FSCA tells Veracity Markets to stop trading

Veracity Markets, with close to 400 000 clients, has been ordered to stop trading by the Financial Sector Conduct Authority (FSCA), for conducting unauthorised over-the-counter (OTC) derivatives and possible breaches of other financial laws.

This appears to be part of a clean-up of the online broking industry. The FSCA previously told Moneyweb that it was investigating 16 online brokers for potential violations of financial laws.

It previously shut down trading at JP Markets and brought a liquidation application before the courts. The liquidation application was overturned in court, though JP Markets cannot resume trading until it has an over-the-counter derivative provider (ODP) licence.

Veracity Markets is reckoned to be one of the largest online brokers in SA, and operates as the juristic representative of Nirvesh Financial Services, which has a Category 1 financial services provider (FSP) licence, giving it the right to offer advice and intermediary services on certain instruments.

However, the FSCA says Veracity Markets does not have the requisite ODP licence needed to offer trading in products such as contracts for difference (CFDs).

Listen/read: What is an ODP licence, and why is it important?

CFDs are a type of derivative product which allows the trader to benefit from the price movements in an underlying asset, such as a stock or index, without actually owning the asset. Many CFD providers also add leverage to these trades, amplifying the gains and losses on price movements in the underlying asset.

CFDs were unregulated for many years, but that changed in 2018 when regulations were introduced under the Financial Markets Act. Online brokers offering CFDs were given until June 2019 to get their ODP licence applications in, but some argued that they did not need to be licensed.

Veracity’s website says it offers leverage of up to 1:500 on a range of 55 currencies, precious metals, energies, equity indices and individual stocks.

The FSCA has ordered Nirvesh Financial Services and Veracity Markets to:

• Stop acting as an OTC derivatives provider, including advertising or holding themselves out to be OTC providers, pending the finalisation of an FSCA investigation;
• Immediately cease conducting any new OTC business;
• Close all open OTC derivative trading positions without delay; and
• Pay out clients, upon request, within seven working days.

“Members of the public should always check that an entity or individual is registered with the FSCA to provide financial advisory & intermediary services and what category of advice it is that the entity is registered to provide… There are instances where someone is registered to provide basic advisory services,” says the FSCA in a statement.

Veracity’s website says it is “an execution-only trading intermediary and makes use of regulated liquidity providers for clearing of its client trades”.

FSCA divisional head of enforcement Brandon Topham tells Moneyweb that Veracity is cooperating with the investigation, part of which includes looking at the solvency of the company.

“We did look at [the] solvency situation of Veracity and we were satisfied they are in a position to honour their current client positions. It should also be noted that Veracity is cooperating with the investigation,” says Topham.

“It is for these reasons and others that we haven’t gone a more drastic route, such as approaching the courts for an interdict.”

The cost of acquiring an ODP licence and meeting its onerous standards in terms of risk and compliance can run into millions of rands.

Most of the ODP licences issued by the FSCA are owned by banks, though there are some non-bank ODP licence holders such as QuickTrade, IG Markets South Africa and Khwezi Trade.

“It’s important when doing online trading to make sure that you check to see if the provider has an ODP licence,” Topham emphasised.

Moneyweb reached out to Veracity Markets for comment, but had not received a reply by the time of publication.