Central Bank finds major problems with stockbrokers
Regulator wants mergers so industry can survive
Published 04/01/2013 | 05:00
A WORRYING Central Bank report has found major problems in the country's stockbroking industry.
The confidential report by the Central Bank warns there will have to be mergers of firms to ensure the industry survives, as part of a major revamp.
The report also says this process will have to be done in a controlled way -- because any instability in the sector could pose a danger to many people's savings, and prevent new businesses from raising money at a time when banks are not lending.
The report follows an unprecedented investigation by the financial watchdog into the industry, which lasted more than a year and uncovered numerous problems in the sector.
A senior source told the Irish Independent that the sector is under pressure and the Central Bank believes further mergers will be necessary.
The Central Bank is anxious to ensure that the consolidation occurs in a "sensible manner" and that firms are not incentivised to take undue risks to maintain unrealistic business levels.
"The regulator is looking very closely at the position of the remaining firms, with very close monitoring and engagement. The Central Bank is also looking at the adequacy of client asset controls to make sure that client funds are properly protected," the source said.
The Irish Independent also understands that the regulator will be taking a tough position on any problems with how assets are controlled, and will be concluding a review on client assets early this year.
The country's oldest stockbrokers, Bloxham, went bust last year.
Davy stockbrokers bought some of Bloxham during a weekend deal which saw partners scramble to sell the business but other parts were not sold.
Dolmen Stockbrokers was recently acquired by US giant Cantor Fitzgerald while NCB was taken over by South Africa-based Investec. Last year Kerry-based Fexco took over Goodbody Stockbrokers.
There has been a huge shakeout in the industry with 16 domestic stockbroking firms in 1988 compared with just six today. Ireland's reputation has taken a battering lately following the banking crisis and series of related problems.
The collapse of the 150-year-old Irish stockbroking firm Bloxham just over six months ago was the latest blow to the industry.
Bloxham was found to have accounting irregularities in its financial returns going back five years.
Bloxham has agreed to transfer its asset management business to Ireland's largest stockbroker Davy, which in March announced it had also acquired Bloxham's private client business. Last year, investors with Custom House Capital were left nursing losses of almost €58m.
The collapse cost the State's investor compensation fund €19.7m and will leave the State out of pocket by €15m.
In 2001, the fund was forced to pay half this when Cork-based Morrogh Stockbrokers failed.
Thousands of people have made claims following the collapse of Custom House Capital, but many will still face losses because the fund does not pay more than €20,000 to each investor. A High Court-appointed investigation by two Central Bank inspectors into the firm found the "systemic and deliberate misuse" of €66m of client money through false accounting to hide the transfer of the money to cover shortfalls in European property investments, mostly in Germany.
A senior source told the Irish Independent that unravelling the Custom House Capital debacle has proven to be a "nightmare" such is the level of misappropriation of client funds.
The stockbroking sector has been under the spotlight ever since the economic collapse began.
The dramatic fall in share prices eroded commissions and profits.
In some cases, wealthy individuals or organisations who lost money have taken legal action against certain firms on the basis of alleged inadequate or improper investment advice.
Stockbroking firms are legally required to hold tapes of recorded conversations for three years after a deal is agreed so they are vulnerable to legal challenges over bad advice.
Some brokers advised clients to invest in highly leveraged deals, particularly in property, during the boom.
One of the few businesses that is buoyant for domestic broking firms is bond sales as the Government tries again to raise cash in the international markets.
That has prompted speculation that international firms such as Merrill Lynch or Goldman Sachs could buy an Irish broking firm if the price is attractive.