An online trading portal has been slapped with a R10-million fine for conducting unauthorised over-the-counter (OTC) derivative business in South Africa.
Last week, Veracity Markets (Pty) Ltd faced hefty sanctions from the FSCA, including a R10m administrative penalty. In addition, the company’s directors, Shelly Ann du Plessis and Dane Mesane, were fined R1m each. These actions by the FSCA followed an investigation prompted by an anonymous complaint.
According to the Authority’s findings, Veracity Markets and its directors served as representatives of Nirvesh Financial Services between 29 May 2020 and 30 April 2022. The FSCA states that during this time, Veracity Markets offered contracts for difference (CFDs) to clients.
Nirvesh Financial Services is authorised as a Category I FSP to render advisory and intermediary services in respect of, among other products, derivative instruments. But it is not authorised in terms of the Financial Markets Act (FMA) to provide, originate, issue, or sell any OTC derivatives in South Africa.
“Therefore, its juristic representative (Veracity Markets) could at best only provide intermediary services in contracts for difference,” says the FSCA.
For Nirvesh’s role in the contravention, the FSCA imposed an administrative penalty of R1m on the FSP and R100 000 each on its directors and key individuals, Bhavesh Patel and Madhubala Patel.
KIs warned to tread carefully
Unauthorised OTC derivative business has been on the FSCA’s radar for some time now. At the FSCA’s 2023/24 Enforcement Roadshow in Cape Town last month, Gerhard van Deventer, the Authority’s head of enforcement, warned KIs to be careful of linking their name to these kinds of operations.
Read: Unlicensed crypto and OTC derivative providers in FSCA’s crosshairs
A FAIS licence does not automatically grant trading platforms the authority to issue OTC derivatives, such as CFDs, as principal. They need an OTC derivative provider (ODP) licence for this purpose.
Under regulations introduced in 2018 through the 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.
As explained in the FSCA’s Regulatory Actions Report, 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).
Contraventions
The FSCA states that by conducting unauthorised OTC business, Veracity contravened Regulation 2 of the Regulations issued in terms of the FMA.
According to the Regulator, from 7 February 2020 to 18 September 2020, Veracity placed a statement on its website to the effect that SCM DMA (Pty) Ltd was providing clearing services to Veracity.
“It is the view of the FSCA that these statements were incorrect. By doing so, Veracity Markets contravened section 8(9)(c)(i) and (ii) of the FAIS Act. Veracity Markets concluded agreements and rendered financial services in its own name in respect of its clients.”
In terms of section 13(1)(c) of the FAIS Act, any financial services must be conducted in the name of the FSP and not the juristic representative.
“By doing so, Veracity Markets contravened section 13(1)(c) of the FAIS Act and section 2 the General Code.”
The Authority states that during the investigation, the directors and KIs of Nirvesh and the directors of Veracity provided incorrect information to the FSCA’s investigation about the existence of a licensed ODP. By so doing, they contravened section 139 of the Financial Sector Regulation Act.
According to the FSCA, it was the responsibility of Nirvesh, as an FSP, in terms of section 13(2)(a) and (b) of the FAIS Act, to ensure that its representatives, Veracity and its directors, complied with any applicable laws and codes of conduct.
“Nirvesh Financial Services failed to exercise oversight to ensure all applicable laws were complied with. Therefore, during the period 29 May 2020 to 30 April 2022, Nirvesh Financial Services contravened section 13(2)(a) and (b) of the FAIS Act and section 11 of the General Code of Conduct,” the Regulator says.
The sanctions
In addition to the administrative penalties, Veracity has agreed to sign an enforceable undertaking: both KIs will not be involved in the financial services industry for the next four years and Veracity will withdraw its application to the FSCA for an FSP licence.
Nirvesh also agreed to signing an enforceable agreement. For its part, it will continue operations as an FSP as per its current licensing and contracts with various financial institutions.
The enforceable undertaking is subject to the following requirements:
- Nirvesh will have a systems and compliance audit conducted by an independent expert on all aspects of its business, and it must provide the FSCA with the expert’s report.
- For three years from the date of the enforceable undertaking, Nirvesh will appoint to its FSP licence an additional KI who has the appropriate qualifications, skills, and experience and who will have the same area of responsibility as the current KIs.
- Nirvesh will ensure that it will not have any juristic representatives registered under its FSP licence.
- Nirvesh will appoint an external compliance officer for three years from the date of the enforceable undertaking.
“In addition, the KIs of Nirvesh Financial Services agreed to not apply to be a key individual of any other FSP for a period of three years and will not apply for an extension of the FSP licence of Nirvesh Financial Services in any manner for a period of three years from the date of the enforceable undertaking,” the FSCA states.
Extenuating circumstances
The FSCA first reported that it was investigating the two entities in July 2022. At the time, the Authority issued a directive to both parties, inter alia, to:
- cease acting as OTC derivative providers and/or advertising and/or holding themselves out as OTC derivative providers, pending the finalisation of the investigation;
- refrain from conducting any new OTC derivative business;
- close all open trading positions of its clients without delay; and
- pay out to all clients all funds owing to such clients irrespective of the basis for the liability, upon request from such clients within seven working days from the date of the request from the client.
The FSCA states that, in imposing the sanctions, it took into account that the parties complied with the directive “without delay and fully co-operated during the investigation”.
Regarding Nirvesh Financial Services in particular, the FSCA says it considered several factors when imposing sanctions.
First, Nirvesh co-operated with the directive, showing a clear willingness to prioritise clients’ interests. Second, the company “has a lengthy history in the financial services industry with no previous investigations or findings of non-compliance”.
