City advisers got £8.3m for Co-op deal but didn't check fatal loans

KPMG and JPMorgan say they weren't asked to look at toxic mortgages, so didn't

Co-operative Bank's auditors of 30 years did no due diligence on the commercial property part of Britannia Building Society's loan book that watchdogs say broke the bank, MPs were told yesterday.

Those auditors also said there was "nothing" in the behaviour of Paul Flowers, the bank's former chairman, that suggested he would fall so dramatically. Mr Flowers is on police bail having been filmed allegedly buying drugs. It also emerged that "inappropriate but not illegal" material had been found on a laptop sparking his resignation from Bradford Council.

Appearing before MPs on the Treasury Select Committee, KPMG partner Andrew Walker said the auditor's due diligence work had looked only at "specific risk areas" agreed with the bank's board. KPMG had only been given access to information on the Britannia's 10 biggest commercial clients, he said. It was paid £1.3m for its work on the deal.

Although he had not seen the crucial commercial loan book, Mr Walker said in one report that the bank's capital position "should not be compromised" by the deal. He said he did not regret saying that.

"We could see that the bank was in excess of its capital requirements and so our report was referring to that. The bank remained above its headlines."

But he said this was not a statement of the robustness of the deal.

"That was [a decision] for management to make."

He also defended the bank's board.

"The board was asking the right questions in terms of the risks," said Mr Walker.

His colleague, Jonathan Hurst, later said that there was "nothing that made me particularly concerned" about either the board's behaviour or its decision making. He said there was no indication in Mr Flowers' behaviour that such lurid allegations would arise. Mr Walker said colleagues had subsequently assessed their work: "We have looked back. We considered the due diligence carefully and we concluded it was a thorough piece of work."

The committee heard from the audit firm as part of its inquiry into the collapse of Co-op Bank's attempt to buy the Verde branches from Lloyds. That will now be floated as TSB.

Mr Walker also defended his signing off of the accounts in 2012 shortly before regulators identified a £1.5bn capital shortfall.

MPs also took evidence from JP Morgan, the investment bank, which it emerged had received a £7m fee for the deal, including a £5m success payment. The bank's evidence said it gave a "fairness" opinion on the transaction but said it was for the board to make a commercial judgement on it.

Tim Wise, managing director of UK investment banking at JPMorgan admitted that the fee was "significant" but said "that is the way that the industry works". He agreed with KPMG over the controversial commercial loan book, that it was the Co-op's board and management team that had the "real expertise in this area".

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