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Davy claims watchdog erred in bond decision

J&E Davy stockbrokers have brought a High Court challenge to a decision by the Financial Services Ombudsman to uphold a complaint by a credit union over advice on three bank bonds which fell in value.

The Ombudsman last month found the bonds were unsuitable investments for credit unions and directed Davy to pay Enfield Credit Union, in Co Meath, €500,000 in exchange for the bonds. He also ordered a refund of all fees and commissions paid to it in connection with the matter.

The Ombudsman upheld complaints by the credit union that Davy had failed to disclose material information when advising it about the perpetual bonds and failed to make it clear the bonds did not have a contractually fixed maturity date, which it said was fundamental to the way it manages its investments.

Risks

He found Davy did not alert the credit union, adequately or at all, to the risks inherent in the bonds.

The credit union said it made a total investment of €500,000 in the three bonds between September 2004 and April 2005 and the value of the investments in July 2007 was €422,959.

Mr Justice Iarfhlaith O'Neill gave leave yesterday to Paul Sreenan SC, for the firm, to seek orders in judicial review proceedings overturning the Ombudsman's decision of January 21 substantiating the complaint by Enfield Credit Union.

The firm is also challenging the constitutionality of the relevant provisions of the Central Bank Act relating to the powers of the Ombudsman and Deputy Ombudsman.

The advice from Davy related to the investment by the credit union in three perpetual bonds issued by three banks -- Nordea Bank, Jyske Bank and Oko Bank -- between September 2004 and April 2005.

In an affidavit for Davy, the firm's chief executive Tony Garry argues the credit union fully understood the nature of the bonds, that it did not rely exclusively on Davy for investment advice and that the fall in the value of the bonds was a result of the general unprecedented deterioration in the credit markets.

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Mr Garry also said it was clear from an Irish League of Credit Union (ILCU) circular the ILCU had adopted the position that perpetual bonds were suitable investments for credit unions.

In its proceedings, which are against the Ombudsman and the State, with the credit union as a notice party, Davy's claim the Ombudsman erred in law and acted in breach of fair procedures, natural and constitutional justice and the provisions of the European Convention on Human Rights.

Mr Garry said that he was advised the Ombudsman had erred in law in the handling of the complaint in that he did not attempt to try and resolve the complaint through mediation and did not follow proper procedures for the processing of the complaint.


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