Financial Sector Conduct Authority v J P Markets SA (Proprietary) (16017/2020) [2020] ZAGPJHC 241; [2020] 4 All SA 457 (GJ) (7 September 2020)

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[2020] ZAGPJHC 241
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Financial Sector Conduct Authority v J P Markets SA (Proprietary) (16017/2020) [2020] ZAGPJHC 241; [2020] 4 All SA 457 (GJ) (7 September 2020)

REPUBLIC
OF SOUTH AFRICA
IN
THE HIGH COURT OF SOUTH AFRICA
GAUTENG
LOCAL DIVISION, JOHANNESBURG
Case
No.: 16017/2020
In
the matter between:
THE
FINANCIAL SECTOR CONDUCT
AUTHORITY

Applicant
and
J
P MARKETS SA (PROPRIETARY)
LIMITED

Respondent
JUDGMENT
Gilbert
AJ
1.
The Financial Sector Conduct Authority as the applicant and the
responsible financial sector regulator in terms of the Financial

Sector Regulation Act, 2017 (“FSRA”) seeks by way of
urgent proceedings the final winding-up of the respondent in terms
of
section 38B of the Financial Advisory and Intermediary Services Act,
2002 (“the FAIS Act”) and in terms of section
96 of the
Financial Markets Act, 2012 (“the FMA”). Both the FAIS
Act and the FMA are financial sector laws falling
with the ambit of
the FSRA.
2.
The application raises issues that are
res nova
in that
neither counsel for the parties were able to refer me to any
authorities in relation to these two sections nor was I able
to find
any. The issues that arise relate both to the interpretation of these
two sections and the application of those sections
to the facts.
3.
The respondent was authorised as a financial services provider
(“FSP”) under the FAIS Act on 7 June 2016, holding
a
Category 1 licence authorising the provision of advice and the
rendering of non-discretionary intermediary services in respect
of
derivative instruments and deposits as defined in the Banks Act,
1990. The respondent’s only director and shareholder
is Justin
Paulsen. Every FSP is, in terms of the FAIS Act, required to have a
key individual who oversees and manages the activities
of the FSP
relating to the rendering of financial services. Paulsen is the chief
executive officer and the key individual of the
respondent.
4.
Paulsen is the deponent to the respondent’s answering
affidavit.
5.
As a licensed financial service provider, the respondent is regulated
by and is subject to the FAIS Act.
6.
As will appear later in this
judgment, the respondent is an “OTC derivative provider”
as defined in the Financial Markets
Act Regulations (“the FMA
Regulations”).
[1]
Regulation 2 of the FMA Regulations expressly provides that:
“
A person may not –
(a)
act as an OTC
derivative provider; or
(b)
advertise or hold
itself out as an OTC derivative provider,
unless authorised by the Authority
in terms of section 6(8) of the [Financial Markets] Act.
”
7.
It is common cause that the respondent is not so authorised
(licensed) by the applicant as the relevant authority in terms of

section 6(8) of the FMA. The respondent lodged its application to be
so authorised only on the eve of the hearing of the urgent

proceedings.
8.
The applicant positively
asserts in both its founding affidavit and replying affidavit that
the respondent is so required to be
authorised.
[2]
The respondent does not accept in its answering affidavit that it is
so required to be authorised. As will appear later in this
judgment,
I reject the respondent’s contention that it need not be
authorised under the FMA s an OTC derivative provider.
A
summary of the relevant regulatory framework
9.
The applicant describes in its founding affidavit the rationale and
framework of the FMA in regulating over-the-counter derivatives,

otherwise known as OTCs. The respondent did not take issue with that
description, which accords with the regulatory framework.
10.
The global financial crisis of 2008 exposed the risk experienced by
one financial institution that may lead to systemic risk
in respect
of other institutions due to inter-relationships.
11.
In particular, over-the-counter markets were not transparent and were
exposed to material counterparty (bilateral) credit risk.
The lessons
learnt from the crisis informed South Africa’s financial
services reform program by
inter alia
requiring the regulation
of OTC derivative providers (known as “ODPs”).
12.
Section 5(1)(b) of the FMA provides that the Minister may prescribe a
category of regulated persons, other than those specifically

regulated under the FMA itself, if the securities services provided,
and the functions and duties exercised, whether in relation
to listed
or unlisted securities, by persons in such category, are not already
regulated under the FMA, and if, in the opinion
of the Minister, it
would further the objects of the FMA in section 2 to regulate persons
in such categories.
13.
Regulation 5 of the FMA Regulations prescribes an authorised “OTC
derivative provider”, or ODP, as a regulated person.
14.
An “OTC derivative provider” means in terms of Regulation
1 “
a person who as a regular feature of its business and
transacting as principal (a) originates, issues or sells OTC
derivatives;
or (b) makes a market in OTC derivatives”.
15.
“
OTC derivative”
means in terms of Regulation 1
“
an unlisted derivative instrument that is executed, whether
confirmed or not confirmed, excluding – (a) foreign exchange
spot
contracts; and (b) physically-settled commodity derivatives.”
The respondent accepts that the instruments that are relevant in
the present instance are OTC derivatives or “OTCs”.
16.
By way of clarification in relation to the acronyms OTCs and ODPs,
the former is the instrument (the over-the-counter derivative

instrument), and the latter is the provider of those OTCs (the
over-the-counter (OTC) derivative provider). The acronyms ODP and
OTC
derivative provider are used interchangeably in this judgment.
17.
The objects of the FMA, as expressly provided for in section 2, and
so applying also to OTCs, are to:
“
(a) ensure that the South
African financial markets are fair, efficient and transparent;
(b)
increase
confidence in the South African financial markets by –
(i)
requiring that
securities services be provided in a fair, efficient and transparent
manner; and
(ii)
contributing
to the maintenance of a stable financial market environment;
(c)
promote the
protection of regulated person, clients and investors;
(d)
reduce systemic
risk; and
(e)
promote the
international and domestic competitiveness of the South African
financial markets and of securities services in the
Republic.
”
18.
Although the FMA regulations issued in terms of the FMA for ODPs were
published in February 2018, ODPs were given an extended
period until
14 June 2019 to lodge their applications to be licensed.
19.
The OTC market plays a significant role in our financial markets and
economy. The two most common derivative asset classes are
interest
rate derivatives and foreign exchange derivatives. OCTs are high-risk
financial products.
20.
The requirement for ODPs to be authorised under the FMA is to ensure
that they are prudentially sound and meet sound governance
and risk
management requirements. ODPs’ reporting obligations facilitate
the monitoring of potential systemic risks by the
regulator. This is
to protect the public against ODPs who may not be able to honour
contracts-for-difference (“CFDs”)
if the market turns
against them.
21.
The reference to CFDs is relevant because that is the form of OTC
instrument in respect of which the respondent acted as an
OTC
derivative provider (ODP).
22.
CFDs are financial products that enable the client/investor to
purchase exposure to a specific underlying product (e.g. shares,

commodities, forex). The client does not purchase the actual
underlying product and does not become the owner of the product. The

client enters into a contract with an issuer of the CFD to the effect
that, if the underlying asset price in the physical or real
market)
increases, the investor will make a profit on the transaction equal
to the increase in the price from date of purchase
to date of
close-out, and if the underlying asset price (in the physical or real
market) decreases, the investor will be in a loss
position, and the
issuer will make a profit.
23.
Because CFDs are OTC (over-the-counter or unlisted) products, they
are not traded on financial markets, but are issued by an
issuer, and
taken up by the client or investor. The issuers of CFDs have
traditionally been financially resilient institutions
such as banks
and even when issuing a CFD, the bank will hedge its position so that
it is not exposed to market forces. In simple
terms, the issuer/bank
will protect itself from the market moving in favour of the client
and the issuer making substantial losses
as a result. This happens
because one party to the contract always profits and the other party
always loses by the same amount;
hence it is referred to as a
zero-sum game.
24.
To be an issuer of CFDs requires substantial financial muscle or
complicated hedging and risk management processes.
25.
The applicant asserts that
unfortunately recent history is marred with many instances of
unscrupulous operators acting as issuers
of derivative products
without having the means or the operational ability to do so, which
has led to substantial losses for a
large number of clients. The
applicant contends that it is against this background that the
regulation of ODPs was introduced by
the FMA Regulations. The
respondent does not take issue with this other than to contend that
seven out of the other eight entities
of which it is aware that are
also ODPs are not licensed and that as far as it is aware the
applicant has neither suspended the
FSP licences of those other
entities
[3]
nor initiated winding-up proceedings against them, and that it is not
clear why the respondent is being treated differently by
the
applicant.
26.
The applicant also states that only entities that are able to show
that they have operational ability and the prerequisite risk

management processes in place may be authorised as ODPs. This is to
protect the public against issuers who will not be able to
honour
CFDs if the market turns against them. Again, the respondent does not
take issue with this, other than to state that the
applicant has
neither alleged nor shown that it cannot honour CFDs, contending that
it has sufficient cash equity to honour its
obligations, and that in
any event it has hedging facilities that it can utilise but to date
has not needed to activate in order
to carry its counterparty risk.
27.
The applicant also describes that the regulatory architecture under
the FMA Regulations also includes a code of conduct aimed
at:
27.1. providing appropriate disclosure
to clients to enable them to understand and appreciate the risks
associated with derivative
transactions;
27.2. ensuring ODPs act in the best
interests of the client or counterparty through the safeguarding of
collateral and margin.
28.
The applicant also summarises the regulatory architecture under the
FAIS Act, which the respondent too does not dispute.
29.
Section 7 of the FAIS Act provides that persons who render financial
services must have a licence issued by the applicant as
the relevant
financial sector regulator. The applicant, acting as the gatekeeper,
determines who may be licensed and continue to
be licensed to render
financial services. It does so with reference to the advisory and
intermediary services rendered by providers
mainly with reference to
a pre-determined category of financial products as defined in the
FAIS Act. The licensing of FSPs is designed
to promote competence and
high standards of conduct and build investor confidence in the
financial services industry.
30.
FSPs who wish to conduct financial services business are required to
satisfy prescribed fit and proper requirements. Currently,
those
requirements are set out in Board Notice 194 of 2017 and encompass
personal character qualities of honesty and integrity,
competence,
continuous professional development, operational ability and
financial soundness.
31.
Authorised FSPs, their key individuals and representatives are in
terms of section 8A(a) of the FAIS Act required to continuously

comply with the fit and proper requirements.
32.
All authorised FSPs and
representatives are subject to a General Code of Conduct.
[4]
The General Code is a comprehensive standard setting code prescribing
the minimum requirements that FSPs and representatives must
comply
with when rendering financial services. It contains provisions
relating to disclosures that must be made, information to
be
obtained, the avoidance of conflicts of interests, and the
undertaking of an analysis of information in order to provide clients

with advice.
33.
The FAIS Act together with the General Code is therefore aimed at
ensuring that financial services are rendered by persons who:
33.1 are honest and have integrity;
33.2 are competent;
33.3 have adequate resources; and
33.4 have adequate risk management
processes, including in relation to the maintenance of financial
records.
34.
The respondent is an authorised (licensed) FSP under the FAIS Act but
is not authorised (licensed) as an ODP (an OTC derivative
provider)
under the FMA. It is important to distinguish between being licensed
as a FSP (financial service provider) under the
FAIS Act and being
licensed as an ODP (an OTC derivative provider) under the FMA.
35.
As described by the applicant, and in respect of which the respondent
does not raise any issue, there is a fundamental difference
between
an FSP licence, where the licence holder renders financial services
(whether advisory or intermediary) without any personal
exposure to
market movements, and an ODP licence, where the licence holder has
extensive exposure to market movements because it
acts as a principal
in originating, issuing or selling of the OTCs.
36.
An FSP licence does not permit a person, including the respondent, as
an ODP to originate, issue or sell OTCs, which are instead
regulated
by the FMA and FMA Regulations.
An
assessment of the affidavits
37.
The applicant seeks a final
winding-up of the respondent. The applicant must establish its case
for a final winding-up on a balance
of probabilities but if there is
a relevant
bona fide
factual
dispute, then the matter cannot be decided on the probabilities but
upon the usual
Plascon-Evans
approach where the
respondent’s version must be accepted.
[5]
38.
But for a relevant factual
dispute to arise, it must be
bona
fide
and on a material
matter. Should the respondent’s version be dismissed as
farfetched and fanciful, then there is no competing
version to that
of the applicant
[6]
and so the matter can be decided on a balance of probabilities as the
Plascon- Evans
approach
to resolving a factual dispute does not arise.
39.
Notwithstanding the seriousness
of the issues, the respondent did not seek that any issue be referred
to oral evidence or “a
live contest”
[7]
but chose to argue the application on the papers.
40.
The respondent has challenged the admissibility and quality of the
evidence adduced by the applicant in support of its application.
The
respondent contends that as the deponent to the founding affidavit
does not have any personal knowledge of any of the facts
but instead
relies predominantly on the evidence of the applicant’s
statutorily appointed investigators, the evidence should
be rejected
as hearsay or as lacking credibility.
41.
The respondent takes issue with
the confirmatory affidavits provided by the investigators who
undertook the investigation and who
confirm the averments in the
founding affidavit. In doing so, the respondents rely upon the
Supreme Court of Appeal decisions of
Drift
Supersand (Pty) Limited v Mogale City Local Municipality
[8]
and
Eskom
Holdings SOC Limited v Masinda.
[9]
42.
By the very nature of the role played by the applicant as a
regulator, it would not have first-hand knowledge of many of the

relevant facts giving rise to an application for liquidation. Whether
in terms of section 96 of the FMA or section 38B of the FAIS
Act, an
investigation must take place, which necessitates the appointment of
investigators. Those investigators have furnished
confirmatory
affidavits of those facts that they have uncovered in support of the
present application. I do not find that because
the primary deponent
to the founding affidavit is not one of the investigators but instead
refers to the evidence of the investigators
as confirmed in
confirmatory affidavits by those investigators that such evidence is
sufficiently lacking in credibility as to
be unacceptable. In the two
authorities relied upon by the respondents, although the court
deprecated the manner in which the evidence
of the relevant witnesses
was adduced by confirmatory affidavits, the court nevertheless
accepted that evidence,
43.
Insofar as the respondent’s challenge that much of the evidence
is hearsay, subsequent confirmatory affidavits have removed
that
hearsay element. To the extent that those confirmatory affidavits may
only have been provided at a later stage and in some
instances by way
of reply, that is understandable given that the application was
launched urgently.
44.
To the extent that the
respondent contends that certain assertions remain hearsay, such as
those of Saad Sidat, a former employer
and consultant of the
respondent explaining certain internal emails in which he featured,
the court can have regard to the emails
themselves. Apart from Sidat,
Paulsen for the respondent was a party to the emails. Both given that
Paulsen is a party to those
emails and the emails are those of the
respondent, it is open for the applicant to attach those emails to
its founding affidavit
and for the respondent to be required to
respond thereto.
[10]
45.
Subsequent to the respondent being issued an FSP licence in June
2016, it commenced its business of dealing in CFDs. At that
stage, it
does not appear that the respondent was required to be authorised
under the FMA to conduct such activity. This is not
to say that the
respondent was authorised by reason of its FSP licence to act as an
ODP in relation to OTCs including CFDs but
rather that such activity
was not yet regulated, at least insofar as such business did not fall
within the ambit of what is regulated
under the FAIS Act.
46.
Upon the publication  and  commencement  of  the
FMA  Regulations  on  9 February 2018,
the conducting
of the business of an OTC provider became regulated under the FMA and
in particular an ODP was required to be authorised
in terms of
section 6(8) as read with section 5(1)(b) of the FMA. As will appear
further in this judgment, the respondent would
obfuscate as to what
role it played in the provision of OTCs and so seek to avoid or delay
regulation under the FMA and the FMA
Regulations.
47.
Regulation 43 provides that a person conducting the business of an
OTC derivative provider (an ODP) must, within six months
from the
commencement of Regulation 2 (9 February 2018), lodge with the
applicant an application for authorisation as an OTC provider
in the
manner prescribed by the applicant. This transitional arrangement
recognised that there were persons such as the respondent
who were
conducting the business of an OTC derivative provider and so provided
such persons six months in which to lodge an application
for
authorisation. Although not entirely clear, it appears that the
intention behind the transitional regulation is that provided
such
application for authorisation had been timeously lodged, pending a
decision upon that application for authorisation the provider
could
continue to conduct the business of an OTC derivative provider.
48.
For reasons unexplained in the affidavits but which is common cause,
the period within which persons conducting the business
of an OTC
derivative provider were to lodge with the applicant an application
for authorisation as an ODP was extended to 14 June
2019.
49.
The respondent therefore has had an extended period of some sixteen
months since the commencement of the FMA Regulations regulating
the
business of an OTC derivative provider in which to lodge its
application with the applicant.
50.
The respondent did not timeously lodge an application but only would
do so on 21 August 2020. This is four days before the present

liquidation application was heard, and over fourteen months after the
expiry of the extended period in which such application was
to be
lodged in terms of the FMA Regulations.
51.
Pursuant to various complaints that had been received from the
respondent’s clients, an interview was held on 14 October
2019
by the applicant as the regulatory authority at the respondent’s
offices for the applicant to obtain an understanding
of the
respondent’s business. Paulsen, as the sole director, chief
executive officer and key individual under the FAIS Act
contends in
his answering affidavit that he explained the respondent’s
business model to the applicant at this interview.
It is common cause
that at the interview Paulsen, after explaining the nature of a CFD,
confirmed that the respondent was a ‘counterparty’
to the
client in a CFD transaction. Paulsen for the respondent would later
contend in his answering affidavit in these proceedings
that because
of this disclosure the respondent cannot subsequently be faulted as
obfuscating the role that it played in a CFD transaction.
52.
Paulsen explains that when he
is referring to the respondent as a ‘counterparty’ to the
CFD transaction, he is referring
to the respondent as the opposite
party to the client in the CFD transaction.
[11]
The applicant contends that as the other party to the CFD
transaction, the respondent is the originator or issuer of the CFD.
It is not merely a third-party facilitating a CFD transaction between
the client and another party, or acting as an intermediary
in
relation thereto – it is a party to the CFD itself.
53.
This contention by the applicant – that the respondent is an
originator or issuer of the CFD as it is privy to the CFD
as the
opposite party – is, based on the material in the affidavits,
well-founded.
54.
The respondent denies, without
any details, the applicant’s assertion in its founding
affidavit that the clients were purchasing
CFDs issued by the
respondent.
[12]
That the respondent was not an issuer of CFDs did not feature in
argument before me. To the extent that the respondent persists
in
contending that there is a dispute as to whether it is an issuer of
CFDs and so required to be licensed to conduct the business
of an OTC
derivative provider under the FMA, I do not find that this dispute as
bona fide
and
can be rejected on the papers as fanciful. I say so for the following
reasons:
54.1 the respondent has admitted that
it is a counterparty, or privy to the CFD as the opposite party to
the client, and so has
placed itself within the applicant’s
assertion of what constitutes an issuer of a CFD, namely a person
that is privy to the
CFD and adopts the opposite position to the
client;
54.2 the respondent does not offer in
its affidavit any cogent basis to gainsay the applicant’s
assertions in its founding
affidavit that the respondent is an issuer
of CFDs and so is required to be licensed as an ODP under the FMA.
The respondent does
not offer an alternative meaning of what
constitutes an issuer, or originator;
54.3 Paulsen admits in a subsequent
interview with the applicant on 25 June 2020 that as a counterparty
and principal, it is an
issuer, and is required to be licensed;
54.4 the conduct of the respondent,
albeit belated, in applying for an ODP licence belies its contention
that it need not be licensed;
54.5 the court is precluded from going
beyond the affidavits. Should it be that the verbs “originate”
or “issue”
as used in the definition of an OTC derivative
provider in the FMA Regulations have a meaning other than that
contended for by
the applicant, the respondent has not in its
answering affidavit (or heads of argument) suggested any other such
meaning;
54.6 the respondent has not taken the
applicant as the regulator, or the court, into its confidence in
fully describing its business
and role in the CFD transaction so as
to place itself beyond the ambit of an OTC derivative provider as
defined in the FMA Regulations.
Instead, as appears later in this
judgment, the respondent obfuscated;
54.7 on the respondent’s
version, there are features of its dealing in the CFDs that are only
consistent with it being privy
to the CFD transaction. The respondent
is able to change the pricing at which it enters into the CFD
transaction with its client,
differentiating between different
clients, and is also able to suspend, close or unwind a CFD
transaction when it, on its version,
forms the view that a particular
client has engaged in prohibited trading practices;
54.8
I accept that it is for the
applicant to demonstrate that the respondent is required to be
licensed under the FMA, rather than for
the respondent to demonstrate
the converse. But I find, for the reasons set out above, that the
applicant has so demonstrated,
relying on its asserted meaning of
what constitutes an issuer of CFDs and the respondent’s
admissions placing itself within
the ambit of that meaning. The
respondent has not put forward a substantiated cogent basis to refute
that, whether in its answering
affidavit or during argument. The
respondent, which has peculiarly within its knowledge the facts
relating to its business and
its role in the CFD transactions, cannot
content itself with bare denials or vague unsubstantiated assertions
in response to the
applicant’s positive assertion that it is an
issuer of CFDs;
[13]
54.9 the respondent has had adequate
opportunity to advance facts to place itself beyond the reach of the
FMA, before in interviews
with the applicant in October 2019 and in
June 2020, and in these proceedings. The respondent has not
complained that it has not
been afforded a sufficient opportunity to
do so. The respondent has also not sought an referral of the issue to
oral evidence.
55.
To return to the narrative of facts, after the interview with the
respondent in October 2019, the applicant as the relevant
financial
sector regulator proceeded to appoint investigators in terms of the
FSRA to carry out an investigation in respect of
the respondent in
terms of section 135(1)(a) of the Act. The section provides that a
financial sector regulator may instruct an
investigator appointed by
it to conduct an investigation in respect of any person, if the
financial sector regulator reasonably
suspects that a person may have
contravened, may be contravening or may be about to contravene, a
financial  sector law for
which the financial sector regulator
is the responsible authority. The respondent has not challenged the
investigation.
56.
On 10 December 2019, the investigator issued formal notice to the
respondent in terms of section 136(1)(a)(ii) of the FSRA to
produce
various documents pursuant to the investigation.
57.
Particularly important is the following enquiry in the formal notice:
“
1.4.7
It is understood that
JP Markets is the counter party or issuer of the CFDs (or any other
instrument relevant in this case). Kindly
confirm this. If so, …
1.4.7.3 Has JP Markets applied for
authorisation as an Over the counter derivative provider (“ODP”),
and if not provide
reasons for not doing so.
”
58.
The respondent’s written response on 6 January 2020, under the
heading “Status of ODP authorisation”, is telling:
“
9. Ad para 1.4.7.3
9.1
JPM notes the
FSCA’s Conduct Standard 1 of 2018 and we find ourselves in a
difficult situation as we believe that the standard
does not apply to
us. This was the view of both our internal and outsourced compliance
officers. Notwithstanding this view, we
have erred on the side of
caution and have since commenced the application process. Our
concerns regarding the application of the
Conduct Standard 1 of 2018
can be described as follows:
9.1.1
At first blush it would seem that the company should be
classified as an OTC derivative provider.
However, if one
delves deeper it becomes apparent that the company does not
originate, issue or sell OTC derivatives nor does it
make a market in
OTC derivatives. The
company only provides the
technology for retail
client to transact
directly with the market. It would
then follow
that if we do not fit into the provided
definition
that the accompanying regulations
would not be
applicable
.
9.1.2
Unlike traditional exchange-traded futures and equity markets,
our clients do not execute any trades through an exchange. Thus, the

key objective of the Conduct Standard would not be met as these
derivatives are not cleared through a central counterparty
clearinghouses.
The reason as to why this objective would not be met
is because the trades are negotiated bilaterally between
counterparties and
executed either through voice-brokering or through
online trade execution directly by the client.
9.1.3
It is important to note that the online platform has an
inbuilt function which mitigates negative account balances as margin
is
set aside from each transaction.
9.1.4
Should the FSCA require us to register as an ODP, we foresee
an unintended consequence of having an intermediary (“JP
Markets
SA (Pty) Ltd and other online platforms) relying on another
intermediary (“a clearinghouse”) to settle trades which

are already being executed directly by clients.
9.2
We do not see how this could be
the intention of the regulator and we would appreciate your guidance
regarding the points raised
above.
”
(my
emphasis).
59.
A further extract from the same response of 6 January 2020 is that
the respondent “
does not originate, issue or sell OTC
derivatives, nor does it make a market in OTC derivatives. It only
provides the technology
which facilitates the trading of said OTC
derivatives. Clients execute directly with the online decentralised
global financial
market.”
60.
The applicant asserts in its affidavits that this response is false.
Based upon what appears in the affidavits, and the analysis
thereof
in paragraph 54 above, the applicant is correct. As an admitted
opposite party to the client in the CFD transaction, the
respondent
is not merely providing the technology for its clients to transact
directly with the market. On its version, the respondent
is
transacting directly with the client in the CFD transaction, adopting
the opposite position to the client, and is, for the reasons
already
stated, an originator or issuer of the CFD. There is no market with
which the clients are transacting as these CFDs are
being concluded
directly between the client and the respondent.
61.
The recordal in paragraph 9.1.4 of the response does not appear to
make any sense. The respondent adduces no evidence in its
answering
affidavit in support of this recordal. The respondent does not rely
on any other intermediary (clearinghouse) to settle
trades, at least
on its version that it is a counterparty or opposite party to the
client in the CFD transaction. This is because
the respondent itself
has entered into the CFD transaction with the client; the respondent
is executing the CFD transaction directly
with the client. Simply
put, the respondent is not an intermediary but the opposite party to
the client in the CFD transaction
62.
The reason for this obfuscation by the respondent is, in my view, to
seek to place itself outside the regulatory framework of
the FMA and
instead to create the impression that at most the services that it
renders constitute some or other form of intermediary
services that
it is entitled to perform under its FAIS license.
63.
Section 139(3) of the FSRA
expressly provides that a person who is asked a question in terms of
the investigation must answer the
question fully and truthfully, to
the best of that person’s knowledge. Failure to do so
constitutes a criminal offence, with
a fine not exceeding R5 000 000
or imprisonment for a period not exceeding two years, or to both a
fine or such imprisonment.
[14]
I do not mention this for purposes of making any finding that the
respondent has contravened section 139(3), which is beyond what
this
court is called upon to decide, but rather to highlight the
importance of the respondent answering the enquiry by the
investigators
fully and truthfully to enable the applicant to
appreciate the respondent’s business and whether it is required
to be licensed
as an ODP. To the extent that the respondent’s
answer is such that the applicant, and the court, draws the
conclusions that
it has that the respondent is an OTC derivative
provider and that the respondent has obfuscated in its disclosures,
the respondent
was precognised of the importance of a full and
truthful response given its statutory obligation to so answer.
64.
Consequent upon the earlier interview in October 2019, the
respondent’s then internal compliance officer addressed an

email to the applicant enquiring whether the process for licensing
for ODPs had been finalised. The applicant responded on 15 October

2019 pointing out that ODPs are to be licensed in terms of the FMA
Regulations as well as referring to the Conduct Standard of
2018
entitled “Criteria for authorisation of OTC service providers”.
In addition, the applicant provided website details
from which
documents could be downloaded including an application index for
non-banks and the applicant’s instructions for
ODPs. From this
email exchange, the respondent to their knowledge had access to the
necessary documents and information to lodge
an application for an
ODP licence from October 2019. But the respondent did not do so.
65.
The respondent, although attaching this email correspondence to its
answering affidavit, does not explain why it did not apply
for a
licence other than to state that both its internal and external
compliance officers were still researching whether the respondent

required an ODP licence under the FMA Regulations. But, as appears
above, such a licence was required, and the applicant had referred

the respondent to the relevant website for details.
66.
Paulsen’s version for the respondent is that on 30 January 2020
he actioned internally the process to prepare the respondent’s

ODP licence application, delegating the task to various staff
members. He attaches to its answering affidavit various emails
addressed
to the applicant seeking advice and a referral to a legal
expert in the field as the list of requirements are “quite
intricate
as well as high-level”.
67.
It is not for the applicant to refer the respondent to a legal
expert. Apart from the self-professed expertise of Paulsen, the

respondent, as a massive business concern on its own version having
paid out over R1 billion in three months, had and has access
to both
external and internal compliance officers as well as access to what
it contends is an attorney with expertise in the field,
Johann
Joosten of Joosten Attorneys. What purports to be an expert report by
Joosten Attorneys, with confirmatory affidavits, features
in the
respondent’s answering affidavit. So too does a confirmatory
affidavit by Gerhard Labuschagne, who is described as
an external
consultant employed by the respondent, who offers an opinion in
relation to the success of the belated application
lodged by him on
behalf of the respondent on 21 August 2020 to be licensed as an ODP.
68.
Paulsen for the respondent explains in his answering affidavit that
he was of the
bona fide
belief, perhaps mistakenly, that the
respondent did not require an ODP license. I have difficulty
accepting this averment. But I
need not make a positive finding as to
what Paulsen’s belief actually was. It is sufficient to find,
as I do for the reasons
set out above, that the respondent obfuscated
in its interactions with the applicant as the regulator as to its
business and the
role it played in the CFD transaction, designed to
place it in a position to contend that it need not be licensed, or
that it was
“confused” whether it needed to be licensed,
or at the least to justify a delay in the lodging of an application
for
an ODP license.
69.
It is apparent from the
regulatory framework, particularly the FMA Regulations, that what is
required of an ODP licensee is onerous,
with substantial compliance
and prudential requirements. The respondent was seeking to kick the
proverbial can down the road by
addressing innocuous emails and
replies
[15]
to the applicant as the regulatory authority in an attempt to create
a paper trail to assist it in later creating the impression
that it
was attempting to address its licensing obligations.
70.
Throughout the respondent continued to conduct the business of an OTC
derivative provider. As the respondent asserts on several
occasions,
it has over 300,000 clients, of which 20,000 are transacting at any
particular time during the week and in respect of
which it has paid
out over R1 billion in three months. Although the respondent advances
these figures to demonstrate that it is
a major player in the
derivative instrument industry, what it also demonstrates is the
magnitude of the unlicensed business that
the respondent was
conducting, at least until June 2020.
71.
On 19 June 2020 the applicant as the relevant financial sector
regulator under the FAIS Act furnished the respondent notice
of
provisional suspension of its authorisation as an FSP. The grounds
for provisional suspension set out in the notice are that
the FSA was
satisfied that in terms of information available substantial
prejudice to the clients or general public may occur if
the
respondent was allowed to continue acting as a FSP and where it does
not meet or no longer meets the fit and proper requirements

applicable to an FSP licensee. Amongst the reasons given by the
applicant is that pursuant to an investigation in terms of section

135 of the FSRA it has established that the respondent was
effectively conducting the business of an OTC derivative provider,
and more particularly
inter alia
being the issuer and product
supplier of derivative financial products. The notice then sets out
why in the applicant’s view
the conduct of the respondent
constituted a
prima facie
contravention of various sections of
the General Code for authorised financial service providers and
representatives and of the
Financial Institutions (Protection of
Funds) Act, 2001
.
72.
In addition to the applicant’s recordals in relation to the
transgression of the FAIS Act, the notice records that:
“
JP Markets initially
represented that it only renders intermediary services on behalf of
clients. It only offers a trading platform
for clients to trade
virtual over-the-counter (OTC) derivatives in respect of currencies
and commodities. It does not originate,
issue or sell OTC
derivatives. It has now become evident that JP Markets does in fact
originates or issues or sells OTC derivatives
and acts as the
principal or product provider. Therefore, it would appear that JP
Markets acted as an OTC derivatives provider
without authorisation in
breach of section 2 (read with section 43) of the Regulations issued
in terms of the
Financial Markets Act, 19 of 2012
.
”
73.
The applicant further recorded in the suspension notice that the
contraventions were “
inconsistent with personal character
qualities of honesty and integrity consequently upon resulting in JP
Markets not complying
with the Fit and Proper Requirements (honesty
and integrity) and it being in breach of section 8A(a) of the FAIS
Act.
”
74.
This notice provisionally suspends the respondent’s FAIS
license until 30 September 2020, subject to certain conditions.
Those
conditions are that the respondent:
74.1. must inform all affected clients
and product suppliers concerned that its licence had been
provisionally withdrawn;
74.2. is prohibited from conducting
any new business as envisaged by FAIS with immediate effect.
75.
The respondent was also informed in the notice of its right to apply
for a reconsideration by the Financial Services Tribunal
of the
applicant’s decision to provisionally suspend the FAIS license.
There is no indication in the papers that the respondent
applied for
such reconsideration.
76.
The applicant’s recordal in the suspension notice that the
respondent initially represented that it only rendered intermediary

services is well-founded given the response by the respondent in
January 2020 to the applicant’s formal request in the
investigation
that it did not originate, issue or sell OTC
derivatives but only provides the technology which facilitates the
trading of those
derivatives and enabling the clients to trade
directly with an online decentralised global financial market.
77.
Paulsen for the respondent in his answering affidavit seeks to
explain the respondent’s position in response to this notice
of
suspension by stating that he had not misrepresented the position to
the applicant in that he had already in October 2019 stated
that the
respondent was a counterparty to the CFDs transactions and that
therefore the applicant was incorrect in its contention
that the
respondent had initially represented that it only renders
intermediary services and that it had only become evident to
the
applicant in June 2020 that the respondent was a counterparty.
78.
This is another instance of the respondent obfuscating. For the
reasons set out above, as respondent was a counterparty in the
CFD
transaction, it fell within the ambit of conducting the business of
an OTC derivative provider, and should have applied for
a licence.
But in order to avoid or delay doing so, the respondent, in January
2020 in direct response to the investigative enquiry
by the
applicant, created the contrary impression that it did not originate,
issue or sell OTC derivatives and only provided the
technology to
enable the clients to transact directly with the market, and so
sought to place itself outside the regulatory ambit
of the FMA and
the FMA Regulations.
79.
The respondent, under the helm of Paulsen, sought to exploit the
delay experienced by applicant in seeking to ascertain what
the
business of the respondent was and so whether the respondent was
properly licensed, and so to continue to conduct the business
of an
OTC derivative provider whilst being unlicensed.
80.
Once the respondent’s FSP license was provisionally suspended
in June 2020, Paulsen continued to obfuscate. Paulsen in
his
answering affidavit refers to an interview conducted at the
applicant’s offices on 25 and 26 June 2020. Paulsen attempts
to
again take the respondent’s business beyond the scope of the
FMA:
“
Justin: Ja ja, maybe I can
just take a step back just to give you some context, you know. So,
you have, so, when you open up an
MT4 platform, okay? You see prices,
okay, you see pricing, right? That pricing comes from what is called
a liquidity provider.
Meta Quotes only provides the platform, okay,
they provide the platform and the, and all the sort of infrastructure
on the platform
and the functionality. Okay, now, in order to give
pricing for your clients to trade, you need to get prices plugged
into Meta
Quotes, okay? That comes from what is called a liquidity
provider, okay, so, Meta Quotes, right? They provide the platform and
the liquidity provider provides you with the pricing.
”
81.
Then later in the interview Paulsen says that:
“
Justin: It comes through as
a pre-package instrument directly through to JP Markets. We did not
originate that instrument. We did
not make that instrument. We did
not have any control over the actual instrument. We have no influence
on it.
”
82.
The respondent, as late as 25 June 2020 remained intent in its
obfuscation by overstating the role of a liquidity provider so
as to
place the respondent’s business outside the regulatory
framework of the FMA:
82.1 Whatever is to be made of the
term originator, for the reasons set out above the respondent is the
issuer of the CFDs. That
the respondent may obtain various components
of its pricing from a third party, such as a liquidity provider, does
not detract
from it as an issuer or otherwise conducting the business
of an OTC derivative provider, at least on the evidence presented in
the affidavits;
82.2 Paulsen’s attempt to convey
the impression that the respondent is an intermediary in providing
services relating to CFDs
over which it has no control, is incorrect;
82.3 Paulsen in his answering
affidavit in response to a complaint of a client set out in the
applicant’s founding affidavit,
explains that in relation to
certain clients, the extent of the spreads in relation to the CFDs
are adjusted. This demonstrates
that the respondent does have the
ability to affect the pricing of the CFD and then proceeds to enter
into that CFD as the opposite
party to the client. Contrary to what
was stated by Paulsen in his interview, the CFD is not a pre-
packaged instrument with pricing
over which the respondent has no
control.
83.
Following of the provisional suspension of respondent’s license
on 19 June 2020, the respondent approached Joosten Attorneys
seeking
a report on the regulatory framework concerning ODP licences. Joosten
Attorneys, as described above, asserts a specialisation
in compliance
in the financial services sector as well as OTC derivative trading.
The respondent does not explain why such approach
was not made months
earlier for purposes of considering the necessity to prepare an ODP
license and to assist in preparing an application
for that licence.
84.
The respondent attaches the report by Joosten Attorneys dated 20 July
2020 to its answering affidavit. Although subsequently
confirmed
under oath, the report does not take the matter any further. Assuming
the report to be admissible given that in at least
certain respects
it appears to be inadmissible opinion evidence on the law, nothing is
said in it that explains why an ODP licence
was unnecessary. Apart
from also offering what is an inadmissible character reference as to
the professionalism of the respondent,
it points to institutional
delays and inefficiencies at the applicant as the financial sector
regulator. But this does not excuse
the respondent’s conduct in
not having lodged its application for an ODP licence within the
extended timeframe provided for
in the FMA Regulations or its
continued conducting of the business of an OTC derivative provider
when it was required to be licensed
to do so.
85.
The report further seeks to express an opinion that the ODP
application by the respondent of which a draft was furnished appears

to materially comply with the requirements for such an application
published by the applicant on 27 July 2018. Whatever the
admissibility
of such an opinion, what the report demonstrates is
that the criteria for authorisation of an ODP to enable a licensing
application
to be made have been known since 27 July 2018.
86.
It would only be on 21 August 2020, on the eve of the hearing of
these proceedings application on 24 August 2020 (the notice
of motion
having been issued on 7 July 2020 and the matter having been called
in the urgent court on two previous occasions on
21 July 2020 and 11
August 2020) that the respondent would eventually lodge its
application for an ODP license.
The
relevant sections providing for the winding-up of the respondent
87.
The applicant has sought the liquidation of the respondent relying on
both section 96 of the FMA and section 38B of the FAIS
Act.
88.
As appears above,:
88.1 pursuant to the FMA Regulations,
OTC derivative providers were designated as regulated persons in
terms of section 5(1)(b)
of the FMA;
88.2 section 6(8) of the FMA provides
for such regulated persons to adhere to various standards to be
prescribed by the Minister,
which are those in
inter alia
the
FMA regulations;
88.3 an OTC derivative provider is so
required to be authorised in terms of Regulation 2 where it acts as
an OTC derivative provider
or advertises or holds itself out as an
OTC derivative provider.
89.
I have already found that the respondent conducts the business of an
OTC derivative provider, and so required to be licensed
under the
FMA.
90.
Section 94(1) of the FMA provides:
“
94. General powers of
Authority
(1) If the Authority receives a
complaint, charge or allegation that a person ('the respondent') who
provides securities services
(whether the respondent is licensed or
authorised in terms of this Act or not) is contravening or is failing
to comply with any
provision of this Act, or if the Authority has
reason to believe that such a contravention or failure is taking
place, the Authority
may investigate the matter in terms of the
Financial Sector Regulation Act.
”
91.
As appears above, OTC service providers were designed in terms of
section 5(1)(b) as regulated persons under the FMA, rendering
and so
render securities services. Although the respondent was not licensed
or authorised to provide the securities services, section
94(1)
expressly provides in defining a respondent as being the person who
renders such securities services notwithstanding that
the person may
or may not be licensed or authorised to do so.
92.
Accordingly, Chapter 12 of the FMA, which includes sections 94 and
96, applies to persons who should be licensed and authorised
but who
are not.
93.
The applicant as the relevant
authority in terms of section 94 of the FMA undertook an
investigation in terms of the FRSA.
[16]
94.
Section 96 of the FMA, headed “
Powers of Authority after
supervisory on-site inspection or investigation”
provides:
After a supervisory on-site
inspection or an investigation has been conducted, the Authority may,
in order to achieve the objects
of this Act referred to in section 2
–
(a)
if the respondent
is a company-
(i)
apply to the court under section 81 of the Companies
Act for the winding-up of the respondent as if the Authority were a
creditor
of the respondent…;
”
95.
No reasons were advanced during the proceedings why section 96 would
not apply if it was established that respondent was an
OTC derivative
provider other than the respondent contending that as the
investigation had not been concluded. This defence is
considered
later in this judgment.
96.
The FAIS Act also provides for a winding-up, albeit differently
worded.
“
38B Application by registrar
for sequestration or liquidation
(1)
Subject to
subsection (3), if the registrar, after an on-site visit in terms of
section 4(5) or an inspection in terms of the Inspection
of Financial
Institutions Act, 1998 (Act 80 of 1998), considers that the interests
of the clients of a financial services provider
or of members of the
public so require, the registrar may apply for the court for the
sequestration or liquidation of that provider,
whether or not the
provider is solvent, in accordance with –
(a)
the Insolvency Act, 1936 (Act 24 of 1936);
(b)
the Companies Act;
(c)
the Close Corporations Act, 1984 (Act 69 of 1984); or
(d)
the law under which that provider is incorporated.
(2)
In deciding
an application contemplated in subsection(1), the court –
(a)
may take
into account whether sequestration or liquidation of the financial
services provider concerned is reasonably necessary
–
(i)
in order to
protect the interests of the clients of the provider; and
(ii)
for the
integrity and stability of the financial sector;
(b)
may make an order concerning the manner in which claims may be
proved by clients of the financial services provider concerned; and
(c)
shall appoint as trustee or liquidator a person nominated by
the registrar.
”
97.
The respondent is a financial services provider registered under the
FAIS Act. No reasons were advanced during the course of
the
proceedings why section 38B would not apply to the respondent other
than the respondent contending that until the applicant
had concluded
its inspection and had obtained the leave of the court in terms of
section 157(1)(d) of the Companies Act to launch
the liquidation
proceedings. I deal with these defences later in this judgment.
98.
Section 1A(6) of the FAIS Act provides that a reference in the FAIS
Act to an inspection in terms of the provision of the FAIS
Act must
be read as a reference to an investigation in terms of the FSRA. It
is common cause that such an investigation was initiated.
99.
The applicant is entitled to rely on either or both sections 98 of
the FMA or section 98B of the FAIS Act, subject to the defences

considered next.
Must
the investigation as envisaged in section 98 of the FMA and section
38B of
FAIS be concluded before the applicant can seek the
winding-up of the respondent
under those sections?
100.
The respondent contends that as section 38B of the FAIS Act provides
that the applicant may apply to the court for the liquidation
of a
financial services provider
after
an inspection, it must
follow that the inspection must be
concluded
before the
applicant can apply for the liquidation of the respondent as a
provider. Similarly in relation to section 96 of the
FMA which
provides that the applicant may apply to court for the winding-up of
the respondent
after
an  inspection  has  been
concluded.  As  it  is  common  cause
the inspection
has not been concluded and is ongoing, the
respondent argues that it was premature for the applicant to have
launched winding-up
proceedings.
101.
The modern unitary approach to
interpretation as set out by Wallis JA in
Natal
Joint Municipal Pension Fund v Endumeni Municipality
2012
(4) SA 593 (SCA)
[17]
is that meaning must be attributed to the words in the document,
having regard to the context provided by reading the particular

provisions in light of the document as a whole and the circumstances
attendant upon its coming into existence. Consideration must
be given
to the language used in the light of the ordinary rules of grammar
and syntax; the context in which the provision applies;
the apparent
purpose to which the provision is directed and the material known to
those responsible for its production. Where,
as in the present
instance, more than one meaning is possible, each possibility must be
weighed in the light of all these factors.
102.
Wallis JA continues that the process is an objective one rather than
subjective and that:
102.1 a sensible meaning is to be
preferred to one that leads to insensible or unbusinesslike results
or undermines the apparent
purpose of the provision;
102.2 a court must nonetheless be
alert to, and guard against, the temptation to substitute what it
regards are reasonable, sensible
or business-like for the words
actually used;
102.3 the inevitable point of
departure is a language of provision itself read in context and
having regard to the purpose of the
provision and the background to
and production of the document.
103.
Wallis JA continues
[18]
that where a court is faced with two or more possible meanings that
are to a greater or lesser degree available on the language
used (and
so the only ambiguity lies in selecting the proper meaning on which
views may legitimately differ), the apparent purpose
of the provision
and the context in which it occurs will be important guides to the
correct interpretation and that an interpretation
will not be given
that leads to impractical, unbusinesslike or oppressive consequences
that will stultify the broad operation of
the document under
consideration.
104.
Wallis JA continued in his
subsequent judgment in
Bothma-Batho
Transport v S Bothma & Seun Transport
2014
(2) SA 494 (SCA)
[19]
to make it clear that the “golden rule” approach from
Coopers & Lybrandt and
others v Bryant
1995 (3) SA
761 (A)
[20]
was no longer consistent with the approach adopted by courts, and
that whilst the starting point remained the words of the document,

the process of interpretation does not stop at a perceived literal
meaning of these words, but considers them in light of all relevant

and admissible contract, including the circumstances in which the
document came into being.
105.
Jafta JA held in
True
Motives 84 (Pty) Ltd v Mahdi and another
2009
(4) SA 153 (SCA)
[21]
that “
if the literal
meaning of the subsection defeats is objective then the subsection
ought to be construed differently so as to ascribe
to it a meaning
that promotes its purpose”.
106.
The respondent argues that as winding-up is a drastic remedy and
where there are a variety of other remedies available to the

applicant as the regulating authority, such as those set out in the
remaining subsections of section 96 of the FMA, the investigation

effectively serves as a “
gate-keeping exercise
”
and that until that exercise had been completed, the sections must be
interpreted as requiring the investigation to be completed.
107.
This argument is unsound. It would not advance the purpose of either
of these sections as well as the purpose of each Act,
to require that
the inspection must have been concluded. It suffices that the
inspection reached a stage, in relation to section
38B, that would
enable the applicant to have reached the considered decision that the
interests of the clients of the financial
services provider or of the
members of the public require application be made to court for the
liquidation of that provider. Similarly,
in relation to section 96 of
the FMA, the investigation must have reached a stage to enable the
applicant to decide whether in
order to achieve the objects of the
Act as referred to section 2 to apply for the liquidation of the
respondent.
108.
The applicant postulated the example of the applicant discovering
during an investigation the misappropriation of monies by
the
financial service provider or respondent concerned. Must the
authority first conclude its investigation before initiating
liquidation proceedings under either of the sections? Surely not, the
applicant reasoned. I agree.
109.
The respondent argued that this is argument is fallacious and is to
be disregarded. I disagree. The respondent’s proposition
is one
of invariable legal principle – that until the investigation is
concluded, there can be no liquidation. But once one
accepts an
investigation need not be concluded before liquidation proceedings
can be brought in the instance of clear fraud or
misappropriation of
monies, as must be so for the remedy not to be emasculated, then it
has been established that it cannot be
a matter of invariable legal
principle that the investigation must be concluded. The respondent’s
interpretation leads to
insensible results and undermines the
apparent purpose of the provision.
110
It is not a matter of invariable principle but a consideration of
whether on the particular facts it can be said that the investigation

has been conducted. In the present instance the respondent has
advanced no substantive grounds, based on the facts, why the
investigation
must first be completed.
111.
My view is further fortified by considering the statutory provisions
in their context.
112.
As an alternative to the
investigation having been conducted or having taken place as a
statutory prerequisite to enable the applicant
to apply for
liquidation, each of the two sections also provide for the applicant
applying to court for liquidation after a supervisory
on-site
inspection.
[22]
Supervisory on-site inspections are provided for in section 132 of
the FSRA.
113.
Section 132(2) of the FSRA provides:
“
(2) The purpose for which a
financial sector regulator may conduct a supervisory on-site
inspection of a supervised entity is to
–
(a)
check
compliance by the entity with a financial sector law for which the
financial sector regulator is the responsible authority,
a
regulator’s directive issued by the financial sector regulator
or an enforceable undertaking accepted by the financial
sector
regulator;
(b)
determine
the extent of the risk posed by the entity of contraventions or the
financial sector law for which the financial sector
regulator is the
responsible authority; and
(c)
assist the
financial sector regulator in supervising the relevant financial
institution.
”
114.
Neither section 132 nor any other section in the FSRA requires there
to have been any particular outcome in respect of that
supervisory
on-site inspection. Given that the applicant is empowered merely on
having conducted a supervisory on-site inspection
to have launched
liquidation proceedings in terms of either section 38B of FAIS or
section 98 of the FMA, it would be incongruous
to require of the
applicant to have concluded its investigation before it can rely upon
the sections where the applicant elected
to conduct an investigation
rather than a supervisory on-site inspection.
115.
The purpose of either the supervisory on-site inspection or the
investigation is to place the applicant responsibly in a position
to
decide whether to approach the court for the liquidation of the
particular financial service provider or respondent. A supervisory

on-site inspection or investigation, as the case may be, also affords
the relevant service provider or respondent an opportunity
to state
its position in response to that which is asserted by the applicant
as the regulator. This took place in the present instance
where the
applicant not only afforded the respondent an opportunity to respond
in writing to its concerns, which the respondent
did by way of its
200-page response on 6 January 2020, but also afforded the respondent
including Paulsen an interview on 25 and
26 June 2020. The
investigation has served its purpose, at least for purposes of
sections 96 of the FMA and section 38B of the
FAIS Act.
116.
In any event, should it has been required that the investigation be
concluded, clear words would have been used to that effect,
such as
“concluded” or “completed”, rather than
“conducted” as appears in section 96 of the
FMA.
117.
I find that the applicant not having concluded its investigation does
not prevent it from seeking the liquidation of the respondent
under
either section 96 of the FMA or section 38B of the FAIS Act.
Is
the applicant obliged to rely upon section 157(1)(d) of the Companies
Act to bring
itself within the ambit of the Companies Act for
purposes of seeking the liquidation
of the respondent as a
solvent company in terms of section 38B of the FAIS Act?
118.
Section 38B(1) provides that the applicant may apply to court for the
winding-up of the respondent “
in accordance with… the
Companies Act”
.
119.
The respondent contends that as the applicant is not one of the
specified persons who are entitled to apply for a winding-up
of a
solvent company in terms of section 81(1) of the Companies Act, it is
required to demonstrate in terms of section 157(1)(d)
of the
Companies Act that it has the right to make such an application as a
person acting in the public interest, with the leave
of the court.
120.
The respondent relies on the recent Supreme Court of Appeal decision
of
Recycling and Economic Development Initiative of South Africa
NPC v Minister of Environment Affairs
2019 (3) SA 251
(SCA)
(“Redisa”) as authority for this argument. In that matter
the Minister seeking the winding-up of the respondent
was not one of
the persons conferred
locus standi
in terms of section 81(1)
and so was not permitted to rely upon that section. The Supreme Court
of Appeal went further and found
that the Minister also could not
rely on section 157(1)(d) to wind-up the applicant in the public
interest as it did not qualify
as a person acting in the public
interest but continued that even if the Minister had the right to
approach the court under section
157(1)(d), leave would not have been
granted in the public interest.
121.
As the applicant has not sought and been granted the leave of the
court to act in the public interest, the respondent contends
that the
applicant has no
locus standi
.
122.
This argument is unsound. Unlike the Minister in
Redisa
who
was not conferred any statutory right to apply for a winding-up, in
the present instance section 38B of the FAIS Act expressly
confers
locus standi
on the applicant to seek the liquidation of the
respondent. It is because there was no comparable section to section
38B of FAIS
in respect of the Minister’s seeking the winding-up
of the respondent in
Redisa
that the Minister was non-suited.
123.
The applicant need not bring itself within one of the specified
categories of persons in section 81(1) of the Companies Act
in order
to bring a winding-up application in respect of a solvent company in
terms of section 38B, which does not refer at all
to section 81 of
the Companies Act but simply to the applicant applying to court for
liquidation in accordance with the Companies
Act.
124.
Section 38B was introduced into the FAIS Act by section 201 of Act 45
of 2013. That same Act, 45 of 2013 inserted the definition
of
“Companies Act”, being the
Companies Act, 71 of 2008
,
into section 1 of the FAIS Act. The legislature was aware of the
sections regulating the winding-up of solvent companies in the
Companies Act but
nevertheless did not refer to
section 81
of that
Act. Had it been necessary that the applicant would have to bring
itself within one of the specified categories in
section 81(1)
of the
Companies Act, section
38B of the FAIS Act would have so provided.
125.
In contrast, section 96 of the FMA expressly provides that the
applicant can apply to court under
section 81
of the
Companies Act
for
the winding-up of the respondent as if it were a creditor of the
respondent. In expressly referring to
section 81
of the
Companies
Act, the
legislature was alive to the fact that the applicant would
not fall within one of the specified categories in
section 81
and so
deemed the applicant to be a creditor.
126.
Section 38B of the FAIS Act in
invoking the
Companies Act incorporates
those aspects of the
Companies Act, including
those of the Companies Act, 1973
[23]
as are necessary to enable the applicant to apply for the liquidation
of a financial service provider. Section 38B of the FAIS
Act is
complementary to and is to be read alongside the Companies Act. To
the extent there is an inconsistency, section 5(4) of
the Companies
Act requires that the provisions of both the Companies Act and the
FAIS Act apply concurrently, to the extent that
it is possible to
apply and comply with one of the inconsistent provisions without
contravening the second. I do not find any inconsistency
but to the
extent there is, both Acts can be applied concurrently. Section 38B
of the FAIS Act does for the applicant in relation
to conferring
locus standi
to
seek the winding up of a financial service provider, whether solvent
or insolvent, as section 81(1) of the Companies Act does
for those
categories of persons specified therein in relation to conferring
locus standi
to
seek the winding-up of a solvent company and as section 346(1) of the
Companies Act 1973
[24]
does for those categories of persons specified therein in relation to
conferring
locus standi
to
seek the winding-up of an insolvent company.
127.
No argument was advanced why it would serve the purpose of the FAIS
Act, which is to regulate the rendering of certain financial
advisory
and intermediary services to clients, to find that the applicant must
apply for leave in terms of section 157(1)(d) of
the Companies Act to
act in the public interest. The objective and functions of the
applicant set out in sections 57 and 58 of
FSRA as the relevant
financial sector regulator demonstrate that it is acting in the
public interest. Section 7 of the FSRA sets
out the object of that
Act, which is also aimed at the public interest. Section 7(2) of the
FSRA provides that when seeking to
achieve the object of the Act, the
applicant as the relevant financial sector regulator must not be
constrained from achieving
its objectives and responsibilities as set
out in section 57 of that Act. Section 38B(1) of FAIS itself requires
that regard be
had to the interests of
inter alia
the members
of the public and section 38B(2) provides that the court may take
into account whether the liquidation of the financial
service
provider is reasonably necessary in order to protect the interests of
the clients of the provider for the integrity and
stability of the
financial sector. It would be superfluous to also require of the
applicant to demonstrate that it is acting in
the public interest in
terms of section 157(1)(d) of the Companies Act, and would not
advance the object or purpose of either the
FAIS Act or the FRSA to
so require of the applicant.
128.
I accordingly find that the applicant was not obliged to obtain the
leave of the court in terms of section 157(1)(d) of the
Companies
Act.
The
just and equitable requirement for a winding-up and liquidation as a
remedy of
last resort
129.
The respondent argues that it is necessary for the applicant to
demonstrate that the winding-up is just and equitable and this

requires that the applicant must demonstrate that there is no
alternative remedy
130.
Section 96 of the FMA provides that the authority may apply for the
winding-up of the respondent as a company in order to achieve
the
objects in section 2 of that Act.
131.
The respondent’s argument is that:
131.1 section 96(a)(i) of the FMA
refers to section 81 of the Companies Act;
131.2 the relevant subsection is
section 81(1)(c) as that is the section relevant to creditors
applying for a winding-up and given
that the applicant is deemed to
be a creditor of the respondent for that purpose in terms of section
96(a)(i) of the FMA;
131.3 section 81(1)(c) provides that a
court may order a solvent company to be wound-up if:
“
(c) one or more of the
company’s creditors have applied to the court for an order to
wind-up the company on the grounds that:
(i)
the company’s
business rescue proceedings have ended in the manner contemplated in
section 132(2)(b) or (c)(i) and it appears
to the court that it is
just and equitable in the circumstances for the company to be
wound-up; or
(ii)
it is
otherwise just and equitable for the company to be wound-up.
”
131.4 the court is therefore required
to consider and the applicant is required to establish that it is
just and equitable for the
respondent to be wound-up;
131.5 this would entail the applicant
demonstrating that there is no other remedy available to the
applicant other than a winding-up
as a winding-up is a remedy of last
resort.
132.
I am prepared to accept, without finding, that the just and equitable
basis for the winding-up of a company is imported into
section 96 of
the FMA.
133.
As the respondent points out,
the just and equitable basis for the winding-up of a company
“
postulates not facts
but only a broad conclusion of law, justice and equity as a ground of
winding-up
” and
“
justice and equity
”
is that between the competing interests of all concerned.
[25]
134.
I need not decide whether the
availability of an alternative remedy is to feature under the rubric
of “just and equitable”
or, if an applicant having
established that it is just and equitable to wind up the respondent,
in the exercise by the court of
its discretion to nevertheless refuse
a winding up. As expressed by Stegmann J in
Tjospomie
Boerdery (Pty) Ltd v Drakensberg Botteliers (Pty) Ltd and another
1989 (4) SA 31 (T),
[26]
it is difficult to visualise any circumstances that would justify a
refusal to issue a winding-up order that would not at the same
time
be relevant to the question whether it was just and equitable that
the company should be wound up.
135.
The respondent’s further
proposition is that as winding-up is a remedy of last resort, it
cannot be just and equitable to
wind-up a company if there is another
remedy and that it is for the applicant to demonstrate that there are
no other remedies available.
As support for this proposition the
respondent relies upon
Muller
v Lilly Valley (Pty) Limited
[2012]
1 All SA (GSJ),
[27]
which provides that “
even
if the applicant had established that it was ‘just and
equitable’ to wind up the respondent based upon the partnership

principle under section 81(1)(d)(iii), before a court will grant a
winding-up solvent company, it must be satisfied that all alternative

means have been investigated and failed”.
136.
The respondent refers to
Redisa
as supporting this
dictum:
“There is one more reason why it was not just and equitable to
wind-up the appellants: the court had to be satisfied
that the
Minister had no alternative means to address complaints before
resorting to the drastic expedient of winding-up the appellants.”
[28]
137.
The Supreme Court of Appeal in
Redisa
continues:
“
At the heart of the enquiry
of whether an applicant should be granted to seek relief in the
public interest, lies a consideration
of alternative remedies …
”
[29]
138.
Neither
Lilly Valley
nor
Redisa
support the
respondent’s proposition that the applicant must demonstrate
that it is seeking a winding-up order as a last resort.
139.
Weiner J in
Lilly Valley
reasoned that:
139.1
as section 347(2) of the
Companies Act, 1973 granted the court a further discretion to issue
or refuse a winding-up order under
section 344(h) where a winding-up
was sought on the basis that it was just and equitable, if the court
was of the opinion or was
satisfied that the applicants were
reasonably refusing to pursue some or other remedy that was available
to them;
[30]
139.2 even if an applicant had
established that it was just and equitable to wind-up the respondent
based upon the partnership principle
under
section 81(1)(d)(iii)
of
the
Companies Act, 2008
;
139.3
before a court would grant a
winding-up of a solvent company, it must be satisfied that all
alternative means have been investigated
and failed.
[31]
140.
Firstly,
Lilly Valley
is distinguishable. The court was
concerned with a winding-up application brought by a director and
member of the company in terms
of
section 81(1)(d)(iii)
of the
Companies Act and
not with a winding-up brought by a creditor under
section 81(1)(c)(ii) of the Act. The reason for the importance of
this distinction
is that section 347(2) of the Companies Act, 1973,
which is the foundation for the reasoning of Weiner J, relates only
to an application
presented by members and is of no application to a
winding-up application by creditors, even on a just and equitable
basis.
141.
Secondly, I, with respect, differ from by Weiner J in her application
of section 347(2) in reasoning her finding that a court
must be
satisfied that all alternative means have been investigated and
failed before a winding-up order can be granted.
142.
Section 347(2) provides that:
“
Where the application is
presented by members of the company and it appears to the court that
the applicants are entitled to relief,
the company
shall
make a winding-up order, unless it is satisfied that some other
remedy is available to the applicants and that they are acting

unreasonably in seeking to have the company wound up instead of
pursuing that other remedy.
”
143.
Section 347(2) does not provide
that a winding-up application cannot be granted unless a court is
satisfied that all alternative
remedies have been investigated and
have failed. To the contrary, section 347(2) provides that the court
shall
make a winding-up order at the instance of its members
unless
it is otherwise satisfied
that there was some other remedy available and the applicant is
acting unreasonably in seeking to have
the company wound up instead.
The onus in terms of section 347(2) is on those opposing the
winding-up to establish on a balance
of probabilities both that some
other remedy is available to the applicant and that the applicant is
acting unreasonably in seeking
to have the company wound up instead
of pursuing that other remedy.
[32]
144.
Although
Redisa
[33]
refers to
Lilly
Valley
as authority that a
court has to be satisfied that there are no alternative means to
address complaints before resorting to the
drastic expedient of a
winding-up application, the situation in
Redisa
is distinguishable. As
appears above, in that matter the Minister did not have
locus
standi
to seek a winding-up
order in terms of section 81(1) and the court found that even if the
Minister was entitled to apply for the
leave of the court to act in
the public interest in terms of section 157(1)(d) in bringing a
liquidation application under section
81(1) of the Companies Act, the
availability of alternative remedies and the failure of the Minister
to have pursued those remedies
precluded the Minister from being able
to make out a case that it was in the public interest for her to be
given the right to pursue
a winding-up application.
[34]
The approval by the Supreme Court of Appeal of
Lilly
Valley
was in the context
of ascertaining whether leave should be granted in terms of section
157(1)(d), and not in the context of section
81.
145.
In the circumstances, I do not find that the applicant is required to
demonstrate that there is no alternative remedy available
to it
before being entitled to seek the liquidation of the respondent,
whether in terms of section 96 of the FMA or section 38B
of the FAIS
Act.
146.
This is not to say that the availability of other remedies is an
irrelevant consideration. It is a relevant consideration,
whether in
the court determining if it is just and equitable to wind up the
respondent, whether in exercise of the court’s
discretion to
nevertheless refuse a winding-up order or in the court considering in
terms of section 38B(2) of the FAIS Act whether
the liquidation of
the respondent is “reasonably necessary” in order to
protect the interests of the clients of the
respondent and for the
integrity and stability of the financial sector.
Has
the applicant made out a case for the liquidation of the respondent?
147.
The respondent has summarised under four headings what it contends
are the applicant’s grounds for winding-up as appears
from the
papers, namely:
147.1 allegations relating to the
treatment of “
toxic clients
” and the respondent’s
alleged manipulation of spreads;
147.2 complaints against the
respondent by some of its clients;
147.3 an alleged conflict of interest
between the respondent and its clients; and
147.4 the ODP licence, or more
accurately the absence of such a licence.
148.
It is the failure of the respondent to have timeously applied for an
ODP licence when it was conducting the business of an
OTC derivative
provider and its persistence in conducting that business without
applying for a licence when it was required to
do so, coupled with
its obfuscation in its dealings with the applicant as the relevant
financial sector regulator, that most strongly
militates in favour of
the granting of a liquidation order, whether in terms of section 96
of the FMA or section 38B of FAIS.
149.
The other grounds for winding-up therefore need not be considered in
any detail save to state that such grounds demonstrate
the necessity
for the respondent to have been licenced as an ODP.
150.
As appears above, section 96 of the FMA provides for the winding-up
of the respondent in order to achieve the objects of the
FMA as set
out in section 2 of that Act. The winding-up of the respondent does
achieve the objects of the FMA. Particularly relevant
are the objects
to:
150.1 ensure that the South African
financial markets are fair, efficient and transparent;
150.2 increase confidence in the South
African financial markets by requiring that securities services be
provided in a fair, efficient
and transparent manner and contributing
to the maintenance of a stable financial market environment; and
150.3 promote the protection of
regulated persons, clients and investors.
151.
To the extent that the
reference in section 96(1)(a)(i) does import the requirement that the
winding-up of the respondent must be
just and equitable as provided
for in section 81(1)(c)(ii) of the Companies Act, the establishment
that the winding-up of a respondent
as achieving the objects of
section 2 of the FMA would constitute a ‘
broad
conclusion of law, justice and equity as a ground of winding-up’.
[35]
152.
It serves none of these objects should a winding-up of the respondent
be refused where it conducted the business of an OTC
derivative
provider for a protracted period, since 14 June 2019, without
timeously applying for an ODP license.
153.
This is particularly so in relation to the respondent which on its
own version has over 300,000 clients, of which 20,000 at
any point
during the week are transacting on its systems, and where it has paid
out over R1 billion to clients in a three-month
period.
154.
Although the respondent emphasises these figures to persuade the
court that it is a substantial business and not, to use the
phrase
from the respondent’s heads of argument, a “fly by night”
operation, and that this is a factor to be taken
into account in
refusing a winding-up order, the magnitude of the scale of the
respondent’s unlicensed CFD business militates
in favour of the
granting of a winding-up order. To permit the respondent in the
circumstances described above to have conducted
such large scale
business without having been licensed does not ensure that the South
African financial markets are fair, efficient
and transparent, does
not increase confidence in the South African financial markets by
requiring that securities services be provided
in a fair, efficient
and transparent manner and in contributing to the maintenance of a
stable financial market environment, and
does not promote the
protection of regulated persons, clients and investors.
155.
The high-water mark of the respondent’s case in relation to it
not being licensed as an ODP, repeated on several occasions
in the
respondent’s answering affidavit, in its heads of argument and
in argument before the court was that the court should
exercise its
discretion against winding-up the respondent in circumstances where
the applicant as the regulating authority had
(i) delayed since
October 2019 in launching liquidation proceedings and (i) not taken
any similar steps against other ODPs who
were similarly conducting
the business of an OCT derivative provider without being licensed,
and that the respondent was being
singled out by the applicant.
156.
Neither of these contentions have any merit.
157.
That the applicant as the regulator may take time to come to grips
with the nature of the respondent’s business is understandable,

which included initiating a formal investigation in terms of section
135 of the FSRA, and affording the respondent an opportunity
to
explain its position in various interviews, including on 25 and 26
June 2020. It was the respondent who obfuscated as to the
nature of
its business and involvement in the CFD transactions. Although the
respondent may have in October 2019 stated to the
applicant that it
was a counterparty to the CFD transactions, and which the respondent
contends should have triggered what is now
a belated reaction by the
applicant, the respondent adopted a contrary position in its formal
response in January 2020. In any
event, the respondent as an
unlicensed ODP cannot rely on the lag between the coming into force
of the regulatory framework in
February 2018 and the regulating
authority enforcing the regulatory framework as a reason to explain
why it had not complied with
its licensing obligations.
158.
Similarly the assertion that other unlicensed ODPs have not been
pursued by the applicant cannot constitute a basis for explaining
why
the respondent need not be licensed or why the applicant should be
excluded from pursuing what remedies may legitimately be
available to
it in discharging its statutory regulatory mandate. The applicant as
the regulator must make a start, and that the
respondent is the
subject of that start cannot weigh in favour of refusing a winding-up
order. Now that the applicant has caught
up with the respondent and
its unlicensed business, the winding-up of the respondent achieves
the objects of the Act.
159.
Should the respondent have applied and had been licensed as an ODP,
the other grounds of complaint levelled against it such
as in
relation to the client complaints, its treatment of ‘toxic
clients’ and its alleged manipulation of spreads would
have
been regulated, at least to a large extent, by its licensing. The
licensing requirements would have required of it to have
in place
various systems that would presumably have addressed these
complaints. I therefore do not rely on those grounds of complaints
as
a distinct basis for winding-up the respondent and therefore do not
need to make any definitive finding in regard thereto, rendering

irrelevant any factual disputes that may arise in respect thereof.
160.
That there were complaints, whatever the merits thereof, demonstrate
the importance of the respondent to have been licensed
as an ODP for
such complaints to be properly regulated.
161.
Section 38B(2) of FAIS requires that the court
may
take into
account whether the liquidation of a financial service provider is
“reasonably necessary”:
161.1 in order to protect the
interests of the clients of the provider; and
161.2 for the integrity and stability
of the financial sector.
162.
This subsection expands rather than limits the factors that a court
can take into account in deciding whether to grant a liquidation

order.
163.
The phrase “reasonably necessary” requires a particular
degree of satisfaction. By way of comparative illustration,
the
phrase “strictly necessary” also requires a particular
degree of satisfaction. When compared, the latter requires
a much
higher degree of satisfaction than the former. This comparison
assists in appreciating that the court need not be persuaded
that the
liquidation of the respondent is strictly or absolutely necessary,
i.e. that it is essential. Something less will suffice.
164.
For the reasons why the objects in section 2 of the FMA are achieved
by the liquidation of the respondent, so too is the liquidation
of
the respondent in terms of section 38B of the FAIS Act reasonably
necessary in order to protect the interests of the clients
of the
respondent as a financial services provider, and for the integrity
and stability of the financial sector.
165.
The respondent contends that there are various alternate remedies
available to the applicant and that therefore liquidation
as a last
resort cannot be granted. I have already rejected the legal
proposition that the applicant must demonstrate an absence
of
alternative remedies to succeed in its application for winding-up.
Nonetheless, as I have also found, the availability of alternative

remedies is a factor to be taken into account.
166.
In establishing whether the liquidation is “reasonably
necessary”, self- evidently the availability of other remedies

feature.
167.
The respondent refers to the other remedies notionally or as
possibilities, without supporting facts as to their suitability
in
the present instance. The court is therefore not properly placed to
consider whether those remedies would be a suitable alternative
to a
winding-up order.
168.
The respondent’s response to the provisional suspension of its
FAIS license as a financial service provider is instructive
in the
consideration of alternative remedies and whether it is reasonably
necessary to issue a winding up order. Although the provisional

suspension notice prohibits the respondent from conducting any new
business with immediate effect, the respondent continued to
do new
business. The respondent sought to justify its continued doing of new
business, notwithstanding the suspension notice, as
follows.
169.
The respondent explains that various of its existing clients have
“
open
” positions in respect of existing CFDs that
needed to be closed out in order to prevent financial losses. This is
to be distinguished
from new CFD transactions entered into by
existing clients. Whilst the respondent’s position may be
understandable in respect
of open positions as at date of suspension
of its licence, the respondent was not entitled to enter into new CPD
transactions with
existing clients after the provisional suspension
of its license. This the respondent accepted. But, the respondent
explains, its
information technology system is unable to distinguish
between the transactions necessary to close out the open positions
and new
CFD transactions with existing clients. The respondent
therefore justified its continued business in concluding new CFD
transactions
with existing clients, although prohibited under the
suspension notice, on the basis that it could not do otherwise
because of
information technology limitations.
170.
Whilst I accept on the papers that the respondent’s systems
could not so distinguish between the two types of trade,
this does
not justify the respondent in continuing to conduct new business in
contravention of the conditions of the suspension
notice. The
inability of the respondent’s information technology systems to
make such a distinction demonstrates why it is
reasonably necessary
that the applicant pursue such remedies as may be necessary to
prevent such continued but prohibited new business.
As long as the
respondent continues to conduct new business in contravention of the
provisional suspension of its licence based
upon the inability of its
information technology to allow it to do otherwise, that militates
against an assertion that it should
not be placed under winding-up.
The respondent has offered no alternate solution to the problem.
171.
The respondents have not furnished any undertakings which may have
assisted it, and the applicant, in crafting some form of
suitable
alternative relief. The respondent has elected to oppose the
liquidation proceedings but without advancing any undertakings
or
substantiated alternate forms of relief to mitigate against the risks
of its continued conducting of unlicensed ODP business.
172.
The applicant contends that a consequence of the respondent having
conducted unlicensed business as an OTC derivative provider
results
in the CFDs concluded by it as the opposite party to its clients
being void.
173.
Section 111(1)(a) of the FSRA
provides that a person may not provide, as a business or part of a
business, a financial product,
financial service or market
infrastructure except in accordance with a licence in terms of a
specific financial sector law, the
National Credit Act or the
National Payment System Act. A financial service, as defined in
section 3(1)of FSRA, includes an intermediary
service as defined in
section 1(1) of the FAIS Act
[36]
and any other service provided by a financial institution, being a
service regulated by a specific financial sector law.
[37]
A financial institution is defined in section 1(1) of the FSRA as
including a person licensed or required to be licensed in terms
of a
financial sector law. A financial sector law is defined in section
1(1) of the FSRA as including a law listed in schedule
1 to the Act
or a regulation made in terms of such a law. The laws in schedule 1
to the FSRA include both the FMA and the FAIS
Act.
174.
Accordingly section 111(1) of the FSRA prohibited the conducting of
business by the respondent of:
174.1 the business of an OCT
derivative provider as it was not licensed to do so. This is also
entrenched in regulation 2 of the
FMA regulations;
174.2 further business falling within
the ambit of the FAIS Act once its FSP licence was suspended in June
2020.
175.
A contravention of section
111(1) has a fine not exceeding R15 million or imprisonment for a
period not exceeding 10 years, or to
both such a fine and such
imprisonment.
[38]
176.
The applicant contends that the
CFD transactions are void, whether because they are unlawful or
because the respondent as an unauthorised
(unlicensed) person lacked
the capacity to conclude those transactions, in a similar manner to
an unauthorised trustee not being
able to engage in legal proceedings
in respect of a trust.
[39]
177.
Various consequences would flow from a finding that the CFDs that
have been concluded are void since 14 June 2019 from when
the
respondent was required to have lodged its application for a licence,
which may entail claims being made by the clients against
the
respondent and/or the respondent being entitled to claim from the
clients such profits as the clients may have made.
178.
The respondent does not accept that the CFD transactions concluded by
it as the opposite party to the clients would necessarily
be void,
even should I find that it was required to be licensed as an ODP,
which I have.
179.
Whether a transactions would be void was readily accepted by both
parties in argument as being a legally complex issue. As
the
authorities demonstrate, in certain instances transactions concluded
contrary to the law are void whilst in others the transactions
were
not found to be void.
180.
I need not and am not able on the papers before me to make any
definitive finding as to whether the CFD transactions are void.

Nonetheless an important factor to be taken into account is that
there are many hundreds of thousands of CFDs transactions may
be
void, and this should be taken into account in considering whether it
would be reasonably necessary to wind-up the respondent
in order to
protect the interests of the clients of the respondent and for the
integrity and stability of the financial sector
for purposes of
section 38B(2) of the FAIS Act. Similarly in relation to achieving
the objects of section 2 of the FMA for purposes
of section 96 of the
FMA.
181.
The respondent’s counsel urged upon me that absent my finding
that the CFD transactions are void, I could not take into
account
that the CFD transactions may be void. I disagree. That many
transactions may be void cannot be ignored.
182.
It is the respondent in having
conducted such massive scale unlicensed CFD business that has
resulted in the present predicament.
Whether or not the respondent is
placed under winding-up, the spectre of the CFD transactions being
void remains. That spectre
is more suitably addressed in a winding-up
scenario. The established insolvency framework is more suited to
addressing this issue
than if the respondent was not placed under
winding-up. A duly appointed liquidator can consider whether the
transactions are void
and to approach the court for the necessary
relief in relation thereto. To the extent that any of the many
clients wish to advance
the position that the CFD transactions
entered into by them are void and that they have some or other claim
arising therefrom,
whether by way of unjustified enrichment or
otherwise, they can pursue those claims by proving claims in terms of
section 44
of the
Insolvency Act. To
the extent that a duly appointed
liquidator is of the view that the transactions are void and that
those clients who profited from
the CFD transactions are liable to
repay those profits, such as potentially by way of a disposition
without value in terms of
section 26
of the
Insolvency Act, he
or she
can then seek to advance those claims. These claims, both at the
instance of the liquidator or by clients of the respondent
are more
appropriately addressed under the insolvency framework, for which
there is precedent.
[40]
183.
That the respondent may presently be solvent is predicated upon the
validity of the CFD transactions that it has concluded
without being
licensed since June 2019. Should those transactions be void, it may
be, given that it can be inferred from the papers
the respondent has
been profitable, the obligations of the respondent to make
restoration to its various clients of those profits
consequent upon
those void transactions will render the respondent insolvent.
184.
The winding-up the respondent to address the situation is preferable
to not winding-up the respondent and leaving the respondent’
s
300
,
000
clients to their own devices in seeking to pursue, whether
individually or by way of some or other class action, relief against

the respondent in it having engaged in unlicensed CFD business under
the umbrella of its FAIS licence.
185.
The respondent argues that the
applicant did not make out the illegality, and the resultant
voidness, as part of its case. The applicant
argues that the case can
reasonably be made out on the facts that do appear in the affidavits.
The applicant has throughout, including
in its founding affidavit,
contended that the respondent has conducted unlawful unlicensed
business. The respondent was forewarned
in the applicant’s
heads of argument of the contention that the CFD transactions were
void as a result of the transgressions
of the
section 111
of the
FSRA.
[41]
186.
A further factor militates in
favour of why it is reasonably necessary in terms of section 38B of
the FAIS Act to wind-up the respondent
as a financial service
provider. Section 15 of FAIS provides for a binding code of conduct
for authorised financial service providers,
which includes the
respondent. Section 16(1) expressly provides that the code of conduct
must provide for financial services providers
and their
representatives to inter alia (i) act honestly and fairly, and with
due skill, care and diligence, in the interests of
their clients and
the integrity of the financial services industry;
[42]
act with circumspection and treat clients fairly in a situation of
conflicting interests;
[43]
and (iii) comply with all applicable statutory and common law
requirements applicable to the conduct of the business.
[44]
Section 16(2) provides that the code of conduct must contain
provisions relating to the making of adequate disclosures of relevant

material information, including the disclosure of actual or potential
own interests, in dealing with clients.
187.
That code of conduct takes the form of the General Code, which has
been referred to earlier in this judgment.
188.
The General Code, in section 2, imposes a duty on all FSPs to at all
times render financial services honestly, fairly, with
due care and
diligence and in the interests of clients and the integrity of the
financial services industry.
189.
Sections 3 and 3A of the General Code deal extensively with the
duties of FSPs to avoid conflicts of interests, establish prescribed

policies in respect thereof and to disclose conflicts.
190.
Section 11 of the General Code requires of all FSPs at all times to
have and effectively employ resources, procedures and appropriate

technology systems to eliminate as far as possible the risk that
clients will suffer financial loss through theft, fraud, other

dishonest acts, poor administration, negligence, professional
misconduct or culpable omissions.
191.
Section 12 of the General Code requires of FSPs to structure their
internal control procedures to provide reasonable assurance
that all
laws are complied with.
192.
Section 8A of the FAIS Act requires that the respondent as a
financial service provider and its key individual must continue
to
comply with the fit and proper requirements.
193.
The applicant expressly relies
upon breaches of the General Code in its founding affidavit in
motivating for a liquidation, including
that the respondent failed to
render financial services fairly, honestly and with due diligence and
that it failed to avoid or
properly disclose its conflict of
interests to its clients.
[45]
The respondent denies these breaches. It is an issue before me
whether there were such breaches, at least insofar as it impacts
upon
whether a winding-up order is to be granted.
194.
The conduct of the respondent and its key individual person as
described above, particularly in relation to their obfuscatory

interactions with the applicant and their continued conduct of
unlicensed ODP business on a massive scale over a protracted period,

even after the provisional suspension of the respondent’s FSP
licence, supports the applicant’s contention that they
lack the
personal character qualities of honesty and integrity required of
them to be fit and proper.
195.
As the opposite party to the client in the CFD transactions, there is
an inherent conflict of interest. As the respondent is
the opposite
party to the client in a CFD transaction, it is common cause on the
papers that should the client make a profit, the
respondent makes a
loss and
vice versa
. Notwithstanding this inherent conflict of
interest, the respondent misrepresented to the applicant in its
formal response of 6
January 2020 that it only provided the
technology for the clients to transact directly with the market,
effectively advancing that
it was an intermediary.
196.
In incorrectly advancing its position as an intermediary, when in
fact it was a party to the CFD transactions, the applicant
made use
of its FAIS license as a financial service provider to represent to
clients that it was authorised to conduct the business
of an OTC
derivative provider when the licence that was required was an ODP
licence under the FMA and the FMA Regulations. There
is substance in
the applicant’s assertion in its founding affidavit that “
[t]he
liquidation of JP Markets is reasonably necessary to protect the
clients of JP Markets and protect the integrity of the financial

sector. A regulated institution luring clients under its FSP licence
should not be permitted to conduct unregistered ODP business.”
197.
Notwithstanding the inherent conflict of interest, the respondent
obfuscated in an attempt to downplay the conflict of interest
by
contending that it was in the nature of a CFD. But that misses the
point. That it is in the nature of a CFD does not remove
the conflict
or absolve the respondent from seeking to take steps to mitigate that
conflict, as required under the General Code.
198.
I have already found that the respondent was not entitled to conduct
the business of an OTC derivative provider under its FSP
licence. But
that does not make the respondent’s conduct irrelevant for
purposes of assessing whether it complied with its
obligations under
the FAIS Act, including to act honestly and fairly as part of its fit
and proper requirements and to disclose
any conflict of interests and
take steps to mitigate that conflict of interests. This is
particularly so as the respondent invoked
its FSP licence as the
basis for its being authorised to conduct its business.
199.
Rather than the respondent acknowledging the conflict of interests,
and seeking to take transparent steps to mitigate against
that
conflict of interests such as by hedging, it instead underplayed the
conflict of interests and sought to manage its exposure
as the
opposite party to the CFD transactions by, in certain instances,
changing the pricing of the spreads offered to certain
clients who
regularly made profits. Although the respondent took issue that this
change of pricing in relation to what is described
as “the
toxic clients” in the papers was unacceptable behaviour, as
asserted by the applicants (which I need not decide),
it is common
cause that such changing of pricing did occur in respect of further
transactions entered into by that group of clients.
200.
The respondent argued that the appropriate disclosure was made in
clause 25 of the customer account agreements it concluded
with its
clients:
“
JP Markets SA may execute
Commodity Contracts for Customer's account(s) either as principal or
broker. As broker, JP Markets SA
will execute transactions similar to
Customer's transaction with another market participant in the
financial market. As principal
JP Markets SA may not execute
transaction similar to Customer in the financial market and hold the
opposing transaction in JP Markets
SA’s Inventory of Commodity
Contracts. As a result of acting as principal Customer should realize
that JP Markets SA may
be acting as your counter party and that JP
Markets SA may be placed in such a position that a conflict of duty
occurs. JP Markets
SA, its Associates or other persons connected with
JP Markets SA may have an interest, relationship or arrangement that
is material
in relation to any Commodity Contract affected under this
Agreement. By entering into this Agreement the Customer agrees that
JP
Markets SA may transact such business without prior reference to
the Customer. In addition, JP Markets SA may provide advice and
other
services to third parties whose interests may be in conflict or
competition with the Customer's interests. JP Markets SA,
its
Associates and the employees of any of them may take positions
opposite to the Customer or may be in competition with the Customer

to acquire the same or a similar Position. JP Markets SA will not
deliberately favor any person over the Customer but will not
be
responsible for any loss this may result from such competition.”
201.
The applicant asserts in its founding affidavit that the disclosure
is confusing and falls short of the statutory expectation
of the
respondent’s obligations as a financial services provider.
202.
I agree that the disclosure is confusing. Once the respondent was a
counterparty and acting as principal, it was required to
be licensed
as an ODP. As broker, the respondent states that it would execute a
transaction similar to the client’s transaction
with another
market participant in the financial market. But if a broker, it is
unclear why it would be itself be executing a transaction
with
another market participant.
203.
The respondent’s explanation in its answering affidavit of the
disclosure in the agreement exacerbates the confusion:
“
On a
plain reading, the agreement states that the respondent cannot take
the position of both buyer and seller where it is the counterparty
to
a trade. This is important, as it protects the trader from collusive
trading.”
The disclosure does not say this, at least not on
a plain reading.
204.
The disclosure appears to be
verbiage to enable the respondent to adopt whichever position it sees
fit without clearly disclosing
its interests to the clients or what
steps it has taken to address any such conflict of interests, such as
by hedging. It does
not comply with the requirement in the General
Code that representations made and information provided to a client
by a financial
service provider must be in plain language, avoid
uncertainty or confusion and not be misleading.
[46]
205.
The respondent adopts
conflicting positions on whether there is a conflict of interests. In
some instances, it denies that there
is a conflict of interests,
[47]
although this conflict is inherent as a consequence of being a
counterparty in the CFD transactions. But it also acknowledges that

there is a conflict of interests, as appears from its disclosure in
its agreement.
206.
The respondent by engaging as the opposite party in the CFD
transactions placed itself in a conflict of interests position.
I do
not find that the existence of such conflict of interests is in
itself a basis for the respondent to be placed under winding-up
but
rather its continued obfuscation in relation to that conflict of
interests detrimentally impacts its compliance with its obligations

under the FAIS Act and the General Code.
207.
Paulsen, the respondent’s sole director and shareholder and key
individual under the FAIS Act, details his personal experience
and
expertise, having studied at the University of Cape Town where he
obtained a BCom Degree specialising in economics and finance
and
excelling in subjects focusing on equities, bonds, derivatives,
international finance, value at risk and investment ethics.
Paulsen
also describes his employment since graduation, including in the
banking sector and then later in a foreign exchange brokerage.
He
describes how he was exposed to institutional level projects, was
responsible for managing a team of people who worked on developing

new and innovative company integration to expand its user base as
well as working on the more technical aspects of the business,

including integrations to the Johannesburg Stock Exchange through
various platforms to ensure additional derivative instruments
could
be offered on the existing platform. The respondent describes how he
developed a sound understanding of the compliance elements
of the
business, including in relation to the FAIS Act and how he passed
various regulatory exams in relation to the FAIS Act.
208.
Notwithstanding Paulsen’s experience, the respondent, with
Paulsen at the helm, engaged in the obfuscation described
in this
judgment. Whilst it may be that the applicant as the relevant
financial sector regulator may have been slow in appreciating
the
nature of the derivative instrument business, which the respondent
asserts to be the position, that does not constitute a valid
reason
for the respondent not apply for an ODP licence and for the
respondent to have engaged in the obfuscation that it did.
209.
When it suited the respondent, it contended that it was rendering
intermediary services under FAIS and therefore it was not
required to
be licensed as an ODP under the FMA and the FMA Regulations. On the
other hand when it suited the respondent to advance
the position that
it was the opposite party in the CFD transaction, it would do so.
210.
That the respondent has belatedly on 21 August 2020 lodged its
application for an ODP licence is not a factor of sufficient
weight
to militate against the granting of a winding-up order. The continued
reluctance of the respondent and its deponent Paulsen
in his
answering affidavit to accept that the respondent was required to be
licensed under the FMA as an ODP, at least based on
the nature of the
respondent’s business as disclosed by it, further militates
against the honesty and integrity required
of the respondent as a fit
and proper person under FAIS.
211.
The applicant’s consideration that the interests of the clients
of the respondent as a financial service provider and
of the members
of the public require that the respondent be liquidated is
well-founded. The liquidation of the respondent is reasonably

necessary in order to protect the interests of the clients of the
applicant and for the integrity and stability of the financial

sector, as provided for in section 38B(2)(a) of the FAIS Act,
212.
The applicant has established that the respondent is liable to be
wound-up, whether under section 96 of the FMA or section
38B of the
FAIS Act, in circumstances where the respondent:
212.1 is required to be licensed as an
OTC derivative business under the FMA and FMA Regulations but is
unlicensed;
212.2 has engaged in the unlicensed
business of an OTC derivative provider since 14 June 2019, from when
it was necessary for the
respondent to have lodged its application
for licensing in terms of the FMA Regulations;
212.3 engaged in such unlicensed
business on a massive scale, with over 300,000 clients, and in which
R1 billon was paid out within
three months.
212.4 continued to engage in new
business after the provisional suspension of its FAIS licence;
212.5 has obfuscated in its
interactions with the applicant as the relevant financial sector
regulator, including during the course
of a statutory investigation
in terms of the FRSA in which the respondent was statutorily bound in
terms of section 139(3) to answer
all questions fully and truthfully,
to the best of its knowledge;
212.6 has not put forward any
substantiated alternate remedies to a winding-up order, including any
undertakings in relation to
its continued business activities if not
placed under winding-up;
212.7 remains under the helm of
Paulsen as its sole director and shareholder, and key individual.
213.
Even should it be that the respondent was not required to be licensed
as an OTC derivative provider under the FMA and the FMA
Regulations,
as the respondent maintains, and that the respondent is not regulated
under the FMA, the respondent in any event is
liable to be wound-up
under section 38B of the FAIS Act for the remaining reasons set out
above.
214.
I have considered that the respondent employs 70 staff and that the
respondent has now applied for an ODP licence. But these
factors do
not weigh sufficiently that a winding-up order should be refused.
215.
I do not intend setting a precedent that wherever a service provider
is unlicensed it is to be placed under winding-up in terms
of either
of the two sections. Each case must be considered on its merits. As
appears above, it is not only the failure of the
respondent to have
been licensed to conduct the business of an OTC derivative provider
but also the other factors that I have described
above that persuade
me that a winding-up order is to granted. To the extent that my
findings may have a broader effect on the regulation
of the
unlicensed conducting of the business of an OTC derivative provider,
particularly given the assertions that the others may
similarly be
conducting such unlicensed business, each case would have to be
considered on its own merits.
216.
Nonetheless section 96 of the FMA expressly refers to a winding-up to
achieve the objects of that Act and section 38B of the
FAIS Act
similarly provides that the court may take into account whether the
liquidation of a respondent is reasonably necessary
for the integrity
and stability of the financial sector, to the extent that this
judgment may advance the regulation of the business
of a OTC
derivative provider, then that is a factor to be taken into account
when deciding whether to grant a liquidation order.
This court is
specifically empowered, if not enjoined by the FMA and the FAIS Act,
to consider interests wider than those of the
respondent such as for
the integrity and stability of the financial sector as a whole.
RELIEF
217.
The applicant has sought a final winding-up order. I mooted with both
parties’ counsel whether the court was able to
grant an order
for provisional winding-up and if so whether it would be appropriate
relief. Neither parties advanced any reason
why a provisional order
would not be competent but both parties expressed doubts as to the
utility of the provisional order in
the present circumstances. The
applicant persisted in seeking a final winding-up order on the basis
that it had established its
entitlement thereto. The respondent
contended that the grant of a provisional order would in any event be
the death knell for the
respondent and therefore the granting of a
provisional order would not be of any assistance to it or serve as an
alternate remedy
to a final winding-up order to enable it to get its
house in order. In the circumstances, a final order will be granted.
218.
Although the respondent made submissions as to why reserved costs
arising out of the matter being before the urgent court on
two
earlier occasions should paid by the applicant and/or the applicant
should be disqualified from recovering those costs in the
winding-up
of the respondent, the applicant was justified in bringing the
winding-up proceedings on an urgent basis. The reason
why those
proceedings were not heard on the two previous occasions in the
urgent court was
inter alia
because of the extent of the
papers and the issues concerned which required, in terms of the
applicable practice manual and directives
of this court, to be
decided by way of expedited special motion proceedings.
219.
For the sake of completeness, a third party sought to intervene in
these proceedings, either as an ostensible creditor of the
respondent
contending that it was a client of the respondent who was owed monies
by the respondent and/or as
amicus curiae
. The submissions
that the intervening party sought to advance related to the
appropriateness of the appointment by the Master of
the High Court of
co-liquidators in addition to the liquidators nominated by the
applicant. Section 38B(2)(c) of the FAIS Act provides
that the court
shall appoint as liquidator a person nominated by the applicant. In
light thereof, the court is required to appoint
those persons
nominated by the applicant as liquidator. The submissions that the
intervening party sought to make were, in my
prima facie
view,
premature, as such representations would only arise consequent upon
such decisions the Master may make in due course as to
whether he is
entitled to appoint co-liquidators in addition to the liquidators
appointed by this court in terms of section 38B(2)(c).
Upon
expressing my
prima facie
view, the intervening party elected
to withdraw its participation in these proceedings. Neither the
applicant nor the respondent
sought any costs against the intervening
party. In the circumstances, nothing further need be said by the
intervening party’s
transient participation in these
proceedings.
220.
Accordingly, I grant the following order:
220.1 the respondent is placed under
final winding-up in the hands of the Master of the High Court,
Johannesburg in terms of
section 38B
of the
Financial Advisory and
Intermediary Services Act, 37 of 2002
and
section 96
of the
Financial
Markets Act, 19 of 2012
;
220.2 Corné van den Heever and
Tebogo Malatjie are appointed as the joint liquidators of the
respondent in terms of
section 38B(2)(c)
of the
Financial Advisory
and Intermediary Services Act, 2002
;
220.3 the applicant’s costs,
including any previously reserved costs, are costs in the winding-up
of the respondent.
___________________________
Gilbert
AJ
Date
of hearing: 25 August 2020
Date
of judgment: 7 September 2020
For
the Applicant: E Theron SC
Instructed
by: Mamatela Attorneys Inc, Johannesburg
For
the Respondent: J Muller SC and P R Long
Instructed
by: Hanekom Attorneys, Cape Town
[1]
Published under GNR98 in GG41433 of 9 February 2018.
[2]
Although the respondent asserts that the applicant is ambivalent as
to whether the respondent is required to be authorised under
the FMA
as an ODP, the applicant does positively assert in its founding
affidavit, such as in paragraphs 67 and 80, that the
respondent is
required to be authorised and again in its replying affidavit, such
as in paragraphs 89, 90 and 95.
[3]
As distinct from an ODP licence under the FMA and the FMA
Regulations.
[4]
Published as Board Notice 80 of 2003, published in terms of section
15 of the FAIS Act.
[5]
See, for example, Orestisolve (Pty) Limited t/a Essa Investments v
NDFT Investment Holdings (Pty) Limited
2015 (4) SA 499
(WCC) at para
9, citing Paarwater v South Sahara Investments (Pty) Limited
[2005]
4 All SA 185
(SCA) paras 3 and 4.
[6]
See “the robust approach” to dispose of fanciful
disputes in the application of the Plascon-Evans approach, Fakie
NO
v CCII Systems (Pty) Ltd
[2006] ZASCA 52
;
2006 (4) SA 326
(SCA) para 54 to 64,
especially para 63.
[7]
To use the phrase from Fakie above, para 54.
[8]
[2017] 4 All SA 624
(SCA).
[9]
2019 (5) SA 386 (SCA).
[10]
In trial proceedings, as those internal emails would have to be
discovered by the defendant, those emails would be capable of
being
adduced by the plaintiff into evidence in terms of rule 35(10),
without calling any witness.
[11]
The FMA Regulations has its own definition of a “counterparty”,
which appears to be different to the respondent’s
use of that
term. But that does not detract from the analysis. In any event, a
counterparty as defined in the FMA Regulations
is regulated.
[12]
Paragraph 65 of the founding affidavit; denial in paragraph 222 of
the answering affidavit.
[13]
A denial is inadequate to raise a bona fide dispute of fact where
the person making the denial is in possession of the relevant
facts
to amplify the denial: Wightman trading as JW Construction v
Headfour (Pty) Ltd and another
[2008] ZASCA 6
;
2008 (3) SA 371
(SCA) at 375G –
376B.
[14]
Section 267(5) of the FSRA.
[15]
Such as that in paragraph 9.2 of its formal response of 6 January
2020 that it was seeking guidance as to the points raised in
its
response as to why it asserted that it need not be licensed as an
ODP.
[16]
Section 1A(6)(d) of the FMA expressly provides that a reference to
an inspection in terms of the provision of the FMA must be
read as a
reference to an investigation in terms of the FSRA.
[17]
Para 18.
[18]
Para 26
[19]
Para 12
[20]
At 768A-E
[21]
Paragraph 70
[22]
Sections 1A of both the FMA and the FAIS Act provide that the
reference to an on-site inspection is to be read as a reference
to a
supervisory on-site inspection in terms of the FSRA.
[23]
By reason of the Item 9 of Schedule 5 to the
Companies Act, 2008
.
[24]
As read with item 9(1) of schedule 5 to the
Companies Act, 2008
.
[25]
Moosa N.O. v Mavjee Bhawan (Pty) Limited
1967 (3) SA 131
(T) at 136H
as referred to with approval in Muller v Lilly Valley (Pty) Limited
[2012] 1 All SA 187
(GSJ), para 16.
[26]
At 42H.
[27]
At para 33.
[28]
At paras 116.
[29]
At 135; see also paras 137 and 143.
[30]
At para 32.
[31]
At para 33.
[32]
Tjospomie above at 60G.
[33]
At para 116.
[34]
[35]
See Moosa as cited above, at 136.
[36]
Section 3(1)(e)
of the FRSA.
[37]
Section 3(1)(i)
of the FRSA.
[38]
Section 266
of the FSRA.
[39]
Citing Luppachini NO and another v Minister of Safety and Security
2010 (6) SA 457 (SCA).
[40]
See, for example, Fourie NO and others v Edeling NO and others
[2005] 4 All SA 393
(SCA) and Janse van Rensburg NNO v Steyn
2012
(3) SA 72
(SCA).
[41]
Citing Schierhout v Minister of Justice
1926 AD 99
at 109.
[42]
Section 16(1)(a).
[43]
Section 16(1)(d).
[44]
Section 16(1)(e).
[45]
The applicant also expressly stated in its provisional suspension of
the respondent’s FSP licence that the respondent’s

conduct is inconsistent with the personal character qualities of
honesty and integrity required of the respondent to be a fit
and
proper person, as required in terms of section 8A(a) of the FAIS Act
[46]
Section 3(1)(a)(ii) of the General Code.
[47]
Such as in paragraph 232 of the answering affidavit.