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FSCA: Do not say we did not warn you

21 September 2021 Gareth Stokes

The Financial Sector Conduct Authority (FSCA) has directed a deluge of warnings to the consuming public and financial advice community over the past couple of years. And hardly a day goes by without the name of one or other questionable financial product or service ‘business’ being dragged through the mud. In most cases the regulator’s concerns seem warranted; but we also found one or two surprises among their pleas for caution and vigilance, such as warnings against possibly reputable offshore crypto exchanges. FAnews scanned through some recent public warnings to unearth some common themes.

A call for public vigilance

The subject lines of most of these warnings are fairly similar, usually along the lines of: “FSCA warns the public against [insert name here]”. And the opening paragraphs are fairly consistent too, typically saying: “The regulatory authority warns the public to be cautious and vigilant when dealing with [insert name here] as they are not authorised to give any financial advice or render any intermediary services in terms of the Financial Advisory and Intermediary Services Act (FAIS) Act in South Africa”. The body of the letters usually contain a litany of compliance shortcomings that should leave readers wondering why criminal action seldom follows. 

For example, the 16 September 2021 warning about an outfit called Patex Capital alleges that the business “is fraudulently using the FSP number of FXPRO Financial Services, who have indicated that they have no connection to Patex…” The FSCA also writes that the business “may be conducting unregistered business and providing advisory and intermediary services without the necessary authorisation, or they may not be providing financial services at all, but engaging in activities using a FSP number without authorisation to do so”. 

On fraud, misrepresentation and unregistered businesses…

Another warning, published 15 September, has a familiar tone. “The FSCA has received information that Globaltech might be conducting unregistered business and is misrepresenting itself to be an authorised FSP by publishing an incorrect FSP certificate on its Facebook page…” What, wonders the writer, is the point of this public relations smokescreen? And how does issuing a strongly worded letter to the public, via the media, fulfil an enforcement and oversight role without arrests? We want to see our financial conduct authority, with help from the NPA and other local and international enforcement authorities, take strong action. We want to see the police, sirens blazing, armed with crime-scene tape and accompanied by asset forfeiture units rolling up to these businesses to stop them in their tracks. 

If a softly-worded public warning is the best our regulators can do, we are left wondering how South Africa will ever tackle the scourge of financial fraud, misrepresentation and scams that afflict the most vulnerable in society. The regulators will probably hold up their various administrative penalties and fines as evidence that they go above and beyond to protect investors. But what good is there in slapping a massive fine on a business without laying criminal charges against wrongdoers? Equally, what good is levying a huge fine on an illegal and / or offshore business that will probably refuse to pay. 

Letters aplenty; but criminal charges in short supply

Recent warning letters suggest there are plenty of opportunities to press ahead with criminal charges. On 14 September the FSCA warned against Trabot Pty Limited, which offered the public access to a tool called ‘Forex Robots’. “These robots trade automatically for clients and promise a highly unrealistic profit of 20-50% per month,” wrote the FSCA. Now where have we heard this fairy tale before? Ah yes, Mirror Trading International, a crypto trading platform that was placed in final liquidation a couple of months ago, leaving thousands of investors wondering how much, if any, of their initial investment might be recovered. 

Foreign exchange trading crops up frequently and is a long-time favourite among financial scammers… LiteFX Options got a mention from the FSCA mid-August 2021. “The FSCA is of the view that it is likely that the entity is conducting financial services business and requires a financial services provider licence from the FSCA, to conduct business in South Africa,” wrote the regulator… Arrests imminent, wondered the writer. Not a chance.  Most incidents follow a similar path: Regulator issues warning to public, investors panic, scam collapses, investors lose everything, fraudsters evade prosecution, scam starts up again in a different geography or guise. 

Few consequences for the masterminds

It is becoming clear to all and sundry that there are very few consequences for the masterminds of illegal financial scams. Legitimate businesses, meanwhile, face hefty fines following the slightest compliance blunder, even when their mistakes are genuine and cause relatively little damage to end consumers. 

For example the R100000 fine against Absa because its OTC derivatives desk was late in filing an independent audit report; or the R4.8 million in penalties issued against Momentum Collective Investments for “historic non-compliance”; or the R24 million fine imposed on Deutsche Bank in 2019. We do not wish to make light of these penalties or compliance contraventions; but there is an inherent risk in creating a system where reputable brands suffer greater consequences for their administrative errors than many fly-by-nights, for causing actual financial harm to unwary consumers. 

Is my concern misdirected? Judge for yourself by considering the recent R50 million administrative penalty that the FSCA foisted on Viceroy Research and three of its partners, for publishing “false, misleading or deceptive” statements about Capitec Bank in 2018… The FSCA worked with the US SEC to conduct the investigation into the role that Viceroy’s report played in the subsequent 23% fall in Capitec’s share price. But what should stand out to local stakeholders is the quantum of this fine compared to the average fines levied locally. 

The obvious exception is the R1.5 billion the FSCA is chasing from Steinhoff and the R120 million or so it wants from disgraced former Steinhoff CEO, Markus Jooste, for insider trading… We would be surprised, in either case, if the FSCA succeeds in collecting these sums. Besides, why should the regulator benefit more from Steinhoff’s implosion than the company’s long-suffering shareholders? 

Writer’s thoughts:
My frustration with the status quo is that the Financial Sector Conduct Authority (FSCA) seems to have few outlets to tackle financial conduct abuses beyond issuing warning notices and issuing fines… These fines, it seems, are taken on the chin by legitimate businesses; but do little to deter those who operate unlawfully. Do you think that criminal prosecutions are a better deterrent than fines in tackling financial market conduct abuses? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]

Comments

Added by Francois Meyer, 22 Sep 2021
Re Crypto Advisers who are still registered with the FSCA with no SA address or office, with only one KI and only one Rep.
I have reported some to the FSCA but nothings come from that.
How is possible that these business are allowed and are able to serve the public, advertising on Telegram etc?
These business should not be registered at all!
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Added by Quinten Knox, 21 Sep 2021
Tomorrow it MAY snow, tomorrow it MAY NOT snow at all, it MIGHT snow tomorrow, it is LIKELY going to snow tomorrow. Who cares, just be warned, cautious and vigilant about a snowman at [insert name here] tomorrow. The guess may just be right.

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• …the business MAY be conducting…
• …they MAY not be providing financial services at all…
• …MIGHT be conducting unregistered business…
• The FSCA is of the view (i.e., of the opinion) that it is LIKELY that…
• …warns the public against [insert name here]…
• …warns the public to be cautious and vigilant…

____________________________________

There may be an easier way of solving the problem. Maybe not. Maybe that is good advice. The injury may have caused brain damage. Maybe not. Maybe there was dishonest crash helmet advice. I may not be able to play on Saturday. I may will be able to play. Against medical advice. Doctors have no integrity. You may be asked to show your passport. Maybe you won’t be asked. You are probably not in good standing. Some fir trees may grow up to 60 feet high. Some may not. Find some advice on the internet if your tree only grows up to 30 feet.

____________________________________

How long before someone sues the FSCA for tens millions for reputational damage they have caused through speculation, guesswork, tealeaf arrangement interpretation and reading the entrails of a dead cat?

____________________________________

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Added by Gareth Stokes, 21 Sep 2021
To all readers: A quick apology from the writer. The question in this newsletter is poorly worded.

As already pointed out in a few of the comments, the FSCA does not benefit financially from the penalties it issues. FAnews will be publishing an updated version of this article. Thanks all for your inputs.
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Added by Ayanda, 21 Sep 2021
It is pleasing to note that Ms Ludin has confirmed that fines collected are handed over to National Treasury in their entirety. The "Blood Money" incentive to fine would otherwise be far too great and would fundamentally undermine the principles of the Rule of Law on which our Constitution is founded. As it is, fines levied are often arbitrary amounts determined at least in part by the offender's ability to pay.
The FSCA and PA are in fact to be funded in terms of a Money Bill, something which embarrassingly for Parliament is still outstanding.


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Added by Cliff Taylor, 21 Sep 2021
A well written and thought provoking article and I wonder if shared with the police authorities.
As a matter of interest is F A News able to question FSCA on behalf of the industry or should such challenge emanate from registered members only ?
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Added by Astrid Ludin, 21 Sep 2021
Please note that the FSCA is funded only through levies. Fines and penalties are paid to the National Revenue Fund.

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Added by LUCILLE HORN, 21 Sep 2021
Absolutely the case, I am always wondering why I should pay a fee to a regulator to investigate and sue me!!!! I think we in the financial services section are the only ones who to be judged and sued. All else are paying to be protected. The FSCA is just collecting fines and fees to pay the monthly salary bill.
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Added by Paul, 21 Sep 2021
China had the right approach when disciplining one of their largest brokerages for running a ponzi scheme by sentencing the ceo to death and his deputy to life imprisonment.
Makes one think.
Mind you we would be short one parliament and one police force I guess.
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