FSCA was wrong to shut down JP Markets – Supreme Court

The Financial Sector Conduct Authority (FSCA) was wrong to shut down JP Markets, then SA’s largest online broker with more than 300 000 clients, according to a judgment handed down on Wednesday by the Supreme Court of Appeal (SCA).

The SCA overturned a 2020 ruling by the South Gauteng High Court for the liquidation of JP Markets and ordered the FSCA to pay the costs of two counsel for JP Markets.

“We are delighted with this ruling, which naturally presents us with a few options,” says JP Markets CEO and founder Justin Paulsen.

“The ruling overturns the liquidation order and what is encouraging is that it was the unanimous verdict of all five judges at the SCA.

“Our business was unlawfully destroyed by the FSCA and there has to be accountability for that,” he adds.

“We will be discussing our options with our legal team, and that will include a possible damages claim against the regulator and the resuscitation of JP Markets as an online broking business in SA.”

The ruling will also give relief to 16 other online brokers the FSCA told Moneyweb were under investigation for regulatory transgressions.

The FSCA says it will abide by the SCA’s judgment and commence processing the application by JP Markets for an over-the-counter (OTP) product provider licence, adding 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.” (See the full FSCA statement below).

FSCA ‘overstepped’

Paulsen and JP Markets argued in court that the FSCA had overstepped its regulatory powers by liquidating a company that was not insolvent and that was attempting to bring itself under the ambit of the law by applying for a so-called over-the-counter derivatives provider (ODP) licence, which is required for the trading of a type of derivative product known as contracts for difference, or CFDs.

CFD traders can track the price movements of actual financial instruments without having to own the underlying asset. JP Markets clients could pick from more than 500 instruments, from forex to indices and individual stocks.

Darren Hanekom, attorney for JP Markets, says all allegations levelled against JP Markets and Paulsen in the media and by the FSCA have now been expunged.

“JP Markets is for all intents and purposes absolved and its character as Africa’s biggest forex broker restored,” says Hanekom.

The SCA ruling found that JP Markets had not been guilty of obfuscation, as was claimed by the FSCA, nor did it present a systemic risk to its clients or the financial markets generally, and that there was no conflict of interest in its dealings with clients.

Transparency

JP Markets was transparent in acknowledging that it was counterparty to clients in most trades, meaning it would win where a client lost a trade, and vice versa. There was no attempt to conceal this information.

Clients were broadly split into two categories: A-Book and B-Book. A-Book clients trade directly with what is known as a liquidity provider, who furnishes the bid-offer spread on a trade.

The SCA judgment dealt with JP Markets and its relationship to its B-Book clients, who constituted the bulk of the business.

Certain clients were flagged as ‘toxic’ due to the fact that they attempted to partake in collusive or prohibited trading which violated JP Markets’ terms and conditions.

The SCA found nothing objectionable in the practice of JP Markets issuing differentiated spreads to clients that had been deemed ‘toxic’.

There was no obfuscation by JP Markets in so doing, said the SCA, contradicting the ruling of the lower court.

Flawed decision

The SCA ruling says the decision to liquidate JP Markets was neither “just nor equitable”, which is part of the legal test for the closure of any company by the regulator.

“The starting point must be that JP Markets is a solvent company and a substantial concern. It employs 70 permanent employees at a monthly cost of more than R1 million,” says the SCA ruling.

“It paid in excess of R1 billion to thousands of clients during the period of three months preceding the liquidation application.

“It was not disputed that its own cash equity amounted to approximately R220 million.”

‘Covid crash’ sparked alarm

As part of its motivation in applying to the South Gauteng High Court to close down JP Markets, the FSCA pointed to numerous complaints received by clients during the ‘Covid crash’ on March 16, 2020, a crash severe enough to trigger a trading halt in thousands of brokerages across the world.

Due to a technical error, JP Markets continued to quote prices on trading instruments that were either incorrect or absent. Affected clients were restored to the positions they had been in before the trading halt.

“Whilst clients who had lost money were refunded, the profits of others were reversed, which understandably might have caused dissatisfaction and complaints,” reads the SCA ruling.

“JP Markets nevertheless pointed out that around 100 dissatisfied clients did not represent a large percentage of its approximately 300 000 clients. It said that it did its utmost to retain clients in a very competitive environment. It said it would be counterproductive to arbitrarily deny withdrawal requests or to cause unnecessary delays, and that it did not do so.

“The evidence therefore did not establish that the business of JP Markets constituted a systemic risk to its clients or to financial markets generally. It follows that the only remaining relevant factor was that JP Markets had been doing business as an ODP [OTC derivative provider] without a licence. In this regard it was in the first place not irrelevant that it was not the only one to do so.”

In the course of the legal process, it emerged that few of JP Markets’ competitors had applied for an ODP licence, and that the FSCA had not taken steps against any of these.

FSCA responds to SCA judgment

The FSCA has noted the decision of the Supreme Court of Appeal (SCA) to overturn the judgement of the Gauteng Division of the High Court, which had allowed for the liquidation of JP Markets (Pty) Ltd. The FSCA has also noted the Honourable Court’s interpretation with reference to the fair and equitable principle.

The Authority intends to abide by the judgment and will now proceed with the processing of the application by JP Markets for an over-the-counter (OTP) product provider licence, and the consideration of all outstanding enforcement actions.

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.

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 persons are registered to provide basic advisory services for a low-risk product and then offer services of a far more complex and risky nature.

The FSCA reminds customers who wish to conduct financial services with an institution or person to check beforehand with the FSCA on either the toll free number (0800 110 443) or on [its website here] whether such institution or person is authorised to render financial services.