Ireland Davy on sale after bond scandal sparked political backlash

Ireland’s biggest broker Davy Group is on the hunt for a new owner after failing to contain a scandal that casts a shadow over Dublin’s prospects as the EU’s financial center after Brexit.

The country’s central bank fined the broker hit a record 4.1 million euros earlier this month after discovering that 16 Davy staff, including some senior executives, had set up a consortium to buy Anglo Irish bonds Bank to a client, without telling him that they were the buyer.

Initially, Davy was silent on the issue. But following political pressure, he apologized “without reservation” on March 3. Outrage over the affair has since dominated Irish airwaves and parliamentary sessions a decade after the country suffered a banking crisis that prompted a nationwide bailout and painful austerity. Now the 95-year-old broker and wealth manager is for sale.

“They completely ignored the attitude of the public. . . they hadn’t changed their mindset, ”said Professor Niamh Brennan, Academic Director of the Center for Corporate Governance at University College Dublin.

The problem dates back to the transactions that took place in 2014, when Davy’s staff consortium bought bonds from a client without telling them they were the buyer. He subsequently sold a “big slice” of the bonds to a fund manager after the bank provided an “inside view” to investors on the value of the bonds, again without revealing that some of Davy’s staff marketing the bonds also owned them. The deal was structured to avoid Davy’s compliance systems, which the regulator criticized as “weak.”

The original seller sued Davy, claiming the broker had lowballed him on the € 5.58million he received for the bonds, in a case where colonized to the High Court in 2016. But the Central Bank opened an investigation based on the alleged points in the court proceedings, in particular the fact that Davy “willfully withheld” key information about what happened. This investigation lasted five years.

“The behavior of Davy’s leaders was absolutely unacceptable and, I think, reveals a horrific culture of greed, and damaged the reputation of the financial services industry in this country,” Irish Prime Minister Micheál Martin told the country’s parliament. the 11th of March.

Three key figures of Davy, including its CEO Brian McKiernan, resigned Last weekend. Davy too lost of its role as the principal Irish public debt trader and announced the closure of its bond office. The government mandate brought more cachet than cash, bond window closings triggered four layoffs in a company of around 700 employees.

Rival firms have said the real risk is losing other clients, especially firms using Davy as a corporate broker who may be pressed to cut ties by governance-conscious investors.

Ireland’s National Treasury Management Agency is the only one to abandon Davy so far, although others, including food company Glanbia, have said they are monitoring events.

“Davy’s outreach to customers is non-existent,” said one corporate client. But he does not expect a mass exodus. “If you don’t plan to do something [with Davy] immediately you 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 it,” he added, pointing to the scarcity of other options in the Irish market. “It is important to maintain competition in the sector,” echoed a senior executive of a large company listed on ISEQ.

A former Davy executive said that clients of the wealth management company were more likely to be scared because this relationship involved a higher duty of care than the relationship with executives of companies and institutions, which are adults”.

Ireland has many wealth managers ready to step into Davy’s shoes and still has 14 primary dealers in government bonds. Even in equities, where Davy is a key player, “the functioning of the market is not too concerned” because “there are many European brokers who are not based in Ireland who can give you access,” said Reinder Van Dijk. , partner at Oxera Consulting in London.

The concerns are more about Dublin’s “ecosystem” as a financial center. “The timing is also a little unfortunate because after Brexit, Amsterdam, Paris, all the financial places are positioning themselves in a way,” he added.

The best hope is a quick sale by Davy of the staff and the former employees who own it – a group that includes the three personalities who resigned in the wake of the scandal.

Bank of Ireland, the country’s second largest lender, has become an early suitor. BOI sold its brokerage subsidiary IBI in 2017, in part because a ban on bonuses at bailed out banks and their subsidiaries made the company uncompetitive.

BOI has long wanted to get back into this business, said two people familiar with the bank’s thinking. Ireland’s other big bank AIB set a useful precedent when it got approval to pay bonuses to staff at 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 lend his support to Davy’s efforts to find a new owner, in the interests of ‘a’ stable and well-managed local brokerage community to support. Aboriginal businesses ”.

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