As the market conduct regulator for financial services providers (FSPs) and over-the-counter (OTC) derivative providers (ODPs), the Financial Sector Conduct Authority (FSCA) has had their hands full in the last few months, issuing a spate of warnings to the public during the first quarter of 2022.
These warnings have been aimed at preventing the public from trading derivatives and other financial products with unlicensed service providers who either: (1) claim to be registered as FSPs under the Financial Advisory and Intermediary Services Act, 2002 (FAIS), when in fact, these entities are unregistered and not authorised to provide “financial services” (as defined in FAIS) to members of the public; or (2) are issuing derivatives and offering contracts for differences (CFDs) as principal in South Africa without an ODP licence, which is prohibited under and in terms of the Financial Markets Act, 2012 (FMA).
What investors can take from these warnings is that derivatives trading platforms selling CFDs as principal must have a new ODP licence under the FMA.
FAIS and CFDs
FAIS regulates the business of all FSPs who provide advice and/or intermediary services in relation to a wide range of “financial products”, including derivatives like CFDs.
Simply put, CFDs are a type of derivative instrument:
- in the form of a contract between two parties (such as an investor and a CFD provider);
- that allow the parties to trade in the price movement of underlying securities; and
- in terms of which the difference in the settlement between the opening and closing trade prices is cash-settled between the parties.
Therefore, any service provider who provides advice or intermediary services (including marketing and sales activities) in relation to CFDs in South Africa needs to be licensed by the FSCA in terms of FAIS. However, a FAIS licence does not mean that an FSP may issue or write CFDs as principal.
The FMA and CFDs
The regulations published under the FMA define an ODP as a person who as a regular feature of its business, and transacting as principal originates, issues, sells or makes a market in OTC derivatives (which includes CFDs).
Therefore, any person who issues, sells, or makes a market in trading CFDs as principal and as a regular feature of business, must apply to the FSCA to become a duly authorised ODP under the FMA.
Penalties for unlicensed FSPs rendering advice and/or intermediary services
Any person who is not licensed under section 8 of FAIS to provide advice or intermediary services in relation to a financial product, will, on conviction, be liable to a fine not exceeding R10 million or to imprisonment for a period not exceeding ten years, or to both such fine and imprisonment.
Penalties for unlicensed ODPs
In terms of section 109 of the FMA, any person who issues CFDs, as principal and as a regular feature of business, without an ODP licence, is liable on conviction to a fine not exceeding R10 million or to imprisonment for a period not exceeding five years, or to both such fine and such imprisonment.
Further, in addition to the penalty imposed under the FMA, section 111(1) of the Financial Sector Regulation Act, 2017 (FSR Act), states that no person may provide, as a business or part of a business, a financial product, financial service or market infrastructure except in accordance with a licence in terms of a specific financial sector law (such as FAIS and the FMA). Therefore, an unlicensed person may not: (1) provide advice or intermediary services in relation to CFDs without an FSP licence; or (2) trade CFDs, as principal and as a regular feature of business, without an ODP licence.
Any person who fails to comply with section 111(1) of the FSR Act may be liable upon conviction to a fine not exceeding R15 million or to imprisonment for not exceeding ten years, or to both such fine and imprisonment.
Trading in CFDs with service providers posing as licensed FSPs and/or ODPs, who are in fact, unlicensed, carries a significant risk to members of the public, who may suffer vast financial loss as a result of any dealings with such service providers.
Therefore, members of the public should confirm with the FSCA (toll free number: 0800 110 443) that an entity or individual is registered as an FSP and/or an authorised ODP before trading CFDs on any online platform.