The Financial Sector Conduct Authority (FSCA) issued three separate announcements on Wednesday to say it had decided to provisionally withdraw the licences of three financial firms that are authorised to provide broking and asset management services to SA clients.

This move impacts six different trading platforms offering contracts-for-difference (CFD) trading.

The FSCA alleges that its investigations – some dating back to 2022 – found serious misconduct by the operators of the platforms.

They all made promises of big returns, but clients complained that their money simply disappeared and they had problems withdrawing funds.

Read:
FSCA targets unlawful referrals and client data abuse
FSCA issues record fines in crackdown

The FSCA cancelled the financial services provider (FSP) licence of Astrix Data (Pty) Ltd, as well as those of the entities that used the licence, namely IGM Financial Services, Vector Financial Services and Finbok. It also cancelled the FSP authority of the key persons of these entities.

A separate action pulled the plug on Eklavya Asset Managers (Pty) Ltd and its Solis Markets trading platform, and the relevant key persons.

Another announcement says the FSCA provisionally withdraws the FSP licence of Kift Wealth (Pty) Ltd after it concluded an investigation into the company and its director, Martin Kift.

The announcements this week follow a slew of warnings from the FSCA over the last few months, all cautioning the public against unregistered CFD and foreign exchange brokers and trading platforms.

Three announcements, same allegations

It is interesting that the three announcements dealing with the provisional suspension of the licences voice the same concerns.

“The investigation was initiated following information received by the FSCA alleging that the investigated parties were operating a fraudulent forex or crypto trading platform, designed to lure members of the public into investing with them by promising unrealistic returns.

“The investigation uncovered material misconduct, including the unauthorised use of client funds; the rendering of financial services beyond the scope of the licence; failure to safeguard client assets; and the provision of false and misleading information to clients regarding the substantial returns that they could purportedly earn.

“The investigation found prima facie evidence that the investigated parties committed multiple material contraventions of financial sector laws, including unlawful discretionary trading activities, the misappropriation and commingling of client funds, failures to comply with regulatory requirements and conduct inconsistent with the honesty, integrity and fiduciary standards required of authorised FSPs.”

The FSCA says the licences of all the operators have been provisionally withdrawn with immediate effect.

“This action was taken considering the nature of the misconduct identified and the potential risk of further prejudice to clients and the investing public,” it says, adding that these service providers are unable to conduct any further financial services business or receive any funds from clients.

The investigations were initiated after complaints to the FSCA that the brokers had failed to process client requests for the withdrawal of funds.

In the case of Kift Wealth, the FSCA noted that the investigation was launched after Kift submitted a report to the financial services watchdog in which Kift and Kift Wealth admitted to certain breaches of financial sector laws.

Risky business

Trading CFDs is very risky for several reasons. It is actually very difficult to make profit, high leverage can compound a small loss into a huge loss and the business model is biased – if not flawed – in favour of the service provider.

Honest brokers warn potential clients that the majority of traders lose money.

They add to their risk disclaimer that markets move quickly and a small change in the price of the underlying instrument will result in big losses due to high leverage.

Read: CFDs are more complicated than the ‘buy’ button suggests

Some brokers offer leverage of up to 200 times, meaning that an investment of R10 000 allows a trade of R2 million. The idea is that a move of a few rands in the underlying share, index or currency will earn a huge profit.

Unfortunately, a move of a few cents in the wrong direction will register a loss of R10 000, and the trading platform is programmed to close the position immediately.

Even worse is that CFDs are not listed as such, and trading these derivatives does not involve a buyer and a seller.

The CFD merely mimics the price movement in the underlying security, commodity, index, cryptocurrency or foreign currency pair.

Listen/read:
Approaching the world of CFDs
Looking for a CFD broker? Here’s how to pick one

The CFD trades ‘over the counter’ (OTC), with the broker or operator of the platform being the counter party. In effect, the broker creates every contract when a client trades, and the broker trades as a principal against it client.

This creates a serious conflict as the broker will suffer a loss whenever the trader makes a profit.

Unscrupulous brokers might be tempted to manipulate price data with a sudden spike to stop traders out. Or simply not pay out any profit with the aim of getting clients to trade again – and make a loss next time.

Many of the large brokers disclose that up to 70% of clients lose some or all of their capital when “using this platform”.

From ‘unscrupulous’ to worse …

Then there are several crooked operators that only want to solicit clients by promising huge returns – using deepfake video clips of famous personalities and claims of winning trades by artificial intelligence algorithms.

Read:
Banxso owner launches legal challenge that stalls liquidation
Banxso’s final liquidation
FSCA slaps Banxso and directors with R2bn penalty, refers matter to police

They take the money and create fake statements to show losses.

It is worth noting that several countries, including the US and Australia, have strict regulations to limit CFD trading and OTC derivatives. These regulations restrict personal investors from investing and trading in these products.

Ongoing enforcement in these cases

The FSCA notes in its announcements that the enforcement process against the entities that lost their licences is ongoing. It says it will update the public of other possible actions and its final decisions concerning the provisional withdrawal of the FSP licences.

“The FSCA remains committed to protecting financial customers, maintaining confidence in South Africa’s financial sector, and taking decisive action against misconduct that undermines the integrity of, and public confidence in, the financial services sector,” it says.

Moneyweb sent questions to the affected brokers and will add any comments once received.