Client update from our Interim CEO

DAVY GROUP

Latest updates:
Bernard Byrne,
Interim CEO

Video Update

Bernard Byrne
Interim CEO of Davy

I offer an unreserved and unequivocal apology to all Davy clients for what has occurred. I fully acknowledge that Davy failed to adhere to the standards that are expected of us.

As Interim CEO, I wanted to give an update in relation to the recent investigation by the Central Bank of Ireland (CBI) into Davy.

Undoubtedly you will have questions. In this video update and our Q&A section below we have sought to answer some of these and also to outline the actions we have taken since the findings of the CBI investigation were announced.

In summary:

  • Davy has moved decisively and at speed on a number of important issues
  • Delivering the future shareholding structure for Davy is a key step in the process of restoring trust, which will take time
  • We are pursuing a sale of the Group and Rothschild & Co has been appointed financial adviser to manage that process. Any sale will be subject to regulatory approval by the Central Bank of Ireland
  • We have appointed Alvarez & Marsal to conduct an independent review. The Board is committed to sharing the findings of the review
  • Though the processes may take some time to conclude, Davy is a resilient and very well capitalised business
  • For now, our resolute focus is on our day job of delivering for our clients and supporting our people who are integral to the service we offer

I would like to stress that the information provided here is in no way an attempt to justify or minimise the seriousness of the findings which have been made against Davy. We fully recognise that you may have further questions and concerns, we will continue to update this area of our website as the situation evolves.

CBI investigation

The CBI’s investigation was centred around a transaction that took place in 2014. The transaction involved 16 employees of Davy at the time, including certain senior managers, making an unsecured loan and a payment to a third party in exchange for the transfer of ownership of a series of illiquid corporate bonds. This was part of a larger debt settlement transaction undertaken by the third party with his lender.

Davy was fined €4.1 million as part of a settlement agreement with the CBI following its investigation. Davy deeply regrets the shortcomings that emerged from the investigation and apologises unreservedly and unequivocally that these failures occurred, and that Davy failed to adhere to the high standards expected of the firm both internally and externally.

The transaction was limited to a series of illiquid corporate bonds and no other clients of the firm were involved in this transaction.

The fine had no material impact on the solvency of the Group. We regret if we have caused any concern in this area. The Davy Group (Holdings) continues to be in a strong financial position with approximate regulatory capital requirements of €65m and Regulatory Resources of €134m and holds regulatory capital of twice its minimum regulatory requirements. The Group prepares an Internal Capital Adequacy Assessment Programme (ICAAP) which helps ascertain our regulatory capital surplus under a variety of stress scenarios and recent events have had no impact on the regulatory capital surplus.

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Actions taken by Davy since the investigation

On 16th March 2021, we appointed Alvarez & Marsal to review matters arising from the CBI Settlement. Alvarez & Marsal is a global professional services and management consultancy with wide international experience in forensic and regulatory investigations. The work will be conducted by a London-based team.

The review will include a forensic assessment, the scope of which will be determined by Alvarez & Marsal, of relevant staff trading from 2014 to 2021 and any other relevant activity. It will also assess the adequacy of enhanced compliance, controls and governance designed to prevent conflicts of interest.

The Board is committed to sharing the findings of the independent review.

The company has evolved and improved its control environment significantly since 2014. There has been a process of Board and management renewal with a significant investment in people, risk management, structures, policies and processes.

  • Staff dealing rules and processes have been strengthened. Pre-approval by Compliance is required for all staff dealing in all financial instruments. Staff members seeking pre-trade approval must attest that they are not aware of any potential or actual conflicts that may arise from engaging in the transaction. From a process perspective, all orders are routed to our Compliance Team and checks in relation to the number of orders and holding period are carried out pre-trade rather than post-trade. A further review of the staff dealing rules will be completed shortly and it will also be the subject of the independent review which will be carried out by Alvarez & Marsal.

  • There has been a significant investment in the Risk & Compliance area which has seen an almost doubling of staff numbers. The second line functions (Risk, Compliance, Client Asset Oversight and Legal departments) are now headed by our Chief Risk & Regulatory Officer, Caitríona O'Kelly, who was Chief Financial Officer from 2019-2021 and is formerly of Deutsche Bank. She sits on the Group Executive Committee and the Board of J&E Davy.

  • Our Conflicts of Interest Policy and Procedures were reviewed in 2016 to strengthen the firm’s approach. External legal advice was incorporated into this process. The changes included the establishment of an internal Conflicts of Interest Committee chaired by the Chief Compliance Officer. The Conflicts of Interest Policy & Procedure was also updated to reflect the MiFID II requirements which came into force at the start of 2018. It was again reviewed at the end of 2020 and enhancements included an improved focus on internal training as well as improving detailed logging of conflicts and associated controls in a Conflicts Register. A formal obligation for staff to attest to the Policy was also created.

  • We have undertaken an extensive refresh of our Policy universe in line with our MIFID II obligations.

  • Multiple independent third parties have been engaged to support work in developing our risk framework, client asset oversight, conduct risk, compliance, and internal governance. Our risk and compliance framework has been independently benchmarked against peers and we embarked on a large project of work to further enhance and strengthen the risk and compliance framework starting in September 2020. This work builds on improvements in previous years and will ensure a ‘best-in-class’ approach to risk and compliance. The Board of J&E Davy has been restructured to ensure the majority of board positions are held by external non-executives. We have also hired extensively in the external market into executive roles, including the Chief Risk and Regulatory Officer (formerly the CFO), and Chief Compliance Officer, Chief Operations Officer and Chief People Officer. Internal Governance has been strengthened with a far greater emphasis on documented decision-making and escalation to Risk and Compliance. We continue to renew and enhance our cultural framework with a continued focus on personal accountability, strong risk management behaviours and ethics.

  • J&E Davy has PRISM reviews with the CBI with engagement from the Board, the CEO and key role holders in the firm which discuss the firm’s approach to managing risk.

  • The firm has participated in many thematic inspections conducted by the CBI including themes such as effectiveness of Internal Audit, Appropriateness, Suitability, Best Execution, Market Abuse, Cyber Risk. This is part of our regular ongoing dialogue with the CBI.

     

The Conflicts of Interest Policy and Procedure were reviewed, with support from external advisers, and updated in 2016 to enhance the firm’s approach.

The changes included the establishment of an internal Conflicts of Interest Committee chaired by the Chief Compliance Officer. The Policy also provided clarity to staff on the scope of conflicts and the escalation path for potential conflicts. The Committee identifies situations where Davy cannot act because of a conflict.

A conflicts register has been established which is reviewed regularly by the Committee and reported to the Board.

The policy, our approach, and assurance activity regarding conflict of interest management as well as training were reviewed and enhanced in 2018 and again during 2020. We accept that there is a need for further review in light of the Settlement and this policy will be subject to the independent third-party review which we have appointed Alvarez & Marsal to conduct.

We have overhauled our staff dealing rules since 2014. Enhancements include:

  • Pre-approval by Compliance for all staff dealing in all financial instruments (previously approval was confined to a sub-set of financial instruments).

  • All staff members (including non-executive Directors) seeking pre-trade approval must attest that they are not aware of any potential or actual conflicts that may arise from engaging in the transaction.

  • From a process perspective, all orders are routed to our Compliance Team and checks in relation to the number of orders and holding period are carried out pre-trade rather than post-trade.

We accept that there is a need for further review in light of the Settlement and this policy will be subject to the independent third-party review which we have appointed Alvarez & Marsal to conduct.

Yes, two Board members have stepped down: Brian McKiernan, CEO, and Kyran McLaughlin, Deputy Chairman. Brian McKiernan has also relinquished his executive duties within the firm. In addition, Barry Nangle has resigned from his position as Head of Fixed Income.

There are no remaining members of the group of 16 working in Davy. As of 8th March 2021, management took the decision to close the Davy bond desk, and as a result of this decision, none of the individuals involved in the 2014 transaction are now working in Davy.

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Sale announcement

Yes, the Board of J&E Davy has announced that it has decided to pursue a sale of the Group. Rothschild & Co, one of the world's largest independent financial advisory groups, has been appointed as financial adviser to manage the process.

We believe that a sale of the Group to a new owner will help as part of the process of restoring the trust of our clients, our people, and our stakeholders.

Your day-to-day dealings with Davy will not change as a result of the sale announcement.

It’s difficult to provide a definitive timeline for something of this nature but it will take a number of months to complete the process, and secure the requisite regulatory clearance.

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Security of your assets

Your assets are processed and held in line with Client Asset Regulations (CAR) which require them to be fully segregated from firm assets. Davy does not use your individual client assets for any other purpose except for the individual client.

Your assets are held in nominee entities set up by Davy for holding client assets or with an approved third party. This means that the asset is not held on the Balance Sheet of J&E Davy. Client assets are not co-mingled with Davy firm assets and Davy does not use client assets for firm activities.

Within our systems, we record you as the holder or beneficial owner of the assets. Your assets are reconciled as stipulated in the regulations. The nominee entities do not trade or do not transact in any other activities.

When you place your assets with Davy, they are recorded on our internal records on your account and identifiable as client assets. The assets are then held with various custodians depending on the underlying asset type.

A list of approved third-party custodians, also known as counterparties, can be found here.

Prior to lodging client funds with an eligible credit institution, we receive a written confirmation from the credit institution that client asset accounts are legally segregated from any bank account that Davy itself may hold.

If you have financial instruments in your Davy account using the Davy nominee service, you remain at all times the “beneficial” owner of those investments, even though a company independent of the Davy Group (such as Davy’s nominated custodian) or a nominee company of the Davy Group may be registered as the “legal” owner. Davy is obliged by law, and by the CBI, to report to our nominee clients, details of the client assets it holds for them, and any benefits associated with the assets.

Within Davy, an independent team provides oversight on client asset arrangements. This team is headed by an appointed Head of Client Asset Oversight (“HCAO”) - a role that requires CBI approval before an individual can take on the role.

The HCAO manages a team whose sole purpose is to oversee activities regarding the safeguarding of client assets. This means that events from onboarding, segregation, outward transfers and reconciliations are subject to internal reviews.

This oversight is based on an annual Client Asset Monitoring Plan which is approved annually by the Risk & Compliance Committee.

 

Yes. The firm’s auditors complete what is known as a Client Asset Examination on an annual basis. The firm’s auditors complete an industry-standard review of client assets. This external review is completed annually, most recently in October 2020.

Davy completes daily reconciliations on all funds we hold and monthly reconciliations on financial instruments and fixed deposits. This reconciliation enables the firm to ensure that our internal books and records match third-party statements. All funds are held in accounts designated as Davy client asset accounts. All client asset reconciliations must be completed in line with the timelines set out in CAR. Each reconciliation is reviewed and approved by people who are independent of the production and maintenance of the client records. The reconciliations are approved by a person separate from the completion of the exercise, and are subject to periodic oversight from internal and external independent functions. Davy constantly seeks to strengthen the controls in relation to these reviews.

A key pillar of the client asset legislation, and therefore our operational and control infrastructure, is the segregation of client assets from Davy’s own assets. This requirement is stringently enforced and monitored both internally by Davy and by our regulators. We have numerous processes and controls ensuring that segregation is achieved, and these processes and controls are subject to external verification. The primary reason for this is to ensure that, in the unlikely event of the Davy Group’s demise, your assets are legally segregated from those of the firm and therefore protected from the firm’s creditors. Your assets are clearly designated as client assets both on our records and, crucially, also on the records of the third-party custodians. Under the Bank Recovery and Resolution Directive (SI 289/2015), Davy has a recovery plan that provides for formal risk warnings, indicators, and actions to be taken to protect all stakeholders and ensure an orderly wind down plan exists. This is subject to CBI oversight.

Segregation of duties prevents this from occurring. Dual authorisation and approvals ensure that client assets cannot be actioned/transacted without correct authorisation. Client Instructions are processed and authorised by separate departments. Staff training is provided to ensure employees understand the processes.

Within the CBI, there is a dedicated expert team – the Client Asset Supervision Team (“CAST”) – with whom Davy interacts very regularly on client assets. Davy completes monthly reports to the CBI, known as MCAR, which provide the CBI with the value of assets held, the number of clients, and a breakdown of assets held by the custodian.

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Other questions you may have

The CBI investigation process was confidential which prevented us from making any disclosure to our clients. While unavoidable, we sincerely regret the fact that all parties had to hear of the issue in the media first.

Due to the confidential nature of the CBI processes, our people were made aware of the Settlement Agreement on the same day of the CBI Statement release, Tuesday 2nd March.

The Board takes the responsibility to customers of Davy very seriously. Davy is now a safer and more secure place for clients than it has ever been in its almost 100-year history. The improvements we have made in internal controls and the investments we have made in risk and compliance since this event took place should serve to reassure customers that we have learned from our mistakes and are a better company for it.

Since this event occurred, under the supervision of the Board, the relevant aspects of compliance and governance at Davy have been subject to internal and external review as mentioned above. In addition, the Board has appointed Alvarez & Marsal, a global professional services and management consultancy with wide international experience in forensic and regulatory investigations, to undertake an independent review. The review will include a forensic assessment, the scope of which will be determined by Alvarez & Marsal, of relevant staff trading from 2014 to 2021 and any other relevant activity. It will also assess the adequacy of enhanced compliance, controls and governance designed to prevent conflicts of interest. The Board is committed to sharing the findings of the independent review as we actively seek to restore the trust of our people, our clients, and the public.

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