For years the Financial Services Board (FSB) has been warning the public not to buy financial products from any entity that is not a licensed financial services provider (FSP). To the regulator’s credit, this campaign has been quite successful.
It has been so successful, in fact, that people with apparently nefarious motives are trying to turn it to their advantage. This is evidenced by the case of the alleged Ponzi scheme, Profit Trading.
The company, which supposedly developed a ‘forex robot’ that trades the currency markets on behalf of investors, actually secured an FSP licence, under the name DMD Capital, before it started operating. As FSB deputy executive officer Caroline da Silva explains, it satisfied all the necessary conditions for obtaining such a licence.
“The licence application of Profit Trading was received on 18 February 2014 and approved on 10 June 2014,” she notes. “In this four-month period the application and business model was interrogated and various engagements were held with Profit Trading and its compliance officer regarding the requirements, until all the necessary information required to satisfy the Registrar (that Profit Trading complied with the requirements to be issued with a licence to conduct business as a financial services provider) was received.”
This included ensuring that it was financially sound, that the activities in its business plan fell within the Financial Advisory and Intermediary Services (FAIS) Act, and that its key individual was fit and proper.
However, it appears that Profit Trading never had any intention to conduct the business for which it was licensed. It was given a category 1 licence for giving advice and rendering intermediary services in derivatives, but instead began marketing itself as a forex trading company offering its ‘forex robot’ software, which the FSB believes was nothing more than a Ponzi scheme.
According to Da Silva, this is something the FSB is increasingly having to deal with.
“We have seen a practice develop recently, because of our campaign warning customers to check for FSP licences, that persons apply for licences for a simple product then use that licence to give credibility to other practices,” she says. “Part of our frustration with this case was that the company was using an FSP licence to legitimise an illegitimate business.”
Without being prompted, two individuals who gave money to Profit Trading told Moneyweb that they only did so after checking with the FSB that it was in fact licensed. The company’s founder, Myles Ndlovu, also emphasised that Profit Trading was a registered FSP during television interviews.
The regulator has therefore had to alter its message that the public should not only check whether the entity they are dealing with is licensed, but also what it is licensed to do. In addition, the FSB is amending the General Code of Conduct to make it an offence to use an FSP licence to market any activity other than that which is covered by the licence.
A second area of concern is what appears to be the ‘renting’ of key individuals. This is a practice not dissimilar to BEE fronting.
In order to obtain an FSP licence a company must have a key individual who is considered fit and proper by the regulator. In the case of Profit Trading, this was Herman Bezuidenhout.
It is however unclear what role, if any, Bezuidenhout actually played in the operation of the business. He resigned in December 2015 when the FSB’s investigation was starting to uncover evidence that Profit Trading was not at all what it seemed.
The FSB was subsequently able to determine, and to get Ndlovu to concede, that he was running the business himself.
“It seems that there are cases that when someone is not themselves fit and proper, they just find someone else who is fit and proper to get the licence,” says Da Silva. “We need to amend the law to tighten up on this issue.”
For investors, the challenge is to appreciate that even businesses that appear legitimate may not be so. The only antidote to this is education.
Whether it has an FSP licence or not, the public should be wary of the kinds of returns offered by Profit Trading – a target of nearly 80% per year. As tempting as they may seem, the reality is that they just aren’t plausible, and that should warn people off.