Take care when wielding regulatory power

26 October 2021 Gareth Stokes

South Africa’s Financial Sector Conduct Authority (FSCA) received somewhat of a dressing down last week, when a unanimous judgement by the Supreme Court of Appeal (SCA) overturned a High Court liquidation order against JP Markets. The liquidation application, which had been granted on 8 September 2021, had been brought by the FSCA under the statutory powers granted it under section 38B of the Financial Advisory and Intermediary Services (FAIS) Act.

Liquidation application overturned…

In a media release following the successful liquidation application, the authority wrote: “This is the first time that the statutory powers in section 38B of the FAIS Act have been used by the FSCA”. The liquidation and prior steps to freeze the financial services provider’s (FSP’s) bank accounts were held up as necessary to protect consumers. But the FSCA’s tone following the 20 October SCA ruling to overturn the liquidation was somewhat more subdued: “The FSCA has noted the honourable Court’s interpretation with reference to the fair and equitable principle; the authority will abide by the judgment and will now proceed with the processing of the application by JP Markets for an over-the-counter derivatives provider (ODP) licence”. 

We have to wind the clocks back to determine what this spat was all about. On the FSCA’s version, JP Markets was issuing risky financial derivative products to the consuming public “without having the adequate financial reserves, risk management system or knowledge”. As such, their High Court application for liquidation was brought as part of “an on-going effort to remove FSPs who are prepared to act outside the law from the financial industry”, especially in the high risk forex trading environment. FSPs that wish to operate as ODPs must be licensed by the FSCA. And JP Markets, per a reading of the High Court matter, had only applied for its license on the eve of the FSCA’s liquidation application. 

A string of enforcement actions

The liquidation application was one of many enforcement actions initiated by the authority against the FSP. It also announced the withdrawal of the firm’s FSP license and set in motion a debarment process against the firm’s CEO, Justin Paulsen. The authority also indicated that it was preparing to hand the matter over to the National Prosecuting Authority (NPA), for possible criminal prosecution. This writer was surprised to learn that the FSCA had succeeded in a liquidation action despite JP Markets having a substantial cash balances in both its own and clients’ accounts. 

Even the SCA, in paragraph 33 of the ruling, noted that JP Markets was a solvent company and a substantial concern. “It employs 70 permanent employees at a monthly cost of more than R1 million; it paid in excess of R1 billion to thousands of clients during the period of three months preceding the liquidation application; and it was not disputed that its own cash equity amounted to approximately R220 million,” they wrote. And according to an article on, the FSP has around 300000 accountholders at its peak. 

Could further legal action follow?

Many questions need to be asked. One, is whether JP Markets or any of its clients will seek compensation for financial or reputational damages that may have resulted from the liquidation process. writes that Paulsen described the ruling as a vindication. “As the liquidation is set aside, JP Markets is currently consulting with its legal team as to the most prosperous way forward, in order to benefit all clients and stakeholders,” he said. We leave it to you, dear reader, to interpret the phrase ‘most prosperous way forward’. 

Another question, is whether the growing enforcement powers granted under the FAIS Act and other recently-enacted financial services regulation needs to be reined in, or at the very least applied more cautiously. Section 38B, for example, allows the authority to launch liquidation proceedings “if it considered that the interests of the clients of a financial services provider or of members of the public so require”. This is the authority’s summary of its rights, per the aforementioned press release. It seems the SCA disagreed. 

In paragraph 21 of the SCA judgement, the judge noted: “I very much doubt whether s 38B(1) of the FAIS Act could find application in this case”. The judge held that the winding-up application was neither about the conduct of JP Markets as an FSP, nor about the protection of the interests of clients or the public “in respect of financial advisory or intermediary services”. It also noted that the FAIS Act requirement to proceed ‘in accordance with the Companies Act’ presented problems. The judge did not, however, feel it necessary to delve further into the potential conflict between these two pieces of legislation. 

The licensing process was power enough!

Instead, the SCA relied on a couple of shortcomings to overturn the High Court decision. “The decisive consideration was that JP Markets had applied for an ODP licence … at the time of the hearing of the appeal that application was still pending before the Authority,” noted the SCA. The SCA said that the liquidation of JP Markets prior to the determination of its ODP licence application would not achieve the objects of the FMA. The SCA judgement further observed that had the FSCA processed the ODP license application, and refused it, “it would have had no difficulty to obtain an order prohibiting JP Markets from continuing to do business as an ODP”. And thus, the winding-up of JP Markets was neither just nor equitable. 

What happens next? There could be some concerns with the FSCA’s comments immediately following the SCA decision. Although the authority noted the SCA decision, and committed to getting on with the business of processing its various licensing requests, it also issued another veiled warning: “The FSCA brings to the attention of the public that JP Markets is not licensed as an OTP product provider, neither is it entitled to conduct the business of an OTP product provider until a decision has been made by the Authority on the status of its application”. We end then with a final question… Given the history, how can this licensing application proceed without prejudice? 

Writer’s thoughts:
A concern often raised by FAnews readers is the financial and reputational damage suffered by an FSP, Key Individual or Representative following enforcement action. Unfortunately, having a wrongful debarment or license withdrawal overturned does little to undo the negative consequences of the initial decision. On the flipside of the coin, the regulator is often criticised for taking slow action against transgressors. How do we balance the risk that attaches to overly hasty enforcement action, with the risk presented to consumers by illegal financial activity? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]


Added by Gareth Stokes, 26 Oct 2021
Good point re the unconstitutionality of certain pieces of financial sector regulation. I recall more than a few insurance law academics being ‘shot down’ for criticising the proposals on the way in. SA has since rushed headlong into a Twin Peaks implementation with little concern over the complexity and cost implications. We were sold consolidation & simplicity, but ended up with more Acts of Parliament … overseen by more government departments & ministers … and policed by more councils, committees & regulatory-setting bodies.
Report Abuse
Added by Cynical Simon, 26 Oct 2021
In addressing the problems so aptly put in the article certain possible solutions present themselves, none of which would be called innovative. o n the contrary these are as old as the Roman Dutch law itself.
The first and most obvious is "Caveat emptor", in stead of "emptor semper rectum" and a close second to this is the questionable acts that are being written which fly in the face of constitutionality.
Report Abuse

Comment on this post

Email Address*
Security Check *
Quick Polls


The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?


Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
fanews magazine
FAnews November 2021 Get the latest issue of FAnews

This month's headlines

New proposals to amend PPRs have major impact
The untold truth about intermediary agreements
Rethinking claims
Tik-Tok: The clock is ticking on SA’s R45 billion unclaimed benefits bomb
Medical schemes’ average increases for 2022
Disability claims aggregation
Subscribe now