In April this year, the FSCA, after an investigation, imposed fines of R200 000 each on Tempest Trading (Pty) Ltd and its sole member, Storm Elisio, for acting as a discretionary FSP without authorisation.
Tempest and Elisio applied to the Financial Services Tribunal (FST) to have the penalty reconsidered. The applicants did not dispute that they had contravened section 7(1) of the FAIS Act, or that the FSCA had acted within its powers to impose the sanctions. What they sought was to have the penalties reduced, or to be allowed to pay them off. Elisio submitted that he did not intend to contravene the Act.
According to the FST’s decision, the main grounds relied on in the reconsideration application were that Elisio was unemployed, broke and a first offender. Like his clients, he had lost his savings and his inheritance by investing on an Australian trading platform.
The issues that came into play in this matter echo those in the reconsideration application brought by Quinton Moorcroft, who was fined R2 million and debarred for 10 years. Indeed, the reason the FSCA fined Elisio is also similar: Tempest and Elisio traded in contracts for difference (CFD) on behalf of clients through a multi-account manager (MAM) account.
Some background
Elisio opened a MAM account at Union Standard International Group (Pty) Ltd (USGFX), an Australian foreign exchange and CFD broker. The MAM account enabled Tempest Trading to open a master trading account. Tempest Trading sourced clients to open trading accounts at USGFX whose accounts were linked to Tempest’s MAM account. A trading decision by Tempest caused trades to be executed on clients’ accounts, and transactions entered on the MAM account were also executed on the accounts of Tempest’s clients.
In September 2020, the Federal Court of Australia granted a liquidation order against USGFX.
In June this year, it was reported that the Australian Financial Complaints Authority had open complaints totalling more than $376 million against USGFX. In addition, there were unpaid determinations involving compensation of $14.7m.
FSCA reduced the penalties
In its first enforcement notice, in July 2021, the FSCA said it intended to fine the applicants R600 000 each and debar Elisio for 10 years. After considering their submissions, the FSCA reduced the fines to R200 000 and dropped the intention to debar.
The mitigating factors the Authority took into account were similar to those stated by Elisio in his reconsideration application. The other factors included the applicants’ co-operation with the Authority’s investigation, the applicants ceased their activities some time ago, only traded for a short period and that obtained incorrect legal advice that led him to believe he did not need a licence.
However, the FSCA was not prepared to waive the entire penalty. As with the penalty on Moorcroft, the FSCA said it regards conducting unregistered financial services as a serious contravention. This conduct was “endemic” and difficult to detect; hence the need for sanctions that will deter it.
Principles when reconsidering a penalty
The FST considered whether the FSCA had acted in accordance with section 167 of the Financial Sector Regulation Act (FSRA) and whether there were any grounds for the tribunal to interfere with the penalty it imposed.
In its decision, the FST said Elisio’s submission that his conduct was not intentional did not take away the fact that he held himself out as an FSP and as such his clients were entitled to receive proper professional advice from him.
The tribunal said it has consistently maintained that a reconsideration application in respect of an appropriate financial penalty can succeed only if it is shown that the FSCA acted mala fide, exercised its mind capriciously or upon a wrong principle, or that it failed to bring an unbiased judgment to bear, unless the sanction was excessive or startlingly inappropriate.
It found that the FSCA considered all the relevant factors provided for in section 167 of the FSRA, as well as the representations made by the applicants. This was evidenced by the reduced penalty and the fact that debarment was not imposed.
Section 234 of the FSRA does not authorise the FST to grant an order whereby the penalty is waived or paid off in instalments. The tribunal can only set aside the penalty and remit the decision to the FSCA or substitute the penalty amount. The Act empowers the FSCA alone to waive a penalty, on application.
The reconsideration application was dismissed.
