Many UK-based financial institutions had some involvement in equity trading of this kind. Many of the firms involved operated internationally and many of the trades were executed through the UK or by firms linked to the UK. Some UK-based financial institutions were also involved in ancillary roles as brokers or custodians.

The FCA's interest in cum/ex trading has been clear for some years. Unlike some of its counterpart authorities elsewhere in Europe, however, its focus (at least publicly) has been on regulatory matters (especially on systems and controls) rather than criminal investigation of the firms involved.

In June 2017, in its Market Watch newsletter, the FCA emphasised to firms that its own rules under the UK regime required firms to establish and maintain effective policies, procedures, systems and controls to ensure they are not used to facilitate market abuse, and to minimise the extent to which their businesses may be used for purposes connected with financial crime. It reminded both firms and senior managers of their responsibilities, as well as identifying a series of areas of concern.

Since then, publicly available information indicates the FCA has been actively investigating several firms and individuals. According to an FOI release in June 2022, five individuals and 11 organisations remained under regulatory investigation.

The FCA has also achieved a number of public enforcement outcomes, in particular:

• a fine of £178,000 against Sapien Capital Ltd in May 2021 (see: FCA fines Sapien Capital as FCA investigations continue in relation to cum/ex trading, LNB News 06/05/2021 79 (Subscription required))
• a fine of £642,400 against Sunrise Brokers LLP in November 2021 (see: FCA fines Sunrise Brokers LLP £642,400 for financial crime control failings in relation to cum/ex trading, LNB News 12/11/2021 58 (Subscription required))
• a fine of £2,038,700 against TJM Partnership Ltd in July 2022 (see: FCA fines The TJM Partnership Ltd £2m for failings in relation to cum/ex trading, LNB News 15/07/2022 35 (Subscription required))

On 6 June 2023, the FCA published details of its largest fine yet in respect of cum/ex trading. It imposed a financial penalty of £17,219,300 on MCM in respect of breaches of Principles 2 and 3 of the FCA's Principles for Businesses (PRIN).

Principle 2 requires a firm to conduct its business with due skill, care and diligence. In MCM's case, the FCA found this Principle was breached because:

• relevant compliance and Senior Management personnel lacked understanding of its equity finance business and took no steps to increase their level of understanding while it continued
• relevant compliance and Senior Management personnel failed to take steps to oversee the relevant equity finance business and ensure it was properly reviewed and monitored, and
• the firm failed to exercise due skill or care in ensuring risks arising from dividend arbitrage trading were properly considered or understood

Principle 3 requires a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. The FCA found that MCM breached this by:

• not having a system in place to ensure necessary legal and tax opinions were obtained and considered
• not having a system in place to check that the trading was in fact in accordance with such legal or tax opinions as MCM were under the impression existed, and
• not having a system in place to monitor or review the trading undertaking by the equity finance business

In our view, the latest FCA decision continues a trend in the FCA's approach to such cases.

The types of issues on which the FCA had focused in its enforcement cases prior to MCM included:

• failures to apply and follow anti-money laundering policies
• failures to carry out proper risk assessments and enhanced customer due diligence of the entities involved in relevant trading activity
• failures in transaction monitoring and the identification of potentially suspicious transactions
• failures to respond to numerous 'red flags' with trading, such as (in some cases) highly complex structures, of high value but apparently circular in economic effect, and accordingly (in the FCA's view) 'highly suggestive' of financial crime

The FCA found a number of similar issues in the MCM case. Its focus remained on the adequacy of the firm's systems and controls against financial crime.

A number of points do, however, stand out from the latest decision. We suggest these are of interest not only to enforcement practitioners but also to compliance teams dealing with complex trading 'on the ground'.

(1) Size of the fine / penalty calculation

The financial penalty in the MCM case is the FCA's largest so far in respect of cum/ex trading. The size of the fine reflects the FCA's approach to the seriousness of the breaches, as well as the direct financial consequences of them in terms of 'illegitimate' claims for tax refunds made to the relevant authority.

In the MCM case, the FCA identified £10.481bn of cum-dividend trades conducted by MCM's equity finance business (‘Equity Finance Desk’) between February 2012 and March 2015, via its unregulated equity trading business based in Dubai (‘MPT Dubai’). Equities to the value of £4.025bn were traded pursuant to a strategy which took advantage of a double taxation treaty between Denmark and the USA (‘Danish Trading Strategy’), which allowed US shareholders to reclaim withholding tax from the Danish tax authority (Skatteforvaltningen, or SKAT). Tax reclaims of approximately £65.463m were made, and SKAT paid out approximately £20.45m in withholding tax claims to US-based pension plan clients of MCM, which were established to be illegitimate. MCM made approximately £5.06m from these, by way of fees. (The facts as found by the FCA are set out more fully in the final notice).

The fees made by the firm from the trading were included in the FCA's financial penalty assessment by way of disgorgement.

Further, the FCA identified the case as of 'level 4' seriousness in the application of its penalties policy. It noted in its reasoning a series of factors including:

• the loss/risk of loss to other market users 'systemic' weaknesses in procedures
• the risk of facilitating financial crime, and 'aspects of recklessness' in the firm's behaviour, including senior individuals in the relevant business and compliance allowing the trading to proceed without meaningful checks, despite the fact that they did not understand the relevant trading

(2) The role of legal/tax opinions in scrutiny and oversight of the trading activity

The FCA's decision contains useful information about its approach to firm's use of tax and legal opinions to support complex trading of this kind.

The FCA found that MCM had approved the relevant business undertaken by the Equity Finance Desk on the basis of certain legal and tax opinions, commenting that these had been of ‘central importance’ to the operation and oversight of the relevant desk. Reliance had apparently been placed upon the existence of such opinions at desk, Senior Management and Compliance levels.

The FCA found, however, that there were ‘no meaningful systems and controls’ in place to ensure that such opinions were actually obtained, or to check that the trading had been carried out in accordance with them.

The FCA found that the firm had undertaken annual compliance risk assessments, but these had been cursory and insufficient to give assurance that the opinions had actually been obtained or that the trading had been carried out in accordance with them.

On the facts as found by FCA, during the first such assessment in 2012, information had been obtained from the Senior Manager with responsibility for the relevant business to the effect that such legal and tax opinions had been obtained but were 'historical'. This had not been adequately challenged by the firm's compliance team. The FCA found no evidence of any legal or tax opinions having actually been obtained in relation to the dividend arbitrage trading by MCM during the period in issue. The 'historical' legal opinion to which the Senior Manager referred appeared to have related to the fact that, in April 2012, that Senior Manager engaged a global law firm regarding the strategy, and that law firm described it as 'extremely aggressive'; no written opinion was ever provided.

(3) Compliance failures, including the incorrect assessment of risk

The FCA made a number of negative findings about the firm's compliance function, which were not dissimilar to its findings made of other firms in previous cases.

Among them, however, the FCA emphasised that MCM's compliance function had not taken steps to understand the trading strategies or to give proper consideration to the possibility of risks arising, despite high trade volumes and the high value of reclaims being made pursuant to it.

In particular, the FCA found that the firm's obligations as to ongoing monitoring, deriving from the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692, had been ‘disregarded’.

Interestingly, however, it appears from the Final Notice that the firm in this case did consider (but discounted) the risks of market abuse and money laundering. The financial crime risks that the FCA found had not been considered were other types of risk, implicitly risks around withholding tax fraud. With respect to the issue of tax vouchers by the firm's Operations Desk (used for processing tax reclaims and required by tax authorities outside the UK in approving claims for withholding taxes and making payments), the FCA found that the ‘individual responsible for producing the tax vouchers did so even in circumstances where they knew no divided had been paid and no tax had been withheld’ (para 4.34 of the Final Notice).

It appears that, at this time, the FCA's focus in cases like these remains on the regulatory issue of firms' systems and controls, particularly against financial crime. Given the scale of the trading, the number of jurisdictions involved and time period over which the trading took place, however, we do not anticipate this will be the last of the FCA's decisions in relation to cum/ex trading.