Trading platforms - where scamsters love to hide and other high risks

Trading platforms offering the ability to buy and sell shares, cryptocurrencies or derivatives put themselves forward as an easy way to make money, but many scamsters operate from these online platforms and the risks are high even when the provider is legitimate.

Trading platforms are a key focus area for the enforcement division of the Financial Sector Conduct Authority (FSCA) as it seeks to protect you from fraud and misrepresentation. This was revealed by the regulator this week in a briefing on its actions to make the financial sector safer for consumers.

Playground for scamsters

Trading platforms are very popular with scamsters and they provide an easy place to hide, Gerhard van Deventer, the FSCA’s divisional director for enforcement, said at the briefing.

As a fraudster you can operate from anywhere and you can lie about where you are and what your product is, he said.

When you, as a consumer, invest money with a fraudster, it typically leaves the country. Illegitimate providers lie about why investors are not paid out when they want to withdraw and then they just disappear, Van Deventer says.

“We take every opportunity to warn the public against platform trades and the message is please work through a regulated entity,” he says.

Last year the FSCA issued 47 warnings to the public about entities operating without licenses or doing something illegal - most of those were about online derivatives or forex traders, Van Deventer said.

Unlicensed derivative traders

Unlicensed over-the-counter derivative providers are the regulator’s number one priority for future enforcement work, Van Deventer said.

Over-the-counter derivative providers – like those offering trade in shares, cryptocurrencies and commodities through a contract for difference - have had to be licensed since 2018. While some providers got licenses before the grace period ended in June 2019, others ignored this requirement because they are making too much money or because they are confused about the need for a license, he said.

Consumers often deal with an intermediary licensed as a financial services provider to give you advice and services about derivatives.

But if the intermediary hedges your trades with a derivative contract it takes out with a provider, the service involves a second derivative provided by the intermediary to you. The intermediary should therefore be licensed as a derivative provider, Van Deventer says. The regulator recently imposed an administrative penalty on an intermediary, Globex 360, for failing to have such a license.

Unregulated overseas players

The regulator is also concerned about the derivative providers and platforms that local intermediaries choose to work with. Intermediaries should do due diligence on the provider to ensure it is regulated as a financial product, he says.

Van Deventer says some jurisdictions, like the Caribbean, only register companies - they do not regulate financial providers like the UK, for example, does.

High risks must be disclosed

A third concern is that as a consumer, you should not do trading if you cannot afford high-risk investments, because there is no doubt that all forms of platform trading are high-risk investments, he says.

It is not suitable for most people – it is for people with money they can afford to lose, Van Deventer says.

And retired people should definitely not be encouraged to trade with their pension money, he says. Read more: What are the key things I need to know before I start investing?

Crypto asset concerns

Unauthorised crypto asset financial services also top the regulator’s list of concerns, Van Deventer says.  

Many platforms do not actually trade in cryptocurrencies but rather in derivatives on cryptocurrencies. These providers should therefore be licensed as over-the-counter derivative providers, he says.

South Africa has the “dubious honour” of being home to one of the biggest cryptocurrency trading scams following the collapse of Mirror Trading International in 2020, Van Deventer says. Mirror Trading claimed to be earning high returns using an algorithm to trade cryptocurrencies with foreign exchange derivatives. Investors transferred Bitcoin worth billions of rands into thousands of accounts with Mirror Trading.

The FSCA’s investigation led to criminal charges and the FSCA is assisting with the extradition from Brazil of Mirror Trading International’s mastermind Johann Steynberg, Van Deventer says.

Crypto regulation does not mean it’s safe

Besides the risk of fraud, the FSCA believes crypto asset-related activities pose significant risks to consumers because of their high volatility.

Cryptocurrencies have been made financial products under the Financial Advisory and Intermediary Services (FAIS) Act. This means those who provide you with advice or intermediary services about these digital currencies must ensure that you understand the risks, that products are suitable for you and have been subject to a due diligence.

This regulation does not mean you, as a consumer, should regard this as a space you should be comfortable investing in, Unathi Kamlana, the Commissioner of the FSCA, says.

Kamlana says cryptocurrencies remain very high-risk investments more suited to informed investors or people with money they can afford to lose.

Copy trading concerns

Van Deventer said copy trading, also known as mirror trading, is another area of concern on trading platforms.

This practice involves one person, who considers him or herself quite a good trader, allowing investors to see and copy his or her trades, he said. The trading platforms automate this.

Van Deventer said those offering copy trading should have the appropriate financial services provider license and the right qualifications and experience as they will either be regarded as giving advice or investing on behalf of clients for which a license permitting discretionary investment services is required.

He said the practice is quite prevalent. The FSCA fined Quinton Moorcroft, the director of Pioneer FX, R2 million for this. He was also debarred from acting as a financial services provider for 10 years. Moorcroft encouraged investors to deposit R2,7 million in copy accounts from which he earned performance fees and commission despite incurring losses on derivative trades. 

Targeted by scamsters around the world

Katherine Gibson, a deputy commissioner at the FSCA, says the world is changing – it is increasingly digital and operating across borders through new products like crypto assets and new fintech providers.

New scams are coming out all the time and they are increasing exponentially, she says.