Davy's fined €4m by Central Bank

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Brendan Burgess

Brendan Burgess

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The Central Bank’s investigation arose from a transaction a group of 16 Davy employees (the Consortium) undertook in a personal capacity with a Davy client (theClient) in November 2014 (the Transaction). Within the Consortium was a group of senior executives (the Committee). In permitting the Transaction, Davy prioritised facilitating an opportunity for the Consortium to make a personal financial gain over ensuring that it was complying with its regulatory obligations. The Transaction highlighted a weak internal control framework within Davy in relation to conflicts of interest management and personal account dealing. All of this served to create an elevated risk of investor detriment.

Following details about the Transaction becoming public four months after it occurred, Davy contacted the Central Bank to provide an explanation. At that stage, Davy failed to disclose the full extent of the wrongdoing. This lack of candour was treated as an aggravating factor in this
 
The Transaction

In 2014, the Client opened an execution only account1 with Davy for the purposes of carrying out the Transaction and transferred bonds into Davy. The Consortium subsequently entered into an agreement with the Client to advance a loan to settle debt secured on the bonds and to buy the bonds from the Client at an agreed price. Davy took no steps to ensure that the Client was aware that the Consortium was comprised of Davy employees. No written disclosure was made to that effect.

The Transaction involved an off-market transfer.2 Following instructions, Davy transferred the bonds internally from the Client’s account to the Consortium’s account on System B. A payment was made by Davy, from Davy funds, on behalf of the Committee. This was repaid by the Committee later the same day. Three weeks later the Consortium sold a large tranche of the bonds to a fund manager. In the weeks prior to that sale, certain Consortium members engaged with interested buyers to provide a Davy “house view” on the value of the bonds. In so doing, the Consortium members drew no distinction between whether they were acting in a professional capacity (i.e. as broker) or personal capacity, as the seller of the bonds. The Central Bank’s investigation found this to be a particularly serious example of the many potential conflicts of interest that can arise between a firm, its clients and its employees, in the course of one transaction.

There are two important features of the Transaction, as follows:

(i) It was between Davy employees and a Davy client – this meant that Davy’s obligations under the MiFID Regulations in relation to conflicts of interest were triggered; and

(ii) As a group, the Consortium members were dealing in their personal rather than professional capacity – this meant that Davy’s obligations under the MiFID Regulations in relation to personal transactions were triggered.
 
When information about the Transaction entered the public domain, Davy contacted the Central Bank to provide an explanation. During the course of that first engagement, Davy provided vague and misleading details and wilfully withheld information that would have disclosed the full extent of the wrongdoing as was known to Davy at the time.

The Central Bank subsequently wrote to Davy identifying specific areas of concern and seeking additional information from Davy. In a letter of response, Davy once again failed to disclose the full extent of the wrongdoing as it was known to it at the time.

It was only after the commencement of the investigation that the Central Bank realised the extent of the inaccurate information provided. In particular, the information provided by Davy was presented in such a way as to make the involvement of certain individuals appear more central to the Transaction than in fact was the case. This has been treated as an aggravating factor in the case.
 
That is just shocking. Well actually it probably isn't. Surely at this stage after what we have been through, we can name people involved with this type of conduct? They should never work in Financial Services again.
 
It might just be too early - the Regulator has to prove participation before it can go after individuals....
 
Sk1982 said:
It might just be too early - the Regulator has to prove participation before it can go after individuals....
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I think that the Central Bank makes it clear in the last line that they are not going after individuals.
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However, it's quite possible that the Central Bank has let the staff involved know that they will not be approved for any further senior positions.

Brendan


 
I would at least have thought that the Committee member who misled Davy Compliance would be at risk?
 
Following on from SBarretts comment above, is it wise to be using Davy for share dealing activities?.
There costs for execution only accounts are quite expensive and the only reason I have my account with them was mainly based on their reputation.
 
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Bluefin said:
based on their reputation.
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What is their reputation? They certainly put out a lot of publicity but as far as I know their reputation within the industry is one of the worst. I've heard a few brokers say it's a case of 'anyone but Davy'.
 
Bluefin said:
Following on from SBarretts comment above, is it wise to be using Davy for share dealing activities?.
There costs for execution only accounts are quite expensive and the only reason I have my account with them was mainly based on their reputation.
Click to expand...
www.rte.ie

Man awarded €2.1m over Davy's 'deliberate neglect'

A "very vulnerable" young man with intellectual and other difficulties having suffered two strokes by the age of ten has been awarded €2.1m by the High Court against stockbroking firm J & E Davy over its "deliberate neglect" of him resulting in substantial investment losses.
www.rte.ie www.rte.ie
 
Surely people in Davy should get fired for this.

And if this is what they do that gets found out, what else do they do that we don’t know.
 
There's been many threads on AAM about stock trading platforms...the impression that I've gotten is that there's always been concern over firms that charge very litte commission on trades.. What is one to do!
 
As per The Irish Times, members of the consortium included the chief exec, deputy chairman, head of bonds, former chief exec and one time head of institutional equites. This is something that was right at the top of the organisation.

Disclosed in the Central Bank report, when the client and his financial advisor approached Davy, they dealt with an employee in getting the deal in place. It was agreed that the profit would be split between the client, the financial advisor and the Davy employee, a clear breach of Mifid regulations. That employee was also part of the consortium that was on the other side of the table, but he never saw the need to tell the client?!!

Also, this was 2014 and there's still trading in Anglo bonds going on?!!!!




www.irishtimes.com

Minister urges clarification from Davy after record €4.1m fine

Top figures at stockbroking firm involved in bond deal that fell foul of conflict of interest rules
www.irishtimes.com www.irishtimes.com
 
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