The FSCA says it will abide by the Supreme Court of Appeal (SCA) ruling that the Gauteng Division of the High Court erred in September when it ordered the final liquidation of trading platform JP Markets.
The main issues in the appeal were whether the FSCA met the statutory jurisdictional requirements for the exercise of the power to institute an application for liquidation and, if so, whether it made a proper case for the winding-up of JP Markets.
The FSCA invoked section 38B(1) of the FAIS Act for the first time when it filed its urgent application for JP Markets to be liquidated. It provides that if, after a supervisory on-site inspection or an investigation in terms of the Financial Sector Regulation Act, the FSCA considers that the interests of the clients of an FSP or of members of the public so require, it may apply to the court for the liquidation of that FSP, whether or not it is solvent, in accordance with the Companies Act.
But the SCA held that section 38B(1) did not apply in this case. It said the winding-up application was not about the conduct of JP Markets as an FSP or about the protection of the interests of clients or the public in respect of financial advisory or intermediary services.
Winding-up ‘just and equitable’?
The FSCA also relied on the provisions of section 96 of the Financial Markets Act when it launched the liquidation application.
The SCA found that the High Court had been correct in holding that the FSCA was authorised by section 96 of the FMA to apply for the liquidation of JP Markets. This was because the jurisdictional requirement that “an investigation has been conducted” had been met.
However, the SCA found that the FSCA had to show that it was just and equitable for JP Markets to be wound up. The determination of whether it would be just and equitable to order a winding-up in terms of section 96 was “inextricably linked to the achievement of the objects of the FMA”, as set out in section 2.
The judgment said that because “the manifest purpose of the FMA is to serve public interest”, the observation of the SCA in the case of Recycling and Economic Development Initiative of South Africa NPC v Minister of Environmental Affairs was relevant to section 96:
“There is one more reason why it was not just and equitable to wind up the appellants: the court had to be satisfied that the Minister had no alternative means to address complaints before resorting to the drastic expedient of winding up the appellants. The court a quo did not address this requirement.”
Consequently, a consideration of alternative remedies must also take a central place in the enquiry, the SCA found.
Th SCA said JP Markets was a solvent company and a substantial concern. It employs 70 permanent employees at a monthly cost of more than R1 million. It paid in excess of R1 billion to thousands of clients during the period of three months preceding the liquidation application. It was not disputed that its own cash equity amounted to about R220m.
The SCA found that it could not be determined on the papers whether any of the complaints the FSCA received from JP Markets clients were valid. In addition, there was no evidence that the clients of JP Markets had been unaware that they transacted with it. It followed that it could not be said that there was any conflict of interest, as alleged. And because traders were free to accept the spreads offered to them or not, it was not objectionable to quote differentiated spreads to clients who had been regarded as “toxic”.
Moreover, the SCA set out the interactions between JP Markets and the FCSA “in some detail” to show that it was not guilty of obfuscation, contrary to what the High Court found.
“The evidence therefore did not establish that the business of JP Markets constituted a systemic risk to its clients or to the financial markets generally.”
ODP licence application still pending
The SCA said it was clear from the evidence that the business of JP Markets fell squarely within the definition of an over-the-counter (OTC) derivative provider (ODP), and it had been conducting business as an ODP without a licence.
However, the court said it was “not irrelevant” that JP Markets was not the only one to do so.
After the liquidation application had been served, JP Markets sent to the FSCA, seeking copies of the ODP licences of all other OTC derivative brokers, the judgment said. The letter contained a list of eight OTC derivative providers that were known to operate on the same business model as JP Markets. “The Authority’s response recorded that only one of these entities had submitted an application for an ODP licence. Notably, the Authority had not taken steps against any of these brokers.”
The SCA said the “decisive consideration” was that JP Markets had applied for an ODP licence, and the application was still pending before the FSCA.
It said the liquidation of JP Markets prior to the determination of its ODP licence application would not achieve the objects of the FMA.
If an ODP licence were ultimately refused, the FSCA would have no difficulty to obtain an order prohibiting JP Markets from continuing to do business as an ODP, the SCA said.
The court concluded that the winding-up of JP Markets was neither just nor equitable. It ordered the FSCA to pay the costs of two counsel for JP Markets.
In a statement, the FSCA said it will proceed with processing JP Markets’ application for an OTP product provider licence, and the consideration of all outstanding enforcement actions.
