UK Financial Conduct Authority Fines Arian Financial LLP £288,962.53 For Failings Relating To Cum-Ex Trading

Arian’s failure to implement adequate systems and controls against financial crime put it at risk of being used to support fraudulent trading and money laundering on behalf of clients of the Solo Group.

This is the seventh case brought by the FCA in relation to cum-ex trading and withholding tax schemes. This has involved proactive engagement with EU and global law enforcement authorities. The FCA has imposed fines of more than £22m in relation to this trading.

Arian executed purported over-the-counter equity trades of approximately £37 billion and £15 billion in Danish and Belgian equities on behalf of the Solo Group’s clients, receiving commission of approximately £546,949.

The trading was, throughout the period, circular, which is highly suggestive of financial crime. It appears to have been carried out to allow the arranging of withholding tax reclaims in Denmark and Belgium.

In 2014 and 2015, the Solo Group made withholding tax reclaims of £899.27m and £188.00m to Danish and Belgian authorities, with approximately £845.90m and £42.33m respectively paid.

Arian admitted liability but referred the FCA’s proposed fine to the Upper Tribunal. The Tribunal reduced the fine that the FCA would have imposed from £744,745 to £288,962.53. The Tribunal agreed with the FCA’s assessment of the seriousness of the misconduct and the need to impose a penalty. However, the Tribunal reduced the fine as, in the circumstances, it considered the financial benefit Arian received should be net of certain fees Arian paid to Solo and the broker in respect of the trades.

Steve Smart, Joint Executive Director of Enforcement and Market Oversight, said:

'Arian failed to identify red flags which ought to have been obvious. The controls the firms we regulate have in place are an important line of defence against our financial system being abused for criminal ends. Arian’s fell short of what we expect. We are pleased that the Tribunal recognised the seriousness of Arian’s misconduct.' 

Background

1. Final Notice: Arian Financial LLP (PDF) 
2. Read the Tribunal decisionLink is external  dated 11 November 2024.
3. Arian breached Principle 2 and Principle 3 of the FCA’s Principles for Business between 29 January 2015 and 29 September 2015.
4. Principle 2 of the FCA’s Principles for Business states that 'A firm must conduct its business with due skill, care and diligence'.
5. Principle 3 of the FCA’s Principles for Business states that 'a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems'.
6. This is the seventh case brought by the FCA in relation to cum-ex trading. The previous six FCA cases relating to cum/ex trading concluded in May 2021 – Final Notice: Sapien Capital Ltd, November 2021 – Final Notice: Sunrise Brokers LLP, July 2022 – Final Notice: TJM Partnership Limited (in liquidation), June 2023 – Final Notice: ED&F Man Capital Markets Ltd, July 2023 – Final Notice Bastion Capital London Ltd and September 2023 – Decision Notice: Nailesh Teraiya.
7. The Solo Group consists of four previously authorised firms: SCP, West Point Derivatives Ltd, Old Park Lane Capital Ltd and Telesto Markets LLP.
8. Clients of the Solo Group refers to entities that the Solo Group introduced to Arian and other broker firms. Arian executed purported equity trades on behalf of some clients of the Solo Group during the Relevant Period.
9. Cum-ex trading involves trading of shares on or just before the last cum-dividend date. If in a suitable jurisdiction this can then allow a party to claim a tax rebate on withholding tax, sometimes without entitlement.  
10. The intention of dividend arbitrage trading (of which cum-ex is an example) is to place shares in alternative tax jurisdictions around dividend dates, with the aim of minimising withholding tax or generating withholding tax reclaims. This may involve several different trading activities including trading and lending securities and trading derivatives, including futures and total return swaps, designed to hedge movements in the price of the securities over the dividend dates. 
    Withholding tax is a levy deducted at source from income and passed to the government by the entity paying it. Many securities pay periodic income in the form of dividends or interest, and local tax regulations often impose a withholding tax on such income. In certain cases where WHT is levied on payments to a foreign entity it may be reclaimed if there is a formal treaty, called a double taxation agreement (DTA), between the country in which the income is paid and the country of residence of the recipient. DTAs allow for a reduction or rebate of the applicable WHT.
11. The FCA publication of Market Watch 52 highlighted various issues and concerns around dividend arbitrage in 2017. FCA contributed to the European Securities and Markets Authority (ESMA) Final Report on Cum-Ex, Cum-Cum and WHT in 2020.