The Financial Conduct Authority has hit City broker ED&F Man Capital Markets with a record £17.2m fine for “serious failings” in its oversight of a murky cum-ex trading strategy.
In a statement today, the watchdog said the failings from ED&F Man allowed it to collect millions of pounds of fees for the trading strategy as its clients illegitimately reclaimed tax from Danish authorities.
Cum-ex trading strategies generally involve building a position in a jurisdiction which offers favourable tax treatment to the holder. Between February 2012 and March 2015, the FCA said the ED&F Man enabled “significant volumes of dividend arbitrage trading on behalf of clients, allowing clients to make withholding tax reclaims”.
“It is established that £20m of the WHT reclaims made by MCM’s [ED&F Man Capital Markets] clients to the Danish tax authority (SKAT) were illegitimate,” the FCA said.
“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.”
The reclaims were illegitimate because tax was reclaimed despite no shares being owned or borrowed, no dividend being received, and no tax being paid, the FCA said. The firm generated £5.06m in fees from the strategy.
In a statement today, a spokesperson for firm said the FCA’s action relates to a legacy business area that was shut down by MCML in 2015.
“It was specifically excluded from the sale of assets to Marex and is a contingent liability that was ring-fenced as part of that transaction,” the spokesperson said. “It will now be possible to take the final steps in deregulating and closing the MCML business.”
The fine marks the fourth case brought by the FCA against cum-ex trading and is the largest fine for cum-ex trading so far.
ED&F has not disputed the FCA’s findings and agreed to settle and has qualified for a 30 per cent discount. The fine includes £5.06m of income forfeited by MCM as a result of their breaches in relation to cum-ex trading.
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.
Marex’s purchase of ED&F was found to have boosted the firm in recent months, with the London-based business reporting a 53 per cent jump in adjusted pre-tax operating profit in 2022.