With the growing popularity of online investment platforms, spurred by advancements in digital financial services and the rise of crypto assets, the risk of exploitation of consumers and financial services providers has increased.
A recent case in point is Banxso, a Cape Town-based online trading group that, until recently, operated an online investment platform allowing consumers to purchase and sell financial products. On 4 July, the Financial Sector Conduct Authority withdrew Banxso’s FSP licence following allegations of non-compliance with certain financial sector laws. The FSCA’s investigation was prompted by claims that customers were misled into investing via deepfake videos and social media advertisements featuring billionaire celebrities such as Elon Musk purportedly endorsing Banxso.
These customers were directed to register via Immediate Matrix on Banxo’s platform, which Banxso claims occurred without its knowledge as a result of a “malicious attack”. Customers were then contacted by alleged Banxso agents promising substantial returns. Although some initially earned profits, many subsequently suffered significant losses.
This article considers the measures that FSPs and retail customers can take to protect themselves in the online investment space.
Steps FSPs and CASPs can take
FSPs and crypto asset service providers (CASPs) can reduce their exposure to risks through the following actions:
- Regularly review internal policies and procedures to assess whether the entity is meeting its fit and proper requirements.
- Where the compliance function is outsourced, implement clear, robust control measures to assess performance and clarify the role of the outsourced provider.
- Regularly stress test internal frameworks to ensure service delivery meets standards of honesty, integrity, and good standing.
- Maintain a robust and responsive complaints management framework to identify improper or deceptive use of the FSP’s name or branding, or the identity of key persons.
- Establish clear reporting lines to ensure concerns, particularly around the misappropriation of identity or brand, are escalated promptly to the FSCA or other competent authorities.
- CASPs should ensure operational frameworks are tailored to the specific nature of crypto asset businesses.
- Develop and implement a cybersecurity strategy that includes prompt cyber incident reporting to the FSCA.
- Ensure that all adverts (whether internally produced or third-party generated) are accurate, balanced, and not misleading.
- Ensure there is a robust complaints framework, so that complaints received from members of the public are handled in a timeous and comprehensive manner.
Despite these precautions, the risk of illicit use of an FSP’s or CASP’s name or likeness remains. Vigilance and foresight are therefore essential.
Steps retail customers can take
Retail customers should take the following steps to guard against investment scams:
- Verify that the FSP or CASP is authorised for the financial services it offers by checking its registration on the FSCA’s website through the FSCA’s public search functionality of FSP registrations.
- Treat any offer promising disproportionately high returns with If it seems too good to be true, it probably is.
- Be alert to coercive tactics, such as persistent requests for further investment, which may signal fraud.
- Submit complaints to the FSCA or, where applicable, the National Financial Ombud Scheme, which outlines the complaint process and participating FSPs on its website.
- Customers should carefully review and assess the FSP’s or the CASP’s terms and conditions and understand the risks of investing in financial products, particularly those promising high
- Familiarise yourself with the Treating Customers Fairly (TCF) principles to understand your rights as a The FSCA’s MyMoney Learning series is a helpful online resource.
- Where advertises feature prominent individuals, verify with the FSP or CASP whether the endorsement is legitimate. Customers can also report suspicious adverts to the FSCA.
Investment products and the world of online investment platforms can seem daunting to the layperson. Dishonest conduct and precarious investment opportunities are becoming increasingly prevalent. It is important to exercise caution and consideration and to know where assistance can be sought.
Modern investment is evolving at a pace that outstrips the development of regulatory frameworks. This makes it is increasingly difficult to regulate newer, novel forms of investment and online platforms. Financial products are now more complex, and globalisation has opened markets beyond traditional geographical borders. There is also a growing cyber security risk, with customers and FSPs or CASPs facing threats such as scams, data breaches, and hacks.
The measures outlined above can assist in safeguarding against improper and deceptive practices. In doing so, FSPs and CASPs can minimise their exposure to risks, and customers can better protect their hard-earned funds.
This article was written by Lerato Lamola, a partner at Webber Wentzel, and Mateen Memon, who is an associate at the law firm.
