Sources inform ''Globes'' that the Ministry of Finance is finalizing primary legislation of rules and regulations, and is completing legislation and regulations to establish a direct supervisory agency of investment houses and insurance companies' subsidiaries. This is the next step in measures initiated by Ministry of Finance director general Yael Andorn, following demands for greater transparency about salaries and other matters to equalize regulations of companies that manage other people's money.
Some investment house activity is already supervised: the Capital Markets, Insurance, and Savings Division oversees provident and pension funds; and the Israel Securities Authority supervises mutual funds and is responsible for them meeting filing and due diligence requirements. Control permits are required when an investment house with an insurer's license changes ownership, or when the controlling core of an insurance company is sold.
What the market lacks is direct supervision of the parent companies, which have avoided regulation until now; in other words direct regulation of the companies at the top of the control pyramid, and which set the policies of their subsidiaries. This problem was accentuated by the Bachar reform, which came into effect in January 2006, greatly expanding investment houses and insurance companies' businesses and their credit activity. The Bachar Committee recommended equalizing the supervision, but it was not implemented when the law came into effect, mainly because of the argument at the Ministry of Finance at the time that competition would do the job.
As a consequence, investment houses remained unregulated and opaque. Directors of the holding companies and the subsidiaries are often the same people - a situation that could, and has, resulted in conflicts of interest and the prioritizing the parent company and its executives' interests over the interests of the companies that are directly responsible for the public's money.
A similar situation prevails in the insurance industry, where insurance companies are owned by holding companies, such as Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), which owns Clal Insurance Ltd.; Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), which owns Harel Insurance Company Ltd.; Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL), which owns Migdal Insurance Ltd.; and Menorah Mivtachim Holdings Ltd. (TASE: MORA.
Although the insurance companies are regulated, their holding companies are not. Reality has taught us that even when there are laws for full separation of the insurance company and its parent holding company as legal entities, in times of crisis at the parent company, all the subsidiaries, which manage the public's money, are affected.
Published by Globes [online], Israel business news - www.globes-online.com - on June 15, 2014
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