FCA views Cum-Ex Trading as “Abusive”

As our followers on LinkedIn will know, one of FMCR’s areas of expertise is on the complex business of what has become known as ‘Cum-Ex’ trading.

Cum-Ex trading was a dividend arbitrage strategy which exploited a loophole that allowed multiple parties to claim identical withholding tax refunds, by selling a stock short to a tax-advantaged buyer just before the dividend date and then covering this sale ex-dividend by buying in from a 3rd party share provider. The shares were then returned to the provider by the Cum-Ex buyer. In this way both the share provider and the Cum-Ex buyer were able to claim a withholding tax refund even though only one amount of withholding tax had been deducted from the single dividend paid.

“the FCA expressed a view that, in their opinion, Cum-Ex trading was ‘abusive’”

The practice mainly impacted continental European tax jurisdictions as the UK has no requirement to deduct withholding tax from dividends; however, much of the trading was done from the City. Estimates of the losses suffered by governments from dividend arbitrage-type activities range from EUR 10 billion in Germany to a total of EUR 55 billion across Europe as a whole. Needless to say, European governments, having woken up to the losses they experienced, are now trying to recoup them through litigation.

In London, in February 2020, the FCA expressed a view that, in their opinion, Cum-Ex trading was ‘abusive’ and they said they were working closely with European authorities. In June 2020 they followed this by issuing a warning notice against an unnamed trader on the back of information provided by Skatteforvaltningen, the Danish Customs and Tax Administration, (‘SKAT’).

SKAT separately brought five claims in London against around 100 defendants claiming damages of around GBP 1.3 billion and earlier this year, the FCA divulged, in a Freedom of Information Act request, that they had also commenced investigations against 14 firms and 8 individuals involved in Cum-Ex trading in the UK.

At the same time, in a highly unusual move by the London courts, Mr. Justice Jonathan Swift ordered the FCA to stop its investigation into the anonymous trader until a number of legal issues had been resolved in the SKAT case, including whether the alleged fraudulent scheme was in fact consistent with market practice.

In the event, the SKAT case was dismissed in its entirety by Mr. Justice Andrew Barker in July on the grounds that it was inadmissible under the ‘Revenue Rule’, which disallows one sovereign state from asserting its authority within the territory of another state. By dismissing the case completely, the question of whether Cum-Ex trading in the UK had been illegal or abusive was never addressed and the FCA was left only being able to describe it as ‘highly suggestive of financial crime’.

This did not stop the FCA from pursuing other avenues of investigation into Cum-Ex trading and in May they fined Sapien Capital Ltd. for failure to exercise due skill, care and diligence in applying anti-money laundering and financial crime policies and procedures and for failing to properly perform effective risk assessments on clients introduced by the Solo Group, one of the defendants in the SKAT case.

More recently, on 24th August, the FCA gave notice to Sunrise brokers, an interdealer broker, that it was proposing to take action on the same grounds as those taken against Sapien Capital. It is likely that these investigations will become more commonplace and all authorised firms, involved in Cum-Ex trading in any way, should review their procedures to ensure that they met the regulatory requirements for anti-money laundering and financial crime prevention at the time.

FMCR provides technical knowledge and experience on Cum-Ex and Cum-Cum, including forensic data analysis and conduct reviews.