J & E Davy trading as Davy -v- Financial Services Ombudsman & Ors, [2008] IEHC 256 (2008)

Docket Number:2008 140 JR
Party Name:J & E Davy trading as Davy, Financial Services Ombudsman & Ors
Judge:Charleton J.

Neutral Citation [2008] IEHC 256THE HIGH COURT




ENFIELD CREDIT UNIONNOTICE PARTYJudgment of Mr. Justice Charleton delivered the 30th July, 2008

  1. On 21st January, 2008, the Financial Services Ombudsman ruled that the applicant, a firm of stockbrokers, should buy back from Enfield Credit Union, the notice party, three perpetual bank bonds at their original cost of 500,000. Out of this ruling have sprung three distinct cases before this court. Firstly J. & E. Davy have lodged a notice of appeal to the High Court against the ruling under Part VIIB of the Central Bank Act 1942, as inserted by s.16 of the Central Bank and Financial Services Authority of Ireland Act 2004. That appeal will look at the decision again and, having considered its merits, may either affirm the ruling of the Ombudsman or make a different ruling. Secondly, a constitutional challenge has been launched by J. & E. Davy to the authority of the Financial Services Ombudsman. The claim there is that the Financial Services Ombudsman, in exercising his jurisdiction under the legislation, is fulfilling a judicial function without being a judge under Article 34.1 of the Constitution and is outside the exception of the exercise of limited functions and powers of judicial nature provided for in Article 37 of the Constitution. Finally, judicial review is sought to impugn the decision on the basis that the Financial Services Ombudsman has misconstrued his powers under the statute and has fallen into unconstitutional procedures. It is this last case that I am dealing with in this judgment.


  2. Having reviewed the papers, and having heard extensive argument from counsel, I am satisfied that the Financial Services Ombudsman, in making the rulings challenged in this review, carried out his function in good faith and with a high level of skill. The judicial review function of the High Court is concerned with examining whether powers exercised by judges of the Circuit and District Court and the Special Criminal Court are exercised within the terms of the authority conferred on them by statute and by the Constitution, whether officials conferred with quasi judicial powers and administrative functions have carried them out within their jurisdiction, whether quasi judicial functions have been exercised on the basis of fair procedures and, finally, whether an exceeding of jurisdiction is to be found by reason of a decision flying in the face of fundamental reason and common sense. Inevitably, in these cases, the argument on each side will tend to touch on the merits and demerits of any particular decision. It is not the function of the High Court, however, on judicial review of a decision to substitute its own view as to the merits of any case. Nor is it the function of the High Court to issue a judgment in such way that will constrain the decision maker in the exercise of a quasi judicial function in the manner in which any discretionary power may be exercised. In referring concisely to the facts, therefore, I am not to be taken as having formed any view as to the merits of the original ruling. This is outside my function.


  3. As I understand it, there are 438 credit unions in Ireland. The notice party is one of them. On its headed note paper it is described as a limited liability company and, I would assume, that other credit unions are similarly organised. They exist for the benefit of their investors and are owned, and managed, by committees drawn from within the local community. They have a much less prevalent professional input for a financial institution then in the case of a bank. J. & E. Davy have a relationship with 380 of the credit unions. These are organised under an umbrella group, which is called the Irish League of Credit Unions. The relationship of J. & E. Davy to the credit unions goes back over twenty years. In 1996, J. & E. Davy was chosen as a financial advisor to the Irish League of Credit Unions. Since April, 1997 they have been a formally appointed advisor. It is fair to say that the relationship has been mutually beneficial. In 2002, J. & E. Davy developed a forecasting model for the financial investments of credit unions. The individual credit unions around the country also have other advisors as to their investments. I am told that over about the last five years the level of investment by Enfield Credit Union that had been organised through J. & E. Davy has varied between 16% and 41% of the total.

  4. The investment habits of a credit union may vary according to the strategy adopted by its management committee. It is possible that where they have money to invest they may choose to spread a portion of it over more risky investments which carry a greater rate of return. It is possible that this strategy might be confined to a very small percentage of its funds, or might be eschewed altogether.

  5. Through J. & E. Davy, investments may be made on a world-wide basis. As stockbrokers, part of their function is to keep abreast of the kind of investment instruments that are being offered by financial institutions and to give advice to their clients as to how to manage their funds. In return, J. & E. Davy are remunerated through fixed fees assessed on the basis of a small portion of the investment, as in this case, or on the basis of fees agreed for the task, or charged at a particular hourly rate. Governments and banks can issue investment bonds. These are financial instruments that can be purchased on the open market and which can be traded depending upon the value that the market at any particular time, puts on their sale. It might sensibly be thought that the rate of return on an investment is generally dependent upon the length of time for which it captures the money invested and the risk attaching to the purchase of the investment product. In this case, the product in question is a series of three perpetual bonds, details of which I shall shortly give.

  6. A perpetual bond is a financial instrument that may be purchased from a financial institution. The investor pays a sum of money and the conditions of the bond are set as a matter of contract. Unlike ordinary bonds, perpetual bonds have no maturity date, as I would ordinarily understand that term. Once they are purchased, the funds of the investor are tied up in perpetuity with the issuer of the perpetual bond. The issuer need never redeem the bond by buying it back from the investor. As a financial instrument, however, it has a value on the open market, apart from the existing relationship of issuer and investor because, due to its rate of return, other investors may want to purchase it from either the investor or the issuing financial institution. The financial institution can only buy back a bond from the investor on the open market, and it is therefore in exactly the same position as any other purchaser, unless the bond has a callable date. This provision determines that some years after purchase, specified in the bond instrument, the financial institution may buy back the bond at its face value from the investor. If the bonds are not purchased back by the financial institution on any of the dates specified as callable dates, then sometimes the bond instrument specifies that there should be a stepping up in the interest rate that is payable by the financial institution to the investor. Everyone who buys these bonds purchases on the basis that they pay the investor a rate of interest which, in financial jargon, is referred to as a coupon. Fixed coupon bonds pay a fixed rate of interest on the money invested in the instrument, for example 3%. Variable coupon bonds pay a variable rate of interest, often fixing a minimum rate of interest that is payable together with additional percentage points, that can vary depending upon a recognised rate of interest, such as that of the European Central Bank. The value to the investor is that the rate of interest payable on perpetual bonds generally exceeds that of other bonds. In bonds that are not perpetual, the investor can often, after a fixed period of time, call for the return of the invested money, sometimes at the cost of a penalty in terms of the rate of interest paid if that option is taken up before a particular time has elapsed. In a perpetual bond, the right to call back the investment is vested exclusively in the financial institution issuing the bonds and is exercisable, at par, on any callable date, where these are specified in the instrument. The disadvantage, from the point of view of investors, is that once the bonds are purchased, they might never be called back by the financial institution issuing them. Instead, an investor may wait from callable date to callable date, hoping for his investment to be purchased back from him at par by the financial institution, and wait in vain and without recourse. If the investor wants to recover the capital invested in a perpetual bond, there are two avenues open. The investor can wait for a callable date, and hope for a call, or the investor can place the perpetual bond on the open market prior to the callable date, or after having been disappointed on a callable date in the expectation that the instrument might be bought back by the issuing financial institution. On the open market the value of the bonds can fluctuate several percentage points above and below par, depending on the state of the markets.

  7. Over the course of the last year or so, the international financial markets have been beset by turmoil. That turbulence has shattered a long period of stability. Many commentators ascribe it to the rising price of commodities, particularly oil; the stretched nature of lending on house purchases to those who are unable to afford to redeem their mortgages; and to the banks and financial institutions engaging in...

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