Ireland’s biggest stockbroker Davy Group is hunting for a new owner after failing to contain a scandal that casts a shadow over Dublin’s prospects as a post-Brexit EU finance centre.
The country’s central bank fined the broker a record €4.1m earlier this month after finding that 16 Davy staff, including some senior executives, set up a consortium to buy Anglo Irish Bank bonds from a client, without telling the client they were the buyer.
Initially, Davy was silent on the matter. But following political pressure, it apologised “unreservedly” on March 3. Outrage over the affair has since dominated Ireland’s airwaves and parliamentary sittings a decade after the country suffered a banking crisis that prompted a national bailout and painful austerity. Now, the 95-year-old broker and wealth manager is up for sale.
“They completely misjudged the public attitude . . . they hadn’t moved their mindset,” said Prof Niamh Brennan, academic director at University College Dublin’s Centre for Corporate Governance.
The issue stems back to trades that took place in 2014, when the Davy staff consortium bought bonds from a client without telling the client that it was the buyer. It later sold a “large tranche” of the bonds to a fund manager after the bank provided a “house view” to investors on the bonds’ value, again without disclosing that some Davy staff marketing the bonds also owned them. The transaction was structured to avoid Davy’s compliance systems, which the regulator criticised as “weak”.
The initial seller sued Davy, claiming the broker lowballed him on the €5.58m he received for the bonds, in a case that settled at the High Court in 2016. But the Central Bank launched an investigation based on the points alleged in the court proceedings, particularly that Davy “wilfully withheld” key information about what happened. That probe dragged on for five years.
“The behaviour by Davy executives was absolutely unacceptable and, I think, reveals an appalling culture of greed, and has damaged the reputation of the financial services sector in this country,” Ireland’s prime minister Micheál Martin told the country’s parliament on March 11.
Three key Davy figures, including its chief executive Brian McKiernan, stepped down last weekend. Davy also lost of its role as a primary dealer in Irish government debt and announced the closure of its bond desk. The government mandate brought more cachet than cash, the bond desk closures triggered four redundancies in a firm with about 700 staff.
Rival firms said the real risk was losing other clients, particularly the companies using Davy as their corporate broker that might be pressed to cut ties by governance-minded investors.
So far, Ireland’s National Treasury Management Agency is alone in ditching Davy, though others, including food company Glanbia, have said they are monitoring events.
“Davy’s outreach to clients has been non-existent,” said one corporate client. But he does not expect a mass exodus. “If you’re not planning to do something [with Davy] immediately, you’d wait and see what happens,” he said.
“You don’t want the thing to implode and you don’t want to do anything to precipitate that,” he added, stressing the paucity of other options in the Irish market. “It’s important to keep competition in the sector,” echoed a senior executive in a large ISEQ-listed company.
A former Davy’s executive said the firm’s wealth management clients were more likely to take fright, since that relationship implied a higher duty of care than the relationship with executives at companies and institutions, who are “adults”.
Ireland has many wealth managers ready to step into Davy’s shoes and still has 14 primary dealers of government bonds. Even in equities, where Davy is a key player, “there isn’t too much of a concern” about market functioning because “a lot of European brokers that are not based in Ireland can give you access to that,” said Reinder Van Dijk, partner at Oxera Consulting in London.
The concerns are more about the “ecosystem” of Dublin as a financial centre. “The timing is a bit unfortunate as well because post Brexit, Amsterdam, Paris, all the financial centers are sort of positioning themselves,” he added.
The best hope is a quick sale of Davy from the staff and former staff who own it — a group that includes the three figures who stepped down in the wake of the scandal.
Bank of Ireland, the country’s second-largest lender, has emerged as an early suitor. BOI sold its brokerage arm IBI in 2017, partly because a bonus ban at bailed-out banks and their subsidiaries was making the firm uncompetitive.
BOI has long wanted to get back into that business, two people familiar with the bank’s thinking said. Ireland’s other big bank AIB set a helpful precedent when it won approval to pay bonuses to the staff of the country’s other big broker, Goodbody’s, which it will soon own.
As for Ireland, it just wants the scandal to be over, and the country’s finance minister Paschal Donohoe was quick to throw his support behind Davy’s efforts to find a new owner, in the interests of “a stable, well managed local stockbroking community to support indigenous companies”.