Compliance Corner: FCA Fine Capital Markets Firm Over "Serious Failings"

Editorial Staff 7 June 2023


The latest compliance news: regulatory developments, punishments, guidance, permissions, new product and service offerings.

Financial Conduct Authority, ED&F Man Capital Markets
The Financial Conduct Authority has fined ED&F Man Capital Markets  £17.219 million ($21.3 million) for “serious failings” in its oversight of cum-ex trading.

(A cum ex transaction involves three parties that move a share position around just before the dividend payment date. After the transaction, the shares end up with the same party whose position remains the same. A dividend tax refund is claimed not once but twice.)

These failings allowed MCM to collect fees for trading strategies designed to enable its clients to illegitimately reclaim tax from the Danish authorities, the FCA said in a statement on Monday. 

This is the fourth case brought by the FCA in relation to cum-ex trading and the largest fine so far.

The regulator said that as MCM has not disputed the FCA’s findings and agreed to settle, it qualified for a 30 per cent discount under the FCA’s Settlement Discount Scheme. The fine includes £5.06 million of income forfeited by MCM as a result of their breaches in relation to cum-ex trading.

Between February 2012 and March 2015 MCM enabled significant volumes of dividend arbitrage trading on behalf of clients, allowing clients to make withholding tax reclaims. 

It is established that £20 million of the WHT reclaims made by MCM’s clients to the Danish tax authority were illegitimate. A Dubai-based trading firm within the same corporate group as MCM participated in the trading strategy which resulted in these illegitimate WHT reclaims from SKAT. These reclaims were illegitimate because under this strategy WHT was reclaimed despite no shares being owned or borrowed, no dividend being received, and no tax being paid. MCM generated £5.06 million in fees from this, the UK regulator said.

MCM had inadequate compliance checks and failed to ensure that this dividend arbitrage trading was legitimate, the FCA said. 

The firm’s compliance function did not have the necessary expertise to monitor or review the trading and only carried out a high-level annual compliance review of the department responsible. It failed to take any steps to understand the trading activities or properly consider the risks of dividend arbitrage trading. 

“MCM facilitated a significant volume of trades for the purpose of making illegitimate tax reclaims from the Danish Exchequer and earned themselves significant fees. It is completely unacceptable for authorised firms to make money from this kind of trading. It’s essential that all firms have the right controls and expertise in place to avoid the risk of being used to facilitate financial crime,” Therese Chambers, joint executive director of enforcement and market oversight, said.

This action is part of a range of measures taken by the FCA in connection with cum-ex dividend arbitrage cases and WHT schemes, which has involved proactive engagement with global law enforcement authorities.

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