The blizzard of cases swamping the FSCA

The Financial Sector Conduct Authority (FSCA) launched 418 investigations – nearly two for each working day – over the year to March 2023. A total of 406 cases were concluded during the year.

The FSCA’s Regulatory Actions Report, released this week, shows it currently has a further 329 open investigations.

Gerhard van Deventer, head of enforcement at the FSCA, told a media briefing on Tuesday that these investigations and public report-backs are part of a campaign to create credible deterrence through visible enforcement.

The biggest areas of violation were the Financial Advisory and Intermediary Services (Fais) Act, and Insurance Act. A dedicated team was set up by the FSCA to investigate funeral parlours, many of which had started selling financial products without licences.

Some 38 new investigations were launched into market abuse such as insider trading, and a further 23 investigations were opened into over-the-counter derivative providers, some of whom are selling derivatives like contracts for difference (CFDs) without being lisensed to do so.

Van Deventer highlighted some of the violations that prompted investigations, such as “renting-a-key individual”. Key individuals (KIs) are responsible for managing the activities of an FSP (financial service provider), and there has been a growing trend of FSPs hiring KIs who failed in their duties, resulting in financial losses to clients.

Smart Billion Investments now in liquidation

The FSCA report highlights the case of Smart Billion Investments, now in liquidation, which traded CFDs on the GT247 online trading platform. Smart Billion opened a trading account at GT247 in its own name, pooled clients’ funds and executed trades on the platform. Smart Billion calculated and distributed each client’s profits or losses. “Not all clients’ funds were utilised for trading. When a client requested a withdrawal, Smart Billion simply used deposits from other clients in the bank account to pay the withdrawal requests,” says the FSCA report. The key individual, Renault Kay, was found no longer fit and proper in terms of the Fais Act and was debarred for five years. Kay took this decision on reconsideration to the Financial Services Tribunal, which upheld the FSCA’s ruling.

A total of 210 people were debarred over the last year, mostly for dishonest conduct, such as falsifying internal company policies to make it appear the FSP is compliant with the law.

The regulator suspended the licences of 984 financial services providers, about 8% of the total. These are not necessarily permanent suspensions, as shown by the 522 FSP licences reinstated during the year after the conditions of suspension were remedied.

Administrative penalties of R153.8 million were levied against 44 investigated parties, though the amount was reduced to R100.6 million on reconsideration by the Financial Services Tribunal.

Viceroy case heads to high court

One of the largest fines imposed by the FSCA since its inception was for R50 million against Viceroy Research Group for a 2018 report entitled ‘Capitec: A wolf in sheep’s clothing’, which claimed Capitec should be placed in curatorship for overstating its financial statements and income, reckless lending practices and opaque reporting of loan cash flows. Viceroy had shared the report with a hedge fund prior to publication, allowing it to profit from short positions in Capitec stock, which lost R24 billion in market value on the day the report was released.

The FSCA estimates that the hedge fund made a profit of about R82 million from shorting Capitec securities, with Viceroy’s share being roughly $744 482 (R13.61 million). Viceroy was found to have published false, misleading or deceptive statements about Capitec, and further failed to issue a correction once it was made aware of this.

Viceroy applied to the Financial Services Tribunal for reconsideration of the FSCA’s decision. The tribunal set aside the FSCA order on the basis that the regulator did not have jurisdiction over the Viceroy partners, who are domiciled abroad. However, the tribunal found that the FSCA had jurisdiction over the conduct of Viceroy, but not over the partners.

“Those that intend to publish statements (positive or negative) regarding listed companies must ensure that they take the utmost care, and implement each and every possible measure to ensure that what they intend to publish is true, that what they publish is presented in a factually accurate, unambiguous, and frank manner and that if they had made a mistake, that they publish a full and frank correction as soon as they are made aware of any inaccuracy,” says the FSCA report.

The FSCA has since approached the high court to review and set aside the tribunal’s decision.

Read all our coverage of Viceroy’s Capitec report here.

Markus Jooste’s incriminating SMS

Former Steinhoff CEO Markus Jooste, sensing that the group was about to hit the rocks and that auditors would not sign off on the group’s 2017 financial statements without a forensic investigation, sent a warning text message on 30 November 2017 to friends and business associates: “Steinhoff will struggle for a long time to process the bad news coming out of America so there are better investments to make with your money, sell immediately at the current price and delete this SMS and do not disclose it to anyone”.

Three recipients heeded the warning and sold Steinhoff shares and deleted the SMS. The FSCA found that Jooste and the three associates had contravened the Financial Markets Act. Jooste and one of the recipients took the decision on review to the tribunal, which set aside the decision and referred the matter back to the FSCA for calculation of an appropriate penalty. The tribunal ruled that the requirement of specific or precise inside information was not established. The FSCA subsequently imposed a penalty of R20 million. Jooste has lodged an application for reconsideration.

Read: Steinhoff saga: Markus Jooste doesn’t show to face charges