According to a ruling by the Supreme Court of Appeal (SCA) on Wednesday, the Financial Sector Conduct Authority (FSCA) wrongly closed JP Markets, SA’s largest online broker at the time with more than 300,000 customers.
The SCA overturned a 2020 South Gauteng High Court ruling to liquidate JP Markets and ordered the FSCA to pay for two JP Markets lawyers.
“We are delighted with this judgment, which of course opens up a number of options for us,” said JP Markets CEO and founder Justin Paulsen.
“The verdict overturns the liquidation order and it is encouraging that it was the unanimous verdict of all five SCA judges.
“Our business has been unlawfully destroyed by the FSCA and this is accountable,” he adds.
“We will be discussing our options with our legal department, including a possible regulatory action for damages and the revitalization of JP Markets as an online brokering company in SA.”
The ruling will also bring relief to 16 other online brokers, the FSCA told Moneyweb, who were investigating possible regulatory violations.
The FSCA says it will adhere to the SCA’s judgment and begin processing JP Markets’ application for an OTP product provider license entitled to conduct the business of an OTP product provider until the agency decides on the status of its application. “(See the full FSCA statement below).
Paulsen and JP Markets argued in court that the FSCA had exceeded its regulatory powers by liquidating a company that was not bankrupt and trying to bring itself within the scope of the law by filing for a so-called over-the-counter derivatives provider (ODP) license required to trade 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 customers could choose from more than 500 instruments, from Forex to indices to individual stocks.
Darren Hanekom, lawyer for JP Markets, says that all allegations made in the media and by the FSCA against JP Markets and Paulsen have now been dispelled.
“JP Markets has been acquitted in all respects and its character as Africa’s largest forex broker has been restored,” says Hanekom.
The SCA ruling found that JP Markets was not guilty of concealment as claimed by the FSCA, posed a systemic risk to its clients or the financial markets in general, and that there was no conflict of interest in dealing with clients.
JP Markets transparently recognized that on most trades it was a counterparty to clients, meaning that if a client lost a trade it would win and vice versa. No attempt was made to hide this information.
The customers were roughly divided into two categories: A-Book and B-Book. A-book customers trade directly with a so-called liquidity provider who delivers the bid-ask spread on a trade.
The SCA ruling concerned JP Markets and its relationship with its B-book customers, who made up the bulk of its business.
Certain customers have been classified as “toxic” for attempting to engage in collusive or prohibited deals that violate JP Markets’ terms and conditions.
The SCA found nothing objectionable in the practice of JP Markets issuing differentiated spreads to customers that were classified as “toxic”.
There was no concealment of JP Markets, said the SCA and contradicted the judgment of the lower court.
The SCA ruling states that the decision to liquidate JP Markets was neither “just nor fair,” which is part of the regulator’s legal scrutiny for closing a company.
“The starting point has to be that JP Markets is a solvent company and a substantial company. It has 70 permanent employees at monthly costs of more than R1 million, ”says the SCA decision.
“It paid more than 1 billion rupees to thousands of customers in the three months prior to the liquidation petition.
“It was undisputed that our own cash capital amounted to around R 220 million.”
“Covid crash” triggered an alarm
As part of their motivation to petition the South Gauteng High Court to close JP Markets, the FSCA referred to numerous complaints received by clients from thousands of brokers around the world during the “Covid Crash” on April 16th.
Due to a technical error, JP Markets continued to quote prices for trading instruments that were either incorrect or missing. Affected customers have been returned to the positions they were in before the trading stop.
“While customers who had lost money were reimbursed, the profits of others were reversed, which understandably could have led to dissatisfaction and complaints,” said the SCA decision.
“JP Markets nevertheless pointed out that around 100 dissatisfied customers do not make up a large percentage of the around 300,000 customers. She did her best to retain customers in a very competitive environment. It was counterproductive to arbitrarily refuse withdrawal requests or to cause unnecessary delays and had not done so.
“The evidence therefore does not establish that JP Markets’s business poses systemic risk to its clients or the financial markets in general. It follows that the only remaining relevant factor was that JP Markets was acting as the ODP [OTC derivative provider] without a license. At first it was not insignificant that she wasn’t the only one. ”
In the course of the legal proceedings, it emerged that only a few competitors of JP Markets had applied for an ODP license and that the FSCA had not taken any action against any of these measures.
FSCA responds to SCA ruling
The FSCA has taken note of the Supreme Court of Appeal (SCA) decision to overturn the Gauteng Division of the High Court’s ruling that the liquidation of JP Markets (Pty) Ltd is fair and equitable.
The agency intends to abide by the ruling and will now proceed to process JP Markets’ application for an OTP Product Provider License (OTP) and review any outstanding enforcement actions.
The FSCA advises the public that JP Markets is not licensed as a provider of OTP products, nor is it authorized to conduct the business of an OTP product provider until a decision is made by the authority on the status of their application.
The public should always check whether a company or individual is registered with the FSCA to provide financial advisory and brokerage services and what category of advice it is registered for. There are cases where individuals are registered to provide basic advice on a low risk product and then offer far more complex and risky services.
The FSCA reminds customers who wish to conduct financial services with an institution or a person to contact the FSCA beforehand on the toll-free number (0800 110 443) or on. to inquire [its website here] whether the institution or the person is authorized to provide financial services.