrit brought the bill before the Knesset plenum at the end of November 2011, and the government declared its opposition. Shortly before the vote, Sheetrit addressed Prime Minister Benjamin Netanyahu from the Knesset podium, asking him: "If you loaned money to someone and he didn't repay you, would you loan him money again?"

Netanyahu recognized the bill's inherent dynamite and the public outcry that the government would face if it torpedoed the bill. Moments before the vote, he instructed Deputy Finance Minister Yitzhak Cohen (Shas ) to respond to the plenum that the government would re-examine its stance. Two months have gone by since then and the government's position on the Sheetrit bill still hasn't been relayed.

Last week, Netanyahu also agreed to review government and Finance Ministry policy regarding the question of reducing management fees. The prime minister instructed the treasury's commissioner of financial, savings and insurance markets, Prof. Oded Sarig, to enter into talks with the chairman of the Knesset Labor, Welfare and Health Committee, MK Haim Katz (Likud ), on the bill for cutting management fees of provident funds.

Katz submitted the bill back in 2010, before the social protests, but has now found an opportune time to push it forward. He proposes lowering the management fee ceiling to 3.5% on new monthly deposits and another 0.2% on assets for pension funds, to 4% on deposits and 1% on assets for senior employees' insurance, and 0.7% on assets for provident funds. The average actual management fees for pension funds are 4% of deposits and 0.34% of assets.

"Lowering management fees to 0.7% would create a large problem in the capital market," Sarig told the Knesset Finance Committee last week. "The interest of savers not paying too much should be looked after, but, on the other hand, it should not cause the collapse of companies and put all the savings at risk."

A preliminary vote on the legislation was scheduled for last Wednesday, but was postponed for two weeks to try to bridge the differences between Katz and Sarig.

Punishable crime for "regular" people?

Knesset members are showing interest not just in the pensions of the little guy, but also in the paychecks of the big fish at public companies. Two years ago, MK Shelly Yachimovich (Labor ), together with Katz, presented a bill limiting top pay at publicly traded companies to 40 times the amount earned by the company's lowest-paid employee.

When it seemed that the bill - opposed by the prime minister and treasury - had gained majority support, Netanyahu decided to appoint a ministerial committee led by Justice Minister Yaakov Neeman to examine the issue. At the end of 2010, the committee ruled out intervening in pay at public companies.

"The capital market is an enormous and lawless economic arena," insists Yachimovich. "The market is a monster that has grown to such proportions that it is beyond monitoring or restraint by the rule of law. Tshuva pilfered NIS 1 billion from the public. A regular person would be sitting in jail had he done that."

MK Faina Kirshenbaum (Yisrael Beiteinu ), who chairs the Knesset Finance Committee's subcommittee for insurance, submitted the provident funds bill that would restore benefits once enjoyed by provident fund members. The bill proposes that people with savings in the funds for 15 years will be exempt from capital gains tax, and anyone saving for 16 to 20 years will receive enhanced benefits to encourage them to keep saving: The provident fund would thus serve them as another layer of pension/capital that could be converted into a pension allowance if so desired. Anyone saving until the age of 67 and attaching his savings to his pension allowance will be entitled to additional benefits, at a rate not yet determined. The Finance Ministry opposes the bill, partially due to its costs.

"The treasury has failed miserably because it didn't take into account the psychology of savings, that people who save need to be given an incentive and a channel to save money for their retirement years," says Kirshenbaum. "Canceling the option of saving for 15 years and limitations on the withdrawal of equity killed the incentive for saving through provident funds. The proposed legislation will change this."

Except for the haircuts bill submitted by Gal-On and Vaknin, the chances that any of these bills will pass appear remote. But it was public pressure that made the government bend and support the Gal-On and Vaknin proposal, and to reconsider its stand on the bill submitted by Sheetrit. Strong public resonance generated by Yachimovich and Katz pushed the government into establishing a special ministerial committee, the Neeman Committee, whose recommendations are frozen in the Knesset. And the management fee extortion, along with public and parliamentary pressure, induced Netanyahu to direct the treasury's capital markets commissioner, Prof. Oded Sarig, to reach an agreement on the subject with MK Katz.