Co-op Bank slammed over failings before bailout

A DAMNING report into the financial crisis which hit the Co-operative Bank two years ago found it misled investors and kept regulators in the dark.

Andrew Bailey, PRA chief executive and deputy governor of the Bank of England. Picture: Getty

But the troubled lender was spared a potential £120 million fine after the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) took into account the state of its still-weakened balance sheet. They concluded there were serious failings in the way the former mutual was run from July 2009 to December 2013.

The Co-operative nearly collapsed two years ago after a £1.5 billion capital shortfall was discovered in its balance sheet. It had to be rescued by bondholders including US hedge funds in a move which saw the wider Co-op group’s ownership of the bank reduced to 20 per cent stake.

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The report found that the lender had developed a culture “prioritising the short-term financial position of the firm at the cost of taking prudent and sustainable actions for the longer term”.

Andrew Bailey, PRA chief executive and deputy governor of the Bank of England, said: “Co-op Bank’s failings stand out both for the duration and seriousness of the risk management and control deficiencies uncovered. This was compounded by a lack of openness with their regulator. These were serious transgressions.”

The report found that the bank had failed to keep regulators informed about its plans for the departure of two “key individuals” as its financial crisis brewed in early 2013. The individuals were not named in the findings but they relate to a period when controversial ex-chairman Paul Flowers and former chief executive Barry Tootell led the lender. Flowers, who was a Methodist minister, later became embroiled in a drugs scandal. There have been questions about how he was ever approved for his role at the bank despite a lack of experience.

The PRA found regulators were “not informed of either of these intended changes in a timely manner” and on one occasion were “provided with an incorrect assurance by Co-op Bank” when it was asked about one of them. Meanwhile, the FCA found that the bank had published misleading information about its financial health. The bank had issued a financial statement for 2012 assuring investors that it could maintain enough capital even under severe stress.

But there was “no reasonable basis” for stating this, the FCA said. At the time its predecessor, the Financial Services Authority, had told the bank it did not have enough capital.

Georgina Philippou, acting director of enforcement and market oversight, said: “Firms have a very basic but extremely important responsibility to be transparent with their investors and with us, as their regulator, and Co-op Bank fell short of this. As a result, investors were left unaware of Co-op Bank’s true capital position and we were left in the dark about intended changes to senior personnel at the bank.”

Both regulators said their findings would also have justified a substantial fine but that they had considered the fact that the Co-op is engaged in a plan to shore up its capital base. The PRA said it would have imposed a penalty of £120m otherwise.

Regulators said they would continue to probe the role of former senior individuals in events at the lender.

Co-op Bank chairman Dennis Holt apologised on behalf of the bank, adding that it was “a significantly stronger organisation today under the leadership of the current senior management team”.