Online broker JP Markets has been in the news quite often over the last few years, mostly for the wrong reasons.
Among others, an investigation by the Financial Sector Conduct Authority (FSCA) found that the firm issued contracts for difference (CFDs) without the necessary licence and that by accepting all the risk by itself, it effectively traded against its clients.
It emerged during the investigation that the firm’s owner, Justin Paulsen, described clients who made profit on their trades as “toxic clients” and instructed the developers of the trading software to manipulate prices to prevent them from making profitable trades, because it reduced his brokerage’s profits.
The FSCA investigation came after lots of complaints were received. It resulted in the FSCA provisionally suspending the firm’s licence to operate as a financial services provider (FSP) – and eventually applying for the liquidation of JP Markets.
The sector watchdog also assisted the Asset Forfeiture Unit of the National Prosecuting Authority in attaching approximately R258 million in bank accounts under the control of JP Markets and Paulsen.
“This followed an intensive forensic investigation into the business activities of JP Markets that concluded that JP Markets was unlawfully conducting unregistered over-the-counter derivative provider business.
“In short, JP Markets transacted extensively with its clients as a principal, while it was only licensed as an intermediary,” says the FSCA.
“In addition to conducting unregistered over-the-counter business, the investigation also uncovered material misconduct on the part of JP Markets relating to the manipulation of the pricing of bid/offer spreads of profitable clients, operating a business model that created a conflict with each of its clients and failure to comply with the conditions of the provisional suspension of its licence,” the FSCA reported in an update of the case.
The FSCA notes that several courts and the Financial Services Tribunal have dismissed the arguments JP Markets put forward to motivate why it should be allowed to continue its activities.
Reporting on the outcome of two recent applications by JP Markets to the court and the Financial Services Tribunal, the FSCA says the only outstanding case is an appeal by JP Markets to the high court to overturn the final liquidation order granted by the court in September 2020.
A time line of the different rulings by different parties shows the fancy footwork of applications and counter-applications to the courts and, simultaneously, to the Financial Services Tribunal:
- June 19, 2020: FSCA notified JP Markets’ of the provisional suspension of its FSP licence;
- June 24, 2020: JP Markets responded to the suspension;
- July 7, 2020: FSCA applied for liquidation of JP Markets;
- July 14, 2020: FSCA notified JP Markets of its intention to withdraw its FSP licence;
- July 21, 2020: Court hearing to decide the liquidation application postponed;
- August 25, 2020: High court hearing to decide the liquidation application;
- September 7, 2020: High Court (Gauteng Division) granted the final liquidation order;
- September 7, 2020: The FSCA issued a press release to the effect that the firm’s FSP licence was withdrawn due to its liquidation;
- September 23, 2020: JP Markets applied to the Financial Services Tribunal that the FSCA should reconsider its decision to withdraw the firm’s FSP licence;
- December 10, 2020: JP Markets applied to the High Court (Cape Town Division) for the business to be put in business rescue;
- February 26, 2021: The Financial Services Tribunal dismissed JP Market’s application to reinstate its FSP licence; and
- March 4, 2021: The high court dismissed the application to put JP Markets in business rescue.
Of interest is that Paulsen (as first applicant) and the employees (second to 10th applicants) applied to the High Court in Cape Town to put the firm in business rescue after the liquidation order was filed and granted in the Gauteng division of the High Court.
After arguments, the parties accepted that the Cape Town court had jurisdiction over the matter – but to no avail.
‘Continuous disregard’ of the authority
The court ruled that the FSCA’s arguments were valid in that JP Markets was not in financial distress, but that the liquidation process was as a result of the firm’s continuous disregard of the regulatory authority.
Judge Gibson AJ specifically referred to Section 15 of the Financial Advisory and Intermediary Services (Fais) Act, which details the code of conduct for representatives of any FSP.
The code of conduct includes that they must act honestly and fairly, and in the interests of their clients; that they treat clients fairly when a situation of conflicting interest arises; and that they comply with all applicable statutory and common law requirements applicable to their business.
The judge said the Gauteng court found during the liquidation application that JP Markets “did not comply with its fit and proper obligations and that it had acted contrary to the purpose of the objectives of the FMA [Financial Markets Act] and Fais Acts”.
Business rescue not an option
The judgment also states that business rescue will not help JP Markets, as its FSP licence lapsed after it was placed in liquidation and the firm cannot operate without a licence.
“There are no prospects of rescuing the company,” said Judge Gibson in his ruling.
At the time, JP Markets was also awaiting the outcome of an application to the Financial Services Tribunal that the tribunal instruct the FSCA to reconsider its decision to withdraw the FSP licence.
The tribunal issued its ruling at the end of February, agreeing with the FSCA that the final withdrawal of the FSP licence was as a result of the liquidation of JP Markets as determined by legislation, and not a “decision” by the FSCA.
Liquidation even if solvent
Under the chairmanship of Judge Louis Harms, the tribunal found that applicable legislation allows the FSCA to apply for the liquidation of a service provider, whether or not the provider is solvent, if it is in the interests of the firm’s clients.
“In deciding the application, the court may take into account whether liquidation of the provider concerned is reasonably necessary (i) in order to protect the interests of the clients of the provider; and (ii) for the integrity and stability of the financial sector,” according to the tribunal’s ruling.
The high court has already considered these arguments and ruled that the liquidation was justified.
The tribunal was blunt in its ruling: “The applicant [JP Markets] wishes this Tribunal to reconsider the decision to institute and proceed with the liquidation application, set it aside, and thereby demolish the foundation of the liquidation order of the High Court. It is a breathtaking submission that an administrative body can interfere with court procedures and undo a High Court decision.”
Thus, the only hope for JP Markets is its appeal of the high court’s decision to put it in liquidation.
Action against Paulsen
Meanwhile, the FSCA also said that it has instituted regulatory action against Paulsen.
“The FSCA reminds [the] industry that an FSP licence is not sufficient to conduct over-the-counter derivatives business (ODP). It amounts to a criminal offence to do so.
“In other words, if the provider is the issuer or originator (counter party) to the derivative contracts, it is conducting ODP business as opposed to intermediary business and must be duly authorised to do so by the FSCA,” according to the latest update by the financial services watchdog.
It points out that simultaneously hedging positions with a liquidity provider does not change the fact that the provider is still an issuer of derivatives and still requires an ODP licence.