TASE CEO: Split investment consultancy from banks

Something extraordinary happened this week, when the Tel Aviv Stock Exchange (TASE) published a position paper relating to some of its main shareholders, namely the banks, calling on the government to intervene in the running of the banks’ businesses. The stock exchange calls for substantial reform, including separation of the investment advice business from the banks and its sale to third parties, Israeli or foreign.

“There is a deep, built-in failure in Israel in the activity of the financial consultation service available to the general public,” the TASE states, and illustrates the point using figures from the recently published Israel Securities Authority report on “The Activity of the Consultation Function at the Banks”.

The report showed that the number of consultants licensed to provide investment advice had shrunk by 30% within five years, and that this business was highly concentrated, with 94% of the consultants working in the banking system, and in practice providing consultancy services to those with, on average, NIS 950,000 in their accounts.

“These figures, together with the huge current account mountain in Israel, one of the highest in the world and currently amounting to about NIS 520 billion, illustrate the substantive failure in the consultation function at the banks. The rise in interest rates over the past few months represented unambiguous proof that investment consultancy is not available to the general public, when appropriate financial conduct is critical and more than ever important to the ability of households to cope with the cost of living.

“A simple calculation shows that, in the current interest rate environment, an Israeli with a current account balance of NIS 100,000 loses passive income of NIS 4,000 annually, as inflation erodes the value of the money,” the TASE explains.

“It’s clear what isn’t working”

Talking to “Globes”, TASE CEO Ittai Ben-Zeev said that he expected that the widespread reaction would be “How can the stock exchange come out against some of its shareholders?”, but that once people thought about it in depth, the TASE’s stance would be clear to them.

“There are excellent consultants at the banks, but the focus is the method, and that’s where there’s a problem,” Ben-Zeev says. “Since the Bachar reform of 2005, the consultancy function has not been perceived as a strategic line of business for the banks, and nor can it be, since Bank of Israel regulation does not allow the activity of the consultants to be measured.

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“When you add this to the Consultancy Law, which is not adapted to the new worlds of accessibility, data, and analysis, together with the built-in conflict of interests at the banks arising from the fact that they don’t have to pay interest on money lying in a current account, certainly at a time when interest rates are rising, all these things enable the banks to widen the financial spread on current accounts versus the interest rate on loans. So it’s clear what isn’t working. And when there’s no financial education and a large proportion of the public doesn’t know what it could receive, it loses money without even being aware of it,” Ben-Zeev explains.

He added that while distribution of financial products takes place in every Western country in an open, competitive market, in Israel, distribution is in effect controlled by the banks. “If the consultancy functions become subsidiary companies and the banks are forced to sell them, there will be institutions from overseas as well that will be interested in going into depth, recruiting consultants, and measuring their performance. Thus the competition and the variety that the Israeli consumer receives will be greater. The Securities Authority found that the value of an account for which investment advice is provided is almost NIS 1 million. Why shouldn’t people with NIS 100,000 or NIS 200,00 be able to obtain investment advice?,” Ben-Zeev asks.

A figure in the Securities Authority report that seems surprising (or that could indicate that the consultants at the banks are objective) shows that money market funds, a product that competes with bank deposits, were the product most recommended in the first nine months of 2022. NIS 11 billion out of assets totaling NIS 70 billion on which customers received investment advice were channeled to money market funds.

“As soon as interest rates rise, it becomes possible to put money into a money market fund and obtain a few percent interest, with liquidity,” says Ben-Zeev, “but large parts of the public are not aware of this possibility.

“We are in a different financial world, and, after health and happiness, money is important in every family, and the public in Israel does not understand sufficiently and doesn’t know that its money is being eroded. There is no reason in the world that if interest rates rise and can be shared with the consumer that this shouldn’t happen.

“Why, because he doesn’t understand? Twenty or thirty years ago, when interest rates rose, the bank would call its customers and propose placing money on deposit with higher rates. Today, the customer’s money is left lying with zero interest or at old rates. In a sophisticated and competitive market, these things wouldn’t happen, Ben-Zeev adds. “There’s now a new government that will examine what is happening, and the banks can be obliged by legislation to sell the consultancy business.”

What’s your view of the recommendation of the team examining the Concentration Law to allow the banks to become market makers in equities again, as part of an attempt to make the stock exchange more liquid?

Ben-Zeev: “I’d be delighted if that were to happen, but I don’t think that that is part of their agenda. We are trying to encourage foreign institutions to come and be market makers, because there’s no doubt that the liquidity of the stock exchange needs to be improved, and it’s to the capital market’s benefit that there should be as much liquidity as possible and as much tradability as possible.”

The banks: The TASE is misleading the public

The Association of Banks in Israel stated in response: “It is very strange that the stock exchange is proposing to turn the banks’ objective and professional investment advice function (as the CEO of the stock exchange describes it) into biased consultancy with the aim of increasing the stock exchange’s profits at the expense of customers’ interests. It would seem that the stock exchange has no hesitation in using every means of raising the level of risk to which customers’ money is exposed at this very dangerous time.

“On the way to achieving this goal, the TASE CEO also does not hesitate to mislead the public, when he implies that only a customer holding an investment portfolio of NIS 950,000 can obtain investment advice.

“The banking system provides an objective consultancy service to its customers, countrywide, out of a sense of responsibility for managing customers’ invested money prudently, taking into consideration their various needs, using a range of financial products available on the market, and in accordance with the customer’s preferred risk level. No alternative exists in the Israeli capital market to this financial service,” the Association of Banks concludes.

Published by Globes, Israel business news – en.globes.co.il – on January 24, 2023.

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