Davy controversy smacks of proxy battle between Old and New Ireland

Is there a bit of Old Ireland versus New Ireland in the reaction to the Davy scandal?

In Ireland's business world, the Old Ireland gang, whose pension and share portfolio is probably managed by the brokers, is agog reading all about it. They will regret not being able to go to the golf club at the weekend to discuss whether they should "move their money". But is this group, while shocked by the details of what happened, also somewhat surprised at the huge reaction to the news of the Central Bank fine and the extent of the fallout?

Meanwhile members of New Ireland – the up-and-coming entrepreneurs – are reading every word about it too, but mainly because they feel it confirms their suspicions that the older crowd have always rigged the game to look after themselves.

Perhaps I am pushing the divide between the two here a bit. But there is a group in the business world that refers to the interests of “Ireland Inc” and whose members like to sit beside the Minister at the chamber annual dinner. And another whose members see themselves as outsiders and feel they are sometimes succeeding despite the “way Dublin works” rather than because of it.

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Certainly Davy seems to have been blind-sided by the reaction to the Central Bank fine. In arguing with the regulator for years over whether any actual rules were broken, they did not seem to stop and consider what it would look like when the facts emerged. The crucial difference this time – compared to other scandals such as the tracker mortgages – is that those who made the decisions were immediately identifiable, were senior figures and were found to have done so for personal gain. And in a firm such as Davy the senior figures literally are the firm.

The price is loss of control as the business is sold; the shareholders – including many of the 16 – will be bought out, though for less than they would have hoped for. And the sales process could yet be difficult, if more emerges and business drifts away from the broker. The next few weeks will be crucial.

The affair raises wider questions. What is the future of stockbroking in Dublin? There will always be a business in managing people’s money. But what about the business of listing and advising firms, raising finance from shareholders and advising on deals?

Big player

Davy was the big player in the market, so big its competitors often felt squeezed out. If this part of its business does not survive then we are left with only one big player in that part of the market – Goodbody. One big player is not ideal for these kinds of markets – it means the kind of competition and tension needed to get the best deal for those using the service is not there.

Here again the views of the more established older businesses and the newer ones will be different. The biggest businesses – Ryanair, the banks, the agrifood companies and so on – use the market to raise funds, to give a platform for shareholders and to get advisory services on deals. This is where the need for competition comes in.

If Dublin only has one big brokerage, more business and listings will be routed through London. The Government will also want domestic players making a market in Irish bonds.

For the newer group of entrepreneurs, however, many based around the tech sector, the Irish stock exchange and those who make their money from it are largely irrelevant. Most of these companies raise their money via venture capitalists and are advised by specialist financiers who might be in Dublin, London or anywhere.

The stock market, insofar as it is a vehicle to transfer people’s savings to invest in businesses, is largely an irrelevance for them. Irish brokers do in some cases raise funds for buy-outs or advise on deals, but most of the business of Irish brokers is with the bigger, older parts of corporate Ireland. Both groups of companies have a vital role in the wider economy. But they operate in different spheres – in the same economy but rarely touching.

The Government will hope that whoever takes on Davy takes it as one business, rather than buying just the wealth management side, which is profitable and likely to be untouched by any future revelations. Bank of Ireland would swallow Davy whole – others may want to buy just the wealth management arm, which manages money on behalf of private investors. There could be tensions ahead between the Davy employees, who will want the business bought as one, and the big shareholders, who might benefit more from a break-up sale.

Carve-up

Over the past few weeks, the Irish financial sector has shipped a lot of damage. Ulster Bank’s departure will leave the banking market as a carve-up between the big two. Talk of creating a State-backed third force is fanciful. The State already owns a majority stake in one of the big players and a minority stake in the others. Both continue to carry the scars of the financial crisis and will face more bad loans as the pandemic plays out.

Hopes for a single banking market in Europe, allowing consumers and businesses to do business with players elsewhere, are still the subject of earnest reports rather than much action. Meanwhile digital players such as Revolut are chipping away by providing services for which the banks used to charge ridiculous amounts. Branch banking may soon be a thing of the past.

As one observer put it this week: "A half nationalised, still-impaired banking system is what we'll have for a long while." Now with AIB owning Goodbody and Bank of Ireland a possible buyer for Davy, the State is big into stockbroking too. And the very future of Davy could still be damaged by any further revelations. The Irish financial system, build on the old-style quasi-monopolies, is looking strained.