Financial service providers have been requested to be vigilant of copy trading, also known as mirror trading, and to warn clients against it.
Addressing the Enforcement Roadshow in Cape Town on 20 March, the FSCA’s head of enforcement, Gerhard van Deventer, noted the prevalence of copy trading and highlighted the Authority’s focus on tackling it.
The roadshow follows the release of the Authority’s first Regulatory Actions Report in April last year. According to the report, copy trading has become increasingly popular on contracts for difference (CFD) trading platforms. In essence, the platforms enable experienced traders to have their transactions copied by clients.
The FSCA said there seems to be “an erroneous belief” that a copy trader does not require any type of financial services licence.
Many trading platforms are MAM (Multi-Account Manager) enabled. The FSCA stated that traders are essentially using these MAM accounts to trade on behalf of clients.
The configuration of the master/copy account relationship varies from case to case.
“In its most simple form, master traders simply inform copy traders of their transactions, and the traders elect whether they want to follow the trades. In some instances, copy traders are informed automatically of the master trades, and in the more advanced operations, master trades are automatically copied on the copy trader accounts (and no trades are executed on the master account),” the FSCA explained in the report.
Van Deventer said that, particularly in the latter scenario, it’s just a way to get the instructions to the copy accounts, “so clearly that is doing financial services business. It is actually decision-making, so it’s actually a discretionary financial services business. Not everybody agreed with us, but we have made the point a few times with a few cases.”
Van Deventer reiterated that copy trading amounts to unlicensed discretionary FSP business, “and it usually ends badly”.
Just ask Quinton Moorcroft.
Operating as Pioneer FX, Moorcroft opened a MAM account with a platform derivative trader enabling it to trade in derivative instruments (CFDs) based on foreign currency pairs and other commodities.
Neither Pioneer FX nor Moorcroft, the sole director of Pioneer FX, were authorised to conduct financial services.
Between 11 March 2019 and 5 July 2019, 276 copy trader-clients linked to Moorcroft’s MAM account deposited R2 788 957 into their respective accounts. Moorcroft received compensation, including a performance commission/fee. At the end of the five months, the margin on the accounts was depleted because of trading losses resulting from Moorcroft’s decisions.
In 2022, the FSCA found Moorcroft and Pioneer FX in violation of the FAIS Act and imposed a penalty of R2 million and debarred Moorcroft for 10 years. Despite a reconsideration application, the Financial Services Tribunal upheld the decision.
“No matter what the construct of these accounts are, the master trader requires an FSP licence to practise his trade, either in the form of a Cat I licence (for advice and/or intermediary services) or a Cat II licence (for discretionary services),” the Authority said.
Fictitious policies remain a concern
Another notable trend discussed during the roadshow is the widespread occurrence of fictitious policies.
According to the report, the FSCA dealt with an alarming number of cases involving fictitious policies submitted by representatives to insurers in the past year. The Authority said that, in most cases, the modus operandi was essentially the same.
The representatives obtain the bank account details of unsuspecting members of the public and forge their signatures on policy application forms. The applications are submitted in the name of the victims, and the premiums are deducted from their bank accounts.
“These people eventually get caught out because money disappears out of people’s accounts that they don’t know about, and then there is an investigation, often by the industry. And, of course, there is a debarment, but it does not seem to slow down,” said Van Deventer.
To discourage the practice, the FSCA substantially increased the debarment periods for this type of fraud. However, the Authority intends to give more attention to this issue in the coming year.
“We will be focusing on that to find a better way to combat this, but I do rely on the industry to assist us with that … So, whatever you can do if you have representatives, please put in place whatever you can to try and prevent that,” said Van Deventer.
In the report, the Authority stated that another area of concern was FSPs and representatives misrepresenting to insurers that they were the persons who rendered financial services to clients. This modus operandi is colloquially referred to as employing runners, “a practice that seems to be widespread in the industry”.
“Not only does this practice negate the entire regulatory framework, but it also compromises the management and key individual of the FSPs in terms of their oversight and management responsibilities,” said the FSCA.
Guarantee policies
Municipalities and government departments (state entities) require performance guarantees from successful bidders for infrastructure projects. The state entity requests the performance guarantee in terms of the General Code of Contractors, which is a document issued by National Treasury. Once a tender is awarded, the successful bidder (construction company) needs to provide the state entity with a guarantee policy. In the event of a contractor defaulting or not performing, the state entity may call on the guarantor to honour its payment obligations in terms of the policy.
Van Deventer said some people saw an opportunity in the market, attained a National Credit Regulator (NCR) licence, and started issuing these policies.
“At the end of the day, that is an insurance policy, and only an underwriter, a registered insurer, can issue those policies. And I can tell you now, with all the investigations that we have conducted, none of those entities have the deep pockets to stand good for those policies,” he said.
The entities argue that the policies are credit facilities and sureties that fall under the NCR. The FSCA, however, stated that these policies should be issued only by an entity with the required capital adequacy and risk management equivalent to licensed underwriters.
Van Deventer noted that the FSCA has brought the issue to National Treasury’s attention.
“We have asked them to communicate to all of the accounting officers in accounting offices in the country that this is the case.”
He said although cases were still coming in, the incidence has subsided significantly.
“The issue is that it is not a defence to have an NCR licence. If you are issuing these policies, you need an insurance licence.”
