Online trading

FSCA issues licenses as part of e-commerce cleanup movement

As part of an initiative to clean up the previously unregulated online trading market, the Financial Sector Conduct Authority (FSCA) has issued a batch of licenses to online brokers offering over-the-counter (OTC) derivatives.

Among the non-bank players to receive ODP licenses are QuickTrade, Khwezi Trade and IG Markets SA.

The FSCA says it is currently reviewing 32 ODP license applications made up of both banking and non-banking entities. “Applicants who meet all the requirements will be granted clearance while those who do not will be denied,” the FSCA said in response to questions from Moneyweb.

The regulator is investigating 16 possible cases of unregistered ODP companies.

“Some of these investigations are still ongoing and enforcement action will follow in some of these cases, if warranted.”

In August 2018, it became mandatory for all over-the-counter (OTC) derivatives brokers to obtain licenses. Previously, online merchants operated in a regulatory gray area, putting customers at risk with undercapitalized balance sheets, poor to non-existent compliance, and misleading marketing (in particular, underestimating the risks of trading).

In July 2020, the FSCA went so far as to shut down the country’s largest online brokerage, JP Markets, on the grounds that it violated the country’s licensing laws. JP Markets was then placed into liquidation, although the FSCA’s decision to shut it down was overturned by the Supreme Court of Appeals (SCA) last year.

Read:

In response to questions from Moneyweb, the FSCA says the loss of the JP Markets court case had no impact on the decision to start licensing online brokers, as “each application is considered on its own merits. “.

“All applications are assessed against a set of prescribed requirements which, if fully met and complied with to the satisfaction of this office, authorization will be granted,” it says.

A “long overdue” cleanup

Mark Wurr, co-founder and managing director of online brokerage Khwezi Trade, said a cleanup of the online brokerage space was long overdue. “We worked hard to get this license and it cost us a lot of money to meet the very strict compliance standards set by the FSCA, but we are glad we did. Under the Financial Markets Act (FMA), we could not operate a forex trading platform in South Africa unless we obtained ODP license approval, which meant we would have had to close shop.

Hardus van Pletsen, founder and CEO of QuickTrade, told Moneyweb that the company spent over R6 million and thousands of hours to ensure it met the FSCA’s ODP license requirements.

“Of course it’s fantastic to finally receive the license and we think the industry needed a clean up and [to] offer greater protection and better service to the customer. As a licensed trader, we are required to submit regular reports to the FSCA to ensure that we continue to meet the licensing requirements, which are very strict,” says Van Pletsen.

“We are one of the few online merchants outside of the banking industry to receive an ODP license and I think this gives customers some satisfaction that their funds are safe with us and our business practices are above all edge. Many customers want to know whether we are regulated or not, and I think what the FSCA does is separate the credible operators from the rest.

Shaun Murison, Senior Market Analyst at IG Markets SA, says ODP licensing is relatively new in South Africa and a number of license applications are still in the FSCA system awaiting review. “Of course, we are proud to be one of the first non-banking entities to have obtained this [licence].

“Trading on licensed platforms helps protect the interests of clients and the industry,” says Murison.

IG Markets SA is part of the London-listed IG Group, one of the largest online trading groups in the world with operations in 20 countries. Company policy must be regulated in each jurisdiction in which it operates.

Compliance

Wurr says maintaining license terms requires daily reporting and a large amount of compliance. “It is harder to operate a business under such strict controls, but we are happy to do so because if it is difficult for us, it would be even more difficult for unethical companies to operate.

“It will make the market a safer and more attractive place for investors. Which will be great for the industry as a whole.

“After being involved in forex and CFDs [contracts for difference] online business for more than 20 years, I welcome the stricter regulation that the license brings. This will certainly help weed out the unethical vendors that seem to have crept into the market over the years.

Van Pletsen says one of the benefits of having an ODP license is the ability to offer “white label” online brokerage services to those who may not necessarily be eligible for a license.

“They can come under our license. We need to continue to ensure that our compliance standards are met, but this opens up all sorts of exciting possibilities, for example, for crypto exchanges looking to add forex or CFDs to their product suite.

Read: The FSCA is working on a regulatory framework covering cryptocurrencies

Is an ODP license something trading clients should look for when choosing a trading platform?

Knowing that several ODP license applications are currently under review by the FSCA, although not yet awarded, an ODP license definitely improves the level of customer confidence.

“The answer is yes, it’s simple if you are a South African resident looking for the safest place to trade – only trade on a South African domiciled and FSCA ODP approved forex platform”, says Wurr.

Van Pletsen says an ODP license is not easy to obtain, nor to maintain.

“This is one of the first questions you should ask yourself when looking for an online broker – do you have an ODP license?”

Is there evidence of improved regulatory compliance by online brokers?

The FSCA says it has not yet conducted a post-licensing review of online brokers.

“We intend to review their compliance with regulatory requirements six months after the date the license was granted. The thorough review during the application phase has improved the level of awareness of licensing and ongoing compliance obligations and the entities involved have demonstrated efforts to continue to comply with the requirements, including, among others, governance structures, system capabilities and capital adequacy requirements. to ensure the sustainability of these businesses.

Does your online broker do any of these things?

(If so, let them pass.)

  • Misleading advertising, promoting trading as a get-rich-quick scheme.
  • Employing untrained people to interact with customers. Most reputable brokers require client-facing staff to pass certain recognized qualifications, such as the RE5 exams under the Financial Advisory and Intermediary Services (Fais) Act.
  • Operate without a properly constituted board with independent directors.
  • Place customer deposits in the company’s bank account. This has happened, and any company doing this should be reported to the FSCA immediately. Reputable brokers do not touch client funds, insisting that they remain in segregated accounts under the client’s name and control.
  • Failing to perform basic Know Your Customer and Financial Intelligence Center Act (Fica) checks to see if customers appear in international anti-money laundering and anti-terrorist financing databases.
  • Accept money from people who can’t afford to lose it. A basic suitability assessment check by a responsible online broker will reject clients who are not financially qualified for trading. Money invested in online trading should be money you are willing to lose.