As part of a move to clean the previously unregulated online trading market, the Financial Sector Conduct Authority (FSCA) has issued a batch of licences to online brokers offering over-the-counter derivatives products (ODPs).
Among the non-bank players to receive ODP licences are QuickTrade, Khwezi Trade and IG Markets SA.
The FSCA says it is currently considering 32 ODP licence applications consisting of both bank and non-bank entities. “The applicants meeting all of the requirements will be granted authorisation while those that do not, will be declined,” says the FSCA in response to questions from Moneyweb.
The regulator is investigating 16 possible cases of unregistered ODP businesses.
“Some of these investigations are still ongoing and enforcement action will follow in some of these cases, if it is merited.”
In August 2018, it became mandatory for all over-the-counter (OTC) derivative brokers to obtain licences. Prior to that, online traders were operating in a regulatory grey zone, placing clients at risk through undercapitalised balance sheets, poor to non-existent compliance, and misleading marketing (in particular, understating the risks of trading).
In July 2020, the FSCA went as far as shutting down the country’s then-largest online broker, JP Markets, on the grounds that it fell foul of the country’s licensing laws. JP Markets was then placed in liquidation, though the FSCA’s decision to shut it down was overturned by the Supreme Court of Appeals (SCA) last year.
In response to questions from Moneyweb, the FSCA says the loss of the JP Markets legal case had no impact on the decision to start awarding licences to online brokers, as “every application is considered on its own merits”.
“All applications are assessed against a set of prescribed requirements which if fully met and complied with to the satisfaction of this office, authorisation will be granted,” it says.
Clean-up ‘long overdue’
Mark Wurr, co-founder and MD of online broker Khwezi Trade, says a clean-up of the online broking space was long overdue. “We worked hard to get this licence and it cost us a lot of money to meet the very tough compliance standards set by the FSCA, but we are happy we did it. Under the Financial Markets Act (FMA), we could not operate a forex trading platform in SA if we did not get the ODP licence approval, which meant we would have had to shut up shop.”
Hardus van Pletsen, founder and CEO of QuickTrade, tells Moneyweb the company spent more than R6 million and thousands of hours ensuring it satisfied the FSCA’s ODP licensing requirements.
“Of course it is fantastic to finally receive the licence and we think the industry needed a clean-up and [to] provide greater protection, and a better service, for the client. As a licensed trader, we are obliged to submit regular reports to the FSCA to ensure we continue to satisfy the licensing requirements, which are very stringent,” says Van Pletsen.
“We are one of less than a handful of online traders outside the banking sector to receive an ODP licence and I think this gives clients some satisfaction that their funds are safe with us, and that our business practices are above board. Many clients want to know whether or not we are regulated, and I think what the FSCA is doing is separating the credible operators from the rest.”
Shaun Murison, senior market analyst at IG Markets SA, says ODP licences are relatively new in South Africa and there are a number of licence applications still in the FSCA system awaiting review. “Of course, we are proud to be one of the first non-banking entities to have been granted this [licence].
“Trading on licensed platforms helps to safeguard the interests of clients and the industry,” says Murison.
IG Markets SA is part of the London-listed IG Group, one of the world’s largest online trading groups with operations in 20 countries. The company’s policy is to be regulated in each jurisdiction in which it operates.
Wurr says maintaining licence conditions requires daily reporting and a large amount of compliance. “It is tougher to operate a business under such stringent controls but we are happy to do it because if it’s tough for us it would be even tougher for unethical businesses to operate.
“This will make the market a safer and more attractive place for investors. Which will be great for the industry as a whole.
“After being involved in the forex and CFD [contracts for difference] online trading business for over 20 years, I welcome the more stringent regulation that the licence brings. It will certainly help eradicate the unethical providers that seem to have crept into the market over the years.”
Van Pletsen says one of the advantages of having an ODP licence is the ability to offer “white label” online broking services to those who do not necessarily qualify for a licence.
“They can come in under our licence. We have to continue to ensure that our compliance standards are met, but it opens all sorts of interesting possibilities, for example, to crypto exchanges looking to add forex or CFDs to their suite of products.”
Is an ODP licence something that trading clients should look for in choosing a trading platform?
Bearing in mind that several ODP licence applications are currently under consideration by the FSCA, though not yet awarded, an ODP licence unquestionably improves the level of client trust.
“The answer is yes, it’s simple if you are a South African resident looking for the safest place to trade – only trade on a forex platform that is South African domiciled and has FSCA ODP approval,” says Wurr.
Van Pletsen says an ODP licence is not easy to obtain, nor to maintain.
“This is one of the first questions you should ask when looking for an online broker – do you have an ODP licence?”
Is there evidence of improved regulatory compliance from online brokers?
The FSCA says it has yet to conduct a post-licensing review on any online brokers.
“We intend to review their compliance with regulatory requirements after six months from the date of licensing. The intense scrutiny during the application stage has enhanced the level of awareness in respect of licensing and ongoing compliance obligations and the affected entities have demonstrated efforts to continue to comply with the requirements including, inter alia, the governance structures, system capabilities and capital adequacy requirements to ensure sustainability of these businesses.”
Ridwaan Moolla, regional director for ThinkMarkets, says getting an ODP licence is no easy achievement. Those who have it have been through the FSCA wringer, and are clearly in business for the long haul.
“The key for me is sustainability, as [those with a licence] are not looking to be around for just one or two years, trying to make a quick buck and then close shop when their pockets are filled,” says Moolla.
“The licence requirements help South Africans to ensure they dealing with brokers that have a proper local presence and setup, with proper risk management. We’re proud to be awarded an ODP licence, and every one of our staff is a Fais representative.
“Those with ODP licences are supervised and monitored by the FSCA so clients have some level comfort they dealing with reputable brokers. It’s great to see brokers besides the big banks getting this approval as it adds competition to the market and keeps the cost down for clients to invest and trade.”
Does your online broker do any of these?
(If so, give them a miss.)
- Misleading advertising, promoting trading as a get-rich-quick scheme.
- Employing untrained people to interact with customers. Most reputable brokers require customer-facing staff to pass some recognised qualification, such as the RE5 exams under the Financial Advisory and Intermediary Services (Fais) Act.
- Operate without a properly constituted board with independent directors.
- Put clients’ deposits into the company bank account. This has happened, and any company doing this should be reported immediately to the FSCA. Reputable brokers to do not touch client funds, insisting they remain in segregated accounts under the name and control of the client.
- Fail to do basic Know Your Customer and Financial Intelligence Centre Act (Fica) checks to see if clients show up on international databases for anti-money laundering and terrorism financing.
- Accept money from people who cannot afford to lose it. A basic appropriateness assessment check by a responsible online broker will reject customers who are not financially qualified for trading. Money invested in online trading should be money you are willing to lose.