Having a FAIS licence does not mean that a trading platform can issue over-the-counter (OTC) derivatives, including contracts for difference (CFDs), as principal in South Africa. To do this, the entity must have an OTC derivative provider (ODP) licence.
DLA Piper legal director Bridget King and associate Byron Bromham said investors should be aware of the licensing requirements for trading in derivatives, such as CFDs.
The FAIS Act regulates all FSPs who provide advice and/or intermediary services in relation to a range of “financial products”, including derivatives.
King and Bromham said that, in simple terms, CFDs are a type of derivative instrument:
- In the form of a contract between two parties, such as an investor and a CFD provider;
- That allow the parties to trade in the price movement of underlying securities; and
- In terms of which the difference in the settlement between the opening and closing trade prices is cash-settled between the parties.
Therefore, any service provider that provides advice or intermediary services, including marketing and sales activities, in relation to CFDs in South Africa needs to be licensed by the FSCA in terms of the FAIS Act.
However, they point out that a FAIS licence does not mean that an FSP may issue or write CFDs as principal.
Financial Markets Act and CFDs
The regulations published in 2018 under the Financial Markets Act (FMA) define an ODP as a person who as a regular feature of its business and transacting as principal originates, issues or sells OTC derivatives, or makes a market in OTC derivatives.
Therefore, any person who issues, sells, or makes a market in trading CFDs as principal and as a regular feature of business must apply to the FSCA to become an authorised ODP under the FMA, King and Bromham said.
Penalties for not being licensed
Any person who is not licensed under section 8 of FAIS Act to provide advice or intermediary services in relation to a financial product will, on conviction, be liable to a fine not exceeding R10m or to imprisonment for up to 10 years, or both.
In terms of section 109 of the FMA, any person who issues CFDs as principal and as a regular feature of business, without an ODP licence, is liable on conviction to a fine not exceeding R10m or to imprisonment for up to five years, or both.
In addition to the penalty imposed under the FMA, section 111(1) of the Financial Sector Regulation (FSR) Act states that no person may 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, such as the FAIS Act and the FMA.
King and Bromham said this means an unlicensed person may not:
- Provide advice or intermediary services in relation to CFDs without an FSP licence; or
- Trade CFDs as principal and as a regular feature of business without an ODP licence.
Any person who fails to comply with section 111(1) of the FSR Act may be liable upon conviction to a fine not exceeding R15m or to imprisonment for not exceeding 10 years, or both.
Look before you leap
Trading in CFDs with service providers that pose as licensed FSPs and/or ODPs, whereas they are not, poses a significant risk to members of the public.
Investors should confirm with the FSCA (toll-free number 0800 110 443) that an entity or individual is registered as an FSP and/or an authorised ODP before trading CFDs on any online platform, King and Bromham said.