Comptroller alarmed by regulatory vacuum on loans

Joseph Shapira
Joseph Shapira

Lack of regulation in Israel is allowing loan sharking and money laundering to thrive, Joseph Shapira says.

Israel has no single regulator with sole responsibility for the financial aspect of consumer protection, the State Comptroller writes. Neither the Consumer Protection and Fair Trade Authority nor the Israel Consumer Council deal with the financial aspect, for which the Bank of Israel and the Ministry of Finance are responsible.

This situation enables private sector companies to overload consumers with offers of different types of loans.This is a growing phenomenon being fanned by the major increase in credit taken by households.

"In recent years, households have become more and more exposed to loan advertisement in the media," the State Comptroller writes. "As a result, many consumers are tempted to take loans that are not suitable to their economic capability. An investigation by the State Comptroller's office found that there are no guidelines concerning misleading advertising and marketing of non-bank loans provided by private companies, including loans by providers of currency services. It was found that the Ministry of Finance does not oversee the granting of the loans. In many advertisements, in addition to the loan being offered, the companies use the expression 'licensed by the Ministry of Finance,' or 'approved by the Ministry of Finance,' in a way that is liable to sound as if the Ministry of Finance is supervising the process."

In the State Comptroller's opinion, in view of the ongoing increase in loans to households in recent years, the Ministries of Justice and Finance should take action as soon as possible to supervise the private non-bank loans sector, including regulation of the advertising and marketing of loans to consumers.

Failure in dealing with the gray market

The State Comptroller's office also argues that the state is not protecting weak borrowers, and is allowing non-bank loans to become the main channel for money laundering for various criminal elements. According to the report's figures, 28% of the public borrows money from private parties, especially gray market sharks. One third of the borrowers reported that "pressure" had been exerted on them by lenders. Most of the borrowers are from disadvantaged groups, and cannot obtain credit from the banks.

"The State Comptroller's office takes a very grave view of the behavior of the Ministry of Finance, Ministry of Justice, and the Bank of Israel, which have failed to find an appropriate solution for regulation of the non-bank loans market, and the irresponsible practice of passing the hot potato of dealing with the issue from one regulator to another," the State Comptroller writes. "In opinion of the State Comptroller's office, given the public interest in protecting borrowers and the importance of combating money laundering and organized crime, and in view of the macroeconomic aspects accompanying the non-bank lending sector, the government should regulate this market with no further delay."

In view of this severe criticism, it is important to note that establishment of a new authority for overseeing the private (non-bank and non-institutional) credit market is in the advanced stages. At the beginning of next week, a proposed government bill will be presented to the ministerial legislative committee for appointing a supervisor for the private credit market, a measure supported by Minister of Finance Moshe Kahlon.

In addition to legitimate parties operating in it, the non-bank and non-institutional credit market, called the gray market, also includes criminal elements. No government agency has any reliable estimate of the volume of gray market credit activity, and the official data mean nothing. The State Comptroller tried to estimate the volume of the gray market according to the findings of a 2012 financial survey conducted by the Central Bureau of Statistics, which found that 28% of those who took loans reported that their loan was from a private individual, and of those who had debt, 31% reported that private parties had exerted pressure on them to settle their debt.

The main victims of the failure to regulate the non-bank credit market are people with little access to bank credit, such as people with low incomes. Arranging supervision of the private credit market is designed to protect weak borrowers and encourage the entry of legitimate elements into the market.

A key issue is money laundering, which is currently taking place undisturbed in this market. A business providing a non-bank loan is not included among the services requiring a license or registration under the Money Laundering Prohibition Law, and the regulations for preventing money laundering and financing of terrorism therefore do not apply to it.

"Arranging supervision of the market for non-bank loans from private parties is likely to create protection for borrowers, and to help cope with the risks arising from activity in this market, especially risks of crime, money laundering, and unreported business, and is also likely to encourage the entry of legitimate parties into the market, thereby contributing to competition in the household credit market," the State Comptroller concludes.

Published by Globes [online], Israel business news - www.globes-online.com - on October 29, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Joseph Shapira
Joseph Shapira
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