The Ariav committee has reach the stage of writing up its decisions having completed the initial ideas stage. Two weeks ago, all the regulators met at the Ramat Rachel Hotel in Jerusalem for an intensive two-day session for this purpose.
The discussions redefined the Ariav vision. The committee's overarching goal is to create the solid regulatory, tax, and legal infrastructure that will enable the building of a global financial industry in Israel. The intention is for international companies to set up branches in Tel Aviv, which will be manned by Israelis.
Over the next two months, the Ariav committee members will not only formulate its conclusions, but also the necessary legislative amendments which, before they are submitted to the cabinet and the Knesset for approval, will be subject to a kind of public hearing. In other words, the committee members will present the necessary changes to the leaders of the Israeli capital market - the bankers and heads of investment houses - to obtain their comments before the reform is launched. The timetable for this process calls for the public hearings to be held in November and December and the legislative process to begin in January 2009.
Representatives of Deloitte Touche, which is advising the Ariav committee, attended the Ramat Rachel meeting. "Globes" has obtained sections of the final report, which recommends not adopting the supermarket model. In other words, Israel should not create a financial market that offers all services, but should concentrate on two financial subsectors - hedge funds and captive insurance.
Ministry of Finance director general Yarom Ariav told "Globes", "About 80% of the hedge fund industry is manned by Jews. We believe that this affinity, plus the granting of tax-exempt status on income and assets for new immigrants and returning residents for ten years will encourage them to open offices in Tel Aviv."
Captive insurance is a method of risk management under which a business establishes an in-house insurance company that insures all or most of the company's risks. The main advantages of this method are that it slashes costs and enables considerable flexibility. The classic example of the capital insurance industry is Vermont, where 800 such companies are incorporated after the state government passed simple legislation and, more importantly, significant tax breaks for these companies. Ariav wants to adopt this model in Israel.
The structure of the tax breaks for both capital insurers and hedge funds is now being formulated officials from the Ministry of Finance State Revenue Administration deputy director Frieda Yisraeli and Israel Tax Authority deputy director Gideon Bar-Zakkai.
After the tax structure is built, there will be a need to improve the legal system to give foreign investors the certainty and effective management for litigation. The Ariav committee has made two decisions on this issue. The first relates to the establishment of an economics affairs court, which President of the Supreme Court Judge Dorit Beinish and Minister of Justice Daniel Friedmann both support. This will not be a separate court, which would lead to "jealousy" by other sectors that would want their own such independent court systems, but will comprise a cadre of judges who will specialize in the capital market. The court will be based at the Tel Aviv District Court.
Israel Securities Authority chairman Zohar Gershon has already prepared a list of candidate judges for the economics affairs court. Ariav says, "Foreign residents won't come here if they are not certain that in cases of litigation they'll have to wait seven years for a verdict."
The second decision has already been implemented. The 2009 economic arrangements bill includes an item for the granting of licenses to foreign lawyers. The logic of the measure is to enable foreign investors to bring their own legal counsel, in order to facilitate and encourage investors coming here.
Ariav says, "We removed the issue of regulatory structural change from the letter of appointment of the committee. This was not by chance. You simply cannot set up a committee made up of regulators and instruct them to change the regulatory structure. It's ridiculous, and you don’t have to be a genius to understand why. We've talked about regulatory harmonization as another bulwark of the change that we want to implement. For some reason, the erroneous impression was created that the Ariav committee was a Bachar II committee that aimed to compel the regulators to consolidate in the way that the Bachar committee forced the banks to divest their financial institutions. There's nothing farther removed from the truth."
Ariav has support for his arguments - the Deloitte report, which states that there should be no regulatory restructuring in the Israeli market, at least not now. As for regulatory harmonization, Ariav says, "Progress has been made."
The main recommendations of the Ariav committee:
- The Israeli capital market should specialize in hedge funds and captive insurance.
- Formulate alternative models for tax breaks for foreign companies that want to open local branches.
- Establish an economics affairs court at the Tel Aviv District Court. A list of judges has already been made.
- Grant licenses to foreign lawyers, already included in the 2009 economic arrangements bill.
- No regulatory restructuring at this time, based on a recommendation by Deloitte.
Published by Globes [online], Israel business news - www.globes-online.com - on September 4, 2008
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