Central Bank of Ireland Enforcement Action – J&E Davy fined €4,130,000 and reprimanded for regulatory breaches arising from personal account dealing.March 2021
On the 1st of March 2021, the Central Bank reprimanded and fined J&E Davy €4,130,000.00 for four breaches of the European Communities (Markets in Financial Instruments) Regulations 2007 (the MiFID Regulations) that occurred between July 2014 and May 2016.
The Central Bank’s investigation centred on a transaction which was concluded by a group of 16 Davy employees in a personal capacity with a Davy client. Among the 16 Davy employees was a group of senior executives. In permitting the transaction Davy prioritised the opportunity for its employees to make a personal financial gain ahead of their regulatory obligations in the areas of conflicts of interest and personal account dealing.
Failings were found in the following areas:
- Conflict of Interest identification and management.
- Personal account dealing framework.
- Ensuring the compliance function can discharge its role properly.
The Central Bank’s Director of Enforcement and Anti-Money Laundering, Seána Cunningham said: “This case serves as an important reminder that conflicts of interest are an inherent risk to all regulated entities. When not properly managed, they pose a risk to investors and diminish market integrity. Where investment firms permit employees to engage in personal account dealing - i.e., to trade for themselves rather than for a client – the risk of conflicts of interest arising is heightened.”
The National Treasury Management Agency, (NTMA), revoked the appointment of Davy Stockbrokers as a primary dealer in government bonds.
On the 9th of March, Director General, Financial Conduct, Derville Rowland addressed the Joint Oireachtas Committee on Finance, Public Expenditure and Reform. In her speech Ms. Rowland made reference to a number of issues including Covid 19, business interruption insurance and the Davy reprimand and fine and said “Robust enforcement action is a critical component of our work to protect consumers and investors. It is a key part of the regulatory and supervisory toolkit. Enforcement action supports and runs alongside other supervisory interventions to help drive the remediation of risks and issues in the governance, risk management and control frameworks of the firms we supervise.”
Given this enforcement action is against the regulated entity, but the actions involved were clearly perpetrated by individual staff members, a lot of people will be wondering if there will be any personal accountability. Derville Rowland did confirm to the Oireachtas Finance Committee her office had had "tentative engagement" with An Garda Socháina and the Office of the Director of Corporate Enforcement (ODCE) over its Davy investigation but it remains to be seen if further action will be taken by any enforcement body. What has become clear is that the full capabilities of the CBI’s regulatory ‘toolkit’ are being tested and delays on introducing a SEAR type regime may be hindering their efforts. The fallout:
Following the enforcement action, 3 senior members of the Davy management team have resigned their positions - CEO Brian McKiernan, deputy chairman Kyran McLoughlin and head of bonds Barry Nangle.
The firm was placed up for sale on the 11th March with speculation that Bank of Ireland could be set to reacquire the firm – AIB having just confirmed on 2nd March that it had agreed to buy Goodbody. The whole case has raised further questions around implications for the entire stockbroking market in Ireland.
Most recently an international professional services firm, Alvarez & Marsal, has been appointed by Davy to examine staff trading over the past seven years as part of a review of matters arising from the Central Bank action.
There is no doubt that the effects of the settlement action and the ongoing investigations will be felt for some time to come. The events that gave rise to the enforcement action will remind many of actions taken during the last financial crises. The Central Bank in its action has reiterated the importance of regulated financial service providers putting customers interests before their own.