Regulating crypto providers and unlicensed over-the-counter (OTC) derivative providers top the list of the FSCA’s focus areas for the year ahead.
The FSCA held its 2023/24 Enforcement Roadshow at the Cape Town International Convention Centre on 20 March. A similar engagement with the industry took place in Johannesburg in February, and there will be third roadshow in Durban this week.
The roadshows follow the release of the Authority’s first Regulatory Actions Report in April last year.
During the reporting period, the FSCA:
- opened 481 new investigation cases, finalised 406 (at the time of publishing the document, it had 329 ongoing cases);
- imposed R153 864 300 in administrative penalties on 44 investigated parties;
- suspended the licences of 984 FSPs;
- withdrew 420 licences;
- debarred 210 persons from providing financial services; and
- published 47 public warnings, informing the public of possible unauthorised or illegal activities. The warnings mainly related to the rendering of unauthorised financial services.
The Authority said the data in the report will assist the FSCA in identifying a high incidence of cases, changes in industry behaviour and consumer education needs, which will inform the FSCA’s supervisory and regulatory activities and focus.
Read: FSCA releases report on debarments and other regulatory actions in 2022/23
Progress with regulating crypto providers
At the FSCA’s Industry Conference held earlier this month in Johannesburg, the Authority told online publication TechCabal that 355 applications for crypto asset service provider licences had been received by 30 November last year. This deadline applied to anyone regularly offering crypto asset financial services as part of their business.
Those who continue offering crypto financial services after 30 November without submitting a licence application will be considered as engaging in unauthorised or unregistered business. They could face charges, and if convicted may be fined or imprisoned, or both.
Individuals who submitted their licence applications by 30 November are permitted to continue operating until the FSCA completes the application process and makes a final decision on approval or rejection of the licence.
Gerhard van Deventer, the Authority’s head of enforcement, told the roadshow that the first batch of applications has been considered and licences have either been approved or declined.
According to TechCabal’s source, 59 licences have been approved so far.
Van Deventer said the FSCA is actively seeking out entities that failed to apply for a licence. It is examining the list of crypto-related firms registered with the Financial Intelligence Centre (FIC).
Felicity Mabaso, the head of licensing at the FSCA, told Beeld that the Authority has noticed a discrepancy: while 81 crypto-related companies are registered with the FIC, only 43 are registered as financial service providers. Mabaso said the FSCA has contacted the remaining 38 entities.
Van Deventer said the FSCA will be examining individuals whose FSP licence applications were not approved.
He added that the FSCA has instructed the external company it uses to monitor social media platforms to identify scammers to focus on key words that include “crypto”. In addition, he said the Authority will be relying on the industry to identify unlicensed entities.
“We are busy creating quite a big list of investigations, and we will make sure we have a very specific recipe to deal with that going forward,” he said.
Unlicensed over-the-counter derivative provider activities
A FAIS licence does not automatically grant trading platforms the authority to issue OTC derivatives such as contracts for difference (CFDs) as principal. They need an OTC derivative provider (ODP) licence for this purpose.
Under regulations introduced in 2018 through the Financial Markets Act (FMA), an ODP is defined as a person regularly engaged in originating, issuing, or selling OTC derivatives, or making a market in them. Therefore, any entity involved in issuing, selling, or making a market in trading CFDs as principal on a regular basis must seek authorisation from the FSCA to become an authorised ODP under the FMA.
Read: Licensing requirements for trading in derivatives, including CFDs
However, it becomes even more complex.
As explained in the FSCA’s Regulatory Actions Report, if an FSP operates in such a manner that it is fully hedged or conducts so-called “back-to-back trading”, it essentially means that two CFDs are issued – one by the FSP and an identical one between the FSP and the issuer of the CFD that serves as the hedging transaction.
The Authority says it does not matter that the two derivatives are entered into automatically and seamlessly (so-called “straight through processing”), or that the FSP is market neutral.
“In these instances, the FSP is operating as a ODP provider and requires an ODP licence. The intermediary must not be the counter party to the CFD with the client. An intermediary must not be able to amend the terms of the CFD, and the intermediary must have no liability towards the client if the market turns in favour of the client.”
The FSCA states that if two platforms are involved in the execution chain, it is a strong indication that the FSP is acting as an ODP.
“It is important to be mindful that if an FSP acts as intermediary to CFDs, the liquidity provider or ODP provider must be properly licensed to issue CFDs, failing which the FSP will be in breach of section 2 of the FAIS General Code (not acting with due care and diligence).
“An intermediary to FSPs must also ensure that it is correctly licensed (derivative licence versus forex licence). This is dependent on whether the CFD offering is a ‘foreign currency denominated investment instrument’ or not.”
In addition, the FSCA says, consideration should be given to whether South Africans are investing in a rand-denominated or a foreign-currency-denominated CFD with the product provider of CFDs.
Van Deventer said there is still confusion around when a licence is required, and with it being a recent licence, the Authority found some entities that are operating without having applied for a licence.
There were two issues here. There are operators who are genuinely confused, and people who are poorly advised. There are also operators – “usually outside of the country” – who are trying to milk the system.
“There is quite a concentration in the Ukraine and Cyprus. They come into the country, create a key individual and a presence here, and then they push really, really hard in terms of cold calling and convincing people to trade.
“They are on the other side of the transaction, of course, because it is a CFD. So, if the client invests and loses, they win.”
Van Deventer remarked that instances of poor practices are prevalent in the handling of clients and the suitability of the product.
“Retired people trading in CFDs, they are extremely high-risk financial products. Lots of misconduct there,” he said.
He warned KIs to be careful of linking their name to these kinds of operations.
“We often see key individuals still today, unfortunately, agreeing to be a key individual of an FSP but not knowing the first thing of what’s happening at the FSP,” he said.
He said, in some cases, the FSCA found that a person would be listed as the KI of multiple FSPs – in one instance, up to 60 FSPs.
Van Deventer said KIs are being exploited, but they are also allowing themselves to be exploited. “So, this is a big issue for us, and I don’t think that’s going to go away quickly.”
He said the FSCA is trying to send a message with its enforcement action.
“Bottom line, the key individual must have access to the bank accounts, must know what the company’s doing, and must interact with the compliance officer on a regular basis. Ideally, I would like to see the key individual and the CEO being the same person.”
