Address of ISA Chair at the Calcalist Conference, September 5, 2018
Good morning everyone,
I am happy to be here and take part in this important conference.
This morning, I would like to share with you my worldview as a regulator and the directions that the ISA plans to take in the next few years. First, I would like to begin from my plans for the ISA.
Since assuming my position as chairperson of the ISA eight months ago, in view of the importance of outlining a long-term strategy for the ISA, I headed an in-depth project to define and develop such a strategy.
In this project, we explored several fundamental issues: the role of the ISA; who our “clients” actually are and how we are viewed by them; the features of the world’s most successful capital markets and where Israel stands relative to them; and how to generate success here, in our own capital market.
After exploring these issues in-depth, we held discussions with international counterparts, academic researchers in and outside Israel, and various actors in the local capital market, and I decided that our core activities in the forthcoming years will be guided by the following five goals:
- to maintain and improve market fairness;
- to realize the full potential of technology and innovation for the benefit of the public market;
- to develop competition over the standard of services offered to investors;
- to develop the public market and the public’s access to it; and
- to ensure that the Israeli capital market contributes to the growth of the Israeli economy.
Several conclusions came out of this significant project. The most important of these is the necessity to develop and expand the Israeli public capital market in a manner that supports the success of the Israeli economy, with an emphasis on the Israeli market and economy.
It may seem that the need to develop the Israeli public capital market is taken for granted, but we discovered that not everyone is aware of the connection between a successful capital market and a successful economy. The more we delved deeper into our study of successful capital markets in other countries, which included the United States, the UK, Australia, France, and even China, we found that the agenda of the regulators in these markets included the explicit goal of contributing to the strength and growth of their respective local economies.
Unfortunately, in Israel, the understanding that a strong capital market is necessary for a successfully performing economy has not been fully assimilated.
Our goal is to change the existing priorities so that the capital market becomes a dominant player in the Israeli economy.
The countries with the most successful economies are the United States, China, Japan, Germany, and England.
It is not surprising that the world’s largest stock exchanges belong to the same exact countries: The NASDAQ and the NYSE, the Tokyo Stock Exchange, the London Stock Exchange, Euronext in Europe, and the Shanghai Stock Exchange of China.
We want Israel to join this distinguished group.
Only a few days ago, in its landmark decision in the matter of Nohi Dankner, the Supreme Court spoke of the connection between the capital market and the economy, and justifiably stated that, “The capital market promotes an efficient distribution of sources and resources in the economy. Consequently, the capital market constitutes a driver of long-term economic growth, and for this reason, capital market violations cause enormous harm to the Israeli economy and to its society in general.”
One way to connect the capital market to the economy is to encourage investments in national infrastructures.
Today, private sector investments in infrastructure projects total approximately NIS 50 billion. Our goal is to shift a significant portion of financing for these projects to the public capital market. I want the general public — all investors — to benefit from these investments.
To this end, I am working with the General Accountant’s Office of the Ministry of Finance, the Head of the Tax Authority, and additional governmental agencies to establish publicly traded national infrastructure investment funds.
These funds will benefit from unique tax benefits, provided that their holdings are concentrated exclusively in infrastructures, and their profits are regularly distributed to their investors.
This move will take place in the coming weeks. We are already seeing a surge of interest from the market in such investment products.
One of the most important tools for expanding the availability of publicly traded infrastructure investment products is the Securitization Law, and we are taking steps to promote this law jointly with our partners in the Ministry of Finance, Bank of Israel, Ministry of Justice.
The Securitization Law is designed to convert the private financing granted to the infrastructure sector and other targets of financing into assets traded on the public capital market.
The importance of this issue is growing as the quantity of money has increased globally in recent years while interest rates hover around zero, creating undervalued risk, which is why we are experiencing an accelerated shift of investments to the private market, at the expense of the public market.
Public markets are showing a global decline in scope. If we look at OECD countries, and the UK and United States, a decline in the number of publicly traded companies is evident. This is, in fact, a global trend.
Israel is also part of this trend: In 2009, there were 622 publicly traded companies yet only 454 in July 2018.
This constitutes a 30% decline in a decade, which is a serious decline!
In that same interval, private market activities expanded enormously.
For example, looking at the private fund market, where funds typically invest in non-negotiable assets, the number of funds has tripled since 2009, and the portfolio of private investments under management by Israeli institutional investors tripled — from NIS 83 billion to NIS 235 billion, and the scope of private investments of overseas institutional investors increased six fold. This, once again, underscores the need to promote the public capital market in Israel as a counterbalance to these trends.
I believe that the public market is better for investors, because in this market, investors benefit from the added value of transparency, liquidity, and regulation, and for this reason, we will strive to expand the public market as much as possible.
I will take steps to encourage investments in the Israeli capital market in a manner that promotes the Israeli economy.
This approach will serve as our guiding star, and each of the steps that we decide to promote will also be reviewed in light of this principle: whether and to what extent the proposed action contributes to the Israeli economy.
Two additional issues that I intend to promote are related to, and are also part of the ISA’s new strategic plan. These issues are innovation and competition.
Our world is changing at a dizzying pace. We see how technology penetrates all fields and disrupts the existing order. Look at what Uber did to the car market, what AirBNB did to the hotel industry, and what Amazon is doing to the retail market. Fintech is another such field that is and will completely transform the way people consume financial, banking, and other services, with more digital and easily accessible services, greater competition, and lower consumer costs.
Still, isn’t it odd how the Israeli capital market appears to be the “shoemaker’s barefoot child”? I find it astonishing that Israel, the start-up nation, has innovations that are leading the fintech sector all over the world, but in our own capital market, the pace of technological adoption is painfully slow.
This is something that I intend to change.
Our capital market should be the spearhead of progress and technology in the financial service industry.
Therefore, I have already started to promote several steps that are designed to establish a foundation for the introduction of new technology-based financial services, which will be more easily accessible and less costly.
Let’s take brokerage services as an example.
One of the problems in the brokerage market in Israel is that these services are almost entirely rendered by the banks, even though the TASE has another 8 members (including major investment houses) that could create competition for the banks, but this has not happened.
I believe that the reason for this is rooted in two main factors:
- The centralized nature of the capital market and investment houses’ potential dependency on the banks’ distribution system — despite the availability of technologies that would give create complete, independent means of distribution.
- Information barriers that prevent the public from consuming less expensive services. I hope that the publication of fees on the TASE website will improve this situation.
I would like to encourage the development of this market for the benefit of the retail investors, which make up the general public.
To this end, I decided to impose regulation on the field of brokerage services, making them safer and more competitive.
The first step is to promote the Broker-Dealer Law, which will regulate the operations of private brokers. This law will also facilitate the entry of foreign brokers into Israel, which will pose competition for the banks and expand the variety of capital market services available to the Israeli public.
Furthermore, approximately two weeks ago, we permitted major international investment groups and the market makers operating alongside them to list their products on the TASE. This step is expected to expand both product supply and trading liquidity.
The sale of the TASE to private foreign investors is also expected to introduce new trading members, as was the case in other markets under similar circumstances. The goal is to have entities such as JPM, which very recently introduced no-fee online brokerage services for their clients, enter the Israeli market and offer similar services to the Israeli public.
Such services and products will compete with the banks over the pockets of Israeli customers.
Ultimately, the market is expected to grow and costs are expected to decline.
Let me say that, since assuming my current position as head of the ISA, I have been meeting regularly with the regulatory authorities in the financial system and have been pleased to discover that we all share a desire to work to remove regulatory obstacles to create greater competition in the financial market. I am confident that these joint efforts will be fruitful.
Finally, I would like to share with you my worldview as a regulator.
There is a common term used the world over – “good regulation” – I think that we don’t even have a good Hebrew equivalent. Good regulation is effective regulation.
Good regulation is effective regulation that drives market players to supervise each other. It is, in fact, a scheme that promotes growth and accountability.
The ISA is not interested in becoming involved in the internal decision making processes of market players. That is their job.
The capital market currently suffers from a grave disability. This fact, which has emerged repeatedly in my discussions with various market players, was caused by a combination of circumstances, causes, and developments. In some cases, events may have been addressed correctly but excessive aggressiveness drove the market to a level of mediocrity that potentially threatens the interests of investors and savers.
With our own hands, we created a market that, in the best case, aspires to achieve mediocre [performance] and benchmark returns; a market whose default investment vehicle is real estate, which is prioritized over investments in developing the growth engines of our local economy; and all the while we are putting at risk the most precious asset of all – the public’s savings, which deserve the best management available.
These savings are our financial future as older adults. We will all get there.
As a regulator, I would like to be on the side that regulates and expands the opportunities available in the market.
I intend to create transparency with respect to the ISA’s overall enforcement policy. The rules will be known to all market players, and whoever complies will get a “green light” to move forward and won’t have to stop for a stop sign at every intersection.
Yet, in the same breath, I will also emphatically state that whoever violates the rules, will be removed from the road immediately. We will have zero tolerance for offenders.
I believe that the ISA should be a beacon of light for the capital market, and the market’s “responsible adult” —
who knows when to provide assistance to regulated entities, and when to learn from them, but — and this is most important — who knows when to give them free rein, and trust the regulated entities to grow and to maturely assume full responsibilities for their own actions — as long as they don’t abuse their powers, of course.
Our single overarching goal is to act in the interests of Israel’s economy and capital market.
I would like to wish everyone a happy and healthy new year. Thank you.