Out-Law News | 08 Mar 2021 | 4:27 pm | 2 min. read
The Central Bank of Ireland (CBI) has issued its largest ever fine to a stockbroker.
J&E Davy was fined €4.13 million after the CBI found fault with its systems for managing conflicts of interest.
The CBI investigation concerned a transaction that took place in November 2014 involving a consortium of 16 J&E Davy employees. The transaction involved the advance of a loan from the consortium to the client to settle debt secured on bonds and to purchase the bonds from a client at an agreed price. However, the client was not informed that the buyer was the consortium of J&E Davy employees.
The CBI said in permitting the transaction, J&E Davy had prioritised facilitating an opportunity for the consortium to make a personal financial gain over ensuring that it was complying with its regulatory obligations. It said the transaction highlighted a weak internal control framework within the firm in relation to conflicts of interest management and personal account dealing, creating an elevated risk of investor detriment.
According to the CBI, there was no independent oversight of the transaction, with the only discussion on conflicts of interest involving senior individuals who intended to participate in it. The CBI said this “amounted to no consideration” of conflicts of interest.
The investigation found no evidence of a robust framework in place to stop employees entering into personal transactions. The CBI said J&E Davy’s compliance team only became aware of the transaction four months after it took place, when it became public knowledge.
Additionally, the lack of a harmonised data system meant the transaction could be carried out on a separate system to that used by the compliance team, meaning it went largely undetected. As the compliance team did not have access to the information that it needed to discharge its function properly and independently, it was unable to act as a second line of defence, consistent with good corporate governance practices, the CBI said.
CBI director of enforcement and anti-money laundering, Seána Cunningham, said badly managed conflicts of interest pose a risk to investors and diminish market integrity.
“Firms are required to have in place a robust framework and to ensure that there is a no-exceptions approach taken to adherence to the applicable rules," Cunningham said. "It must be driven from the top and embraced by all employees of the firm."
Under its administrative sanctions procedure, the CBI is able to impose a maximum fine of €10m or 10% of the turnover of the regulated entity. The degree of cooperation of the regulated entity will also be considered by the CBI when considering the level of sanction and may be considered to be either an aggravating, neutral or mitigating factor.
In the Davy case, the CBI determined that the appropriate fine was €5.9m. The level of fine was set after the CBI had regard to J&E Davy’s failure to disclose the full extent of the wrongdoing when engaging initially with its investigations. However, the final penalty imposed was reduced due to early settlement.
18 Dec 2020