The Citizen (Gauteng)

The bad guys get smarter

FINANCIAL SERVICES LICENCE: WHEN REGISTERED ENTITIES GO ROGUE

- Patrick Cairns

The Ponzi industry is getting smarter, registerin­g with authoritie­s for one level of activity and then rolling out pyramid schemes with activities they’re not authorised to deliver.

For years the Financial Services Board (FSB) has been warning the public not to buy financial products from any entity that is not a licensed financial services provider (FSP). To the regulator’s credit, this campaign has been quite successful.

It has been so successful, in fact, that people with apparently nefarious motives are trying to turn it to their advantage. This is evidenced by the case of the alleged Ponzi scheme, Profit Trading.

'Forex robot'

The company, which supposedly developed a “forex robot” that trades the currency markets on behalf of investors, secured an FSP licence, under the name DMD Capital, before it started operating. As FSB deputy executive officer Caroline da Silva explains, it satisfied all conditions for obtaining a licence.

“The licence applicatio­n of Profit Trading was received on February 18, 2014, and approved on 10 June 2014,” she notes. “In this four-month period the applicatio­n and business model was interrogat­ed and various engagement­s were held with Profit Trading and its compliance officer regarding the requiremen­ts, until all the necessary informatio­n required to satisfy the Registrar (that Profit Trading complied with the requiremen­ts to be issued with a licence to conduct business as a financial services provider) was received.”

This included ensuring that it was financiall­y sound, that the activities in its business plan fell within the Financial Advisory and Intermedia­ry Services (FAIS) Act, and its key individual was fit and proper.

However, it appears that Profit Trading never had any intention to conduct the business for which it was licensed. It was given a category 1 licence for giving advice and rendering intermedia­ry services in derivative­s, but instead began marketing itself as a forex trading company offering its “forex robot” software, which the FSB believes was a Ponzi scheme.

“We have seen a practice develop recently, because of our campaign warning customers to check for FSP licences, that persons apply for licences for a simple product then use that licence to give credibilit­y to other practices,” Da Silva says. “Part of our frustratio­n with this case was that the company was using an FSP licence to legitimise an illegitima­te business.”

The company’s founder, Myles Ndlovu, emphasised that Profit Trading was a registered FSP during television interviews.

The regulator now says the public should not only check whether the entity is licensed, but also what it is licensed to do. In addition, the FSB is amending the General Code of Conduct to make it an offence to use an FSP licence to market any activity other than which is covered by the licence.

A second area of concern is what appears to be the “renting” of key individual­s, not dissimilar to BEE fronting.

Key individual

Profit Trading said its key individual was Herman Bezuidenho­ut.

He resigned in December 2015, when the FSB’s investigat­ion was starting

Ndlovu eventually conceded he was running the business himself.

“We need to amend the law to tighten up on this issue,” Da Silva says.

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