It seems safe to assume that Tuesday was the worst day in the 95-year history of Davy, the grandee of Irish stockbrokers. It was hit with a record Central Bank of Ireland fine of €4.1 million for breaching market rules on conflicts of interest. But that is a drop in the ocean compared to the reputational cost that could result.
According to the Central Bank, Davy prioritised "facilitating an opportunity" for a staff consortium "to make a personal financial gain over ensuring that it was complying with its regulatory obligations". The regulator said the transaction highlighted a "weak internal control framework within Davy in relation to conflicts of interest management and personal account dealing", all of which created an "elevated risk of investor detriment". Davy also dragged its feet in how it dealt with the Central Bank's inquiry.
The fine relates to a trade in bonds in the now- defunct Anglo Irish Bank. A group of 16 Davy staff, including top executives, sought to profit personally by taking the opposite side of the transaction with a client in 2014 – while failing to tell either the client or its own compliance officials.
It was an extraordinary breach of client trust and due process. The Irish Times has established that membership of the consortium goes right to the top of Davy, past and present. Current chief executive Brian McKiernan was a member of the consortium, along with predecessor Tony Garry, deputy chairman Kyran McLaughlin, and a number of other senior executives.
Trust goes to the very heart of client relationships in stockbroking and this sanction says a lot about the culture that existed in Davy at the time.
Already, Minister for Finance Paschal Donohoe, the National Treasury Management Agency, Bank of Ireland, Permanent TSB and Glenveagh Properties have gone public with their concerns. Many of its 48,000 clients will be considering their positions. And staff in Davy are no doubt upset. The State is a major client, with the firm included on many mandates issued by the NTMA, which manages the national debt. The Oireachtas finance committee wants Davy to appear before it.
Initially, Davy was slow to respond in public before stating that it "deeply regrets the shortcomings" that were identified in the Central Bank's findings. The independent directors, led by chairman John Corrigan, are now tasked with leading a review, and establishing if other regulatory breaches might have occurred.
Instead, Davy should have appointed a person independent of the firm to carry out the review, with a commitment to publish the findings and a clear timeline for doing so. Central to that would be a mandate to examine the roles of those staff who were involved in this deal who remain with Davy. Clear answers – and actions – are needed if confidence in the firm is to be restored.