Davy and tracker scandal reveal toxic culture at heart of Irish financial system

Instances of financial misconduct remain despite new regulatory environment

Whatever you might think about the property market, the construction industry behind it has been transformed by the crash. Developers, builders and others are now subject to an onerous level of regulation – they complain the pendulum has swung too far, maybe it has – but they build to a higher spec and the industry exhibits a stronger culture of compliance.

Can the same be said of the financial sector, the other industry that played such a stellar role in our post-2008 economic meltdown?

In the next few weeks or months – the timeline isn’t significant – the State’s largest stockbroker, Davy, which is mired in a financial scandal involving its most senior staff and subject to the biggest fine ever levelled on a broker here, will most likely be taken over.

A sale process has begun and one of the parties eyeing up Davy is Bank of Ireland. The bank is itself mired in a scandal and facing a huge fine – which will be a multiple of the €4.1 million levied against Davy – for overcharging 10,000 tracker mortgage customers.

Of course this takeover scenario might not happen. Bank of Ireland is only the frontrunner in a list of candidates that might buy (rescue) the troubled stockbroker. It hasn't yet been fined by the Central Bank over the tracker mortgage scandal but a large penalty is coming.

Ulster Bank was last week fined €38 million by the Central Bank for its failures in the tracker scandal. The wider industry, which has admitted to more than 41,000 cases, has paid out more than €735 million to date in compensation, fines and other charges.

Maybe we are the “Wild West” of European financial services. The tag – thrown at us by the New York Times in 2005 – stung back then, the fact that it’s even remotely applicable now after 15 hard years trying to win back our financial reputation is a sorry statement of affairs.

Commentators talk about Ireland’s small financial ecosystem – how the same faces pop up in multiple areas, in public and private roles, and how this breeds cosy relationships – but that shouldn’t presuppose such financial misconduct.

The banks wrongfully took money from their tracker customers right in the heat haze of the financial crisis and, in the case of the Irish ones, directly after being bailed out by the State. Many families lost their homes as a result of this behaviour.

On the morning the Davy fine and reprimand were announced, its former chief executive Brian McKiernan issued an internal memo to staff, saying there were "no findings of actual conflict of interest or customer loss" in relation to the 2014 transaction in which businessman Patrick Kearney sold Anglo bonds via the company at a steep discount in order to settle a debt – seemingly without knowing the buyers were Davy employees who went on to sell the assets at a profit. The transaction bypassed Davy's internal compliance function.

The memo was later retracted and sent again with the “actual conflict of interest or customer loss” line removed. For many, this was mere arrogance. The standard institutional response to a crisis – there’s nothing to see here. But this missive to staff was likely to have been picked over by lawyers and management for some time in the knowledge that it would quickly leak outside the office.

Regulatory obligations

And remember the Central Bank’s finding was that Davy failed in its “regulatory obligations in relation to conflicts of interest” by not considering if there had been one and by keeping its compliance team “in the dark” about the deal. In regulatory terms that’s enough. But why was McKiernan emboldened to state there was no conflict of interest when the finding seemed to suggest otherwise? On any objective analysis it was a clear conflict.

The fact that senior staff circumvented the firm’s own compliance team speaks volumes about the culture of the organisation.

In her testimony to the Oireachtas Joint Committee on Finance, Public Expenditure and Reform earlier this month, Derville Rowland, who heads the Central Bank's financial misconduct unit, described how Davy effectively stonewalled the regulator's probe.

“We formed a view that the information provided mischaracterised the gravity and seriousness of the matter and what had in fact occurred,” she said.

The regulator had to deal with “litigious challenges” from Davy’s lawyers throughout the process.

Committee members queried therefore why the Central Bank did not level the maximum fine on Davy. Rowland said the regulator had determined that €5.9 million would be the appropriate fine but that this was reduced by 30 per cent to €4.1 million in accordance with the regulator’s settlement discount scheme because Davy had reached a settlement with the regulator – in legal parlance, copped a guilty plea.

This raises questions about the teeth we afford the regulator in these circumstances.

In her testimony, Rowland used the word “culture” in relation to Davy multiple times. And it’s this culture of compliance – or lack of – that seems to surface time and time again in our financial system. We may have overhauled the regulation of the financial sector but the “culture” has yet to catch up.

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