Ombudsman finds against Davy over bonds sale to credit union

The deputy financial services ombudsman has found against stockbroker Davy in a dispute over an investment product it recommended to a credit union.

Enfield Credit Union complained to the ombudsman's office after investing in perpetual bonds on the advice of Davy. Perpetual bonds are open-ended investments, generally issued by banks, that pay a set interest rate. Their market value is determined by how the rate, or coupon, offered compares with interest rates in the broader market.

Davy, which began marketing perpetual bonds in 2002, is understood to have sold more than €270 million of the investments to credit unions.

Credit unions are estimated to have lost around €25 million through investments in perpetual bonds and some feel Davy should have done more to warn them about the potential downside to such investments.

However, to date, only Enfield Credit Union has pursued its case. Davy last night insisted it would appeal the decision.

In a statement, the stockbroker said: "The conclusions of the deputy financial services ombudsman are difficult to comprehend as all three perpetual bonds comply with the regulatory order (Trustee Authorised Investment Order), under which credit unions are permitted to invest.

"Davy will immediately appeal this matter through the financial services ombudsman's appeals mechanism and through such other avenues of appeal as may be necessary."

Davy has 15 days to request a review of the finding by financial services ombudsman Joe Meade. The ombudsman will ultimately issue a final decision that is binding on both sides - although there would remain the prospect of an appeal to the High Court.

Sources in the credit union movement last night said news of the finding would cause issues for other credit unions.

Other unions with larger exposure to perpetual bond losses fear the finding may spur members to demand that they pursue Davy.

In many cases, this could be done only through the High Court - an expensive process - as the ombudsman has a €250,000 ceiling for issues on which it can adjudicate.