The case of the Co-op Bank, once a trusted household name, is poised to become a useful case study for risk managers, not least to show that if things go wrong, it can take years to recover.
Although the name remains, only 1% is still owned by the Co-operative Group. The bank is now propped up by hedge funds and other investors after a single buyer could not be found and it continues as a standalone entity.
The deal, announced last June, meant although depositors will not be affected, bondholders, including some private investors, were hit with heavy losses. A name once synonymous with ethics in financial services, is now a tarnished brand and in 2020, the Co-op Group will also end an agreement to promote the bank to customers.
Up until 2013, the group had owned all of the bank, and half of its 4.4 million members had a connection to it. However, as scandal and losses mounted, the group sought to extricate itself.
Now, the Co-op Bank is once again in the news; in March, Economic secretary to the Treasury, John Glen, announced a new independent review into the bank’s prudential supervision between 2008 and 2013. He said: “We are committed to creating a stronger and safer banking system. A vital part of this is ensuring that our regulatory system can learn from past events. The launch of this independent review is a further demonstration of this commitment.”
The review will be led by Canadian Mark Zelmer, an expert in financial services supervision, and it will look at a number of issues, including:
- The actions, policies and approach adopted by the Financial Services Authority (in its role as predecessor to the Prudential Regulatory Authority) and of the PRA’s subsequent role.
- What went wrong with the Project Verde deal when the Co-op Bank was to buy 632 branches of Lloyds. When this collapsed, the bank was downgraded and chief executive Barry Tootell left and later stripped of ICAEW membership after admitting failure to act with due skill, care and diligence.
- The bank nearly collapsed in 2013 when a £1.5 billion black hole was discovered and it was revealed ex-chairman Paul Flowers was guilty of highly inappropriate behaviour including class A drug offences.
- The inquiry will also look at the impact of IT on its operations, specifically whether the regulator was made aware of a change to accounting treatment of the cost of replacing its IT platform in 2010 and if this investment should have been postponed.
Asleep at the wheel?
Clearly, risk management as a group wide function was neither proactive or involved in the process particularly with regards to strategic decision making. There were also many other problems including PPI mis-selling, loan defaults and an old, ineffective IT system. It was also a wrong move to buy Britannia Building Society in 2009, which also had too many bad debts. Then there were the matters such as a lack of stress testing on the bank’s financial position and that Flowers and a number of other board members were not from banking backgrounds.
Banned for life
As for Flowers, he has recently been banned from ever working again in financial services by the FCA, which stated he had a “lack of fitness and propriety”.
According to Mark Steward, the FCA’s executive director of enforcement and market oversight: “The Chair is pivotal in setting expectations of a company’s culture, values and behaviours. Mr Flowers failed in his duty to lead by example and to meet the high standards of integrity and probity demanded by the role. These high standards are what the financial services industry and the wider community rightly expect of its senior individuals. Where a Chair, or other senior individual, fails to discharge these standards the FCA will hold them to account.”
Both the PRA and FCA waived substantial fines since it was believed the bank running up even greater losses would cause more harm. It appears this was a sound decision as results for 2017 showed losses of £140 million, an improvement on the £477 million loss of 2016. Many hoped that the financial crisis of 2008 had drawn a line under wrongdoing – lessons from the Co-op Bank should reveal that there is still much to learn on corporate governance.