FORMER Treasury official Sir Christopher Kelly was yesterday drafted in to run an independent probe into the £1.5 billion black hole at the heart of the Co-operative Bank’s finances.
Kelly, a former chairman of the Financial Ombudsman Service and the Committee on Standards in Public Life, was chosen by the Co-operative Group, which was last month forced to launch a rescue plan for its lending arm.
The Financial Conduct Authority has told the Co-op that it needs to raise £1.5bn to give it the industry-standard 7 per cent capital buffer to help it to survive any future financial crises.
Under the rescue scheme proposed by the mutual, the Co-op Group will float its lending arm on the stock market, wiping out its current shares in the bank.
The Co-op Group will then issue a £500 million bond and will sell its general insurance businesses for a further £500m in order to buy back a controlling stake in the lender.
The remaining cash to fill the black hole would come from bonds being converted into shares, at an expected 30 per cent discount.
Earlier this week pensioners and other private investors who hold the bank’s bonds expressed their anger at the Co-op’s rescue plan, with financial analyst Mark Taber calling on the Prudential Regulation Authority (PRA) to review the proposals.
Kelly’s “forensic” inquiry – which will conclude next May – will also examine the Co-op Bank’s 2009 takeover of the Britannia Building Society.
Many commentators have suggested that that deal was at the heart of its current funding shortfall.
Kelly will also inquire into the proposed acquisition of 632 “project verde” branches from Lloyds Banking Group, which collapsed in April.
Euan Sutherland, chief executive of the Co-op Group, said: “We have announced a comprehensive solution to meet the capital requirements of our bank, bringing stability to a business loved by its customers and members. As we move forward with implementing this plan, it is important to learn from the past. To ensure that we can do that, we are today announcing the launch of an independent review which will take a detailed and forensic look at all the relevant events and issues.
“We are delighted that Sir Christopher has agreed to chair this review. His background means he is ideally placed both to work through the events that led to the current issues in our bank and to recommend any changes that need to be made to our ways of working.”
Kelly added: “The management teams and boards at the Co-op Group and the Co-op Bank are determined to find out what went wrong and are giving me and my team all the support and facilities I need to run a detailed and thorough, fully independent review.”
His probe will also examine “strategic decision making, management structures, culture, governance and accounting practices and aspects of the role of the bank auditors”.
News of the inquiry came as the PRA yesterday accepted the Nationwide building society’s plans to issue bonds – “core capital deferred shares” – to raise its capital buffers. The PRA’s decision came a day after credit ratings agency Moody’s said Nationwide needed to raise £1.8bn.