Furious holders of Co-operative Bank bonds have demanded answers from watchdogs after it appeared that they voluntarily gave up powers which could have been used to force the group to inject more cash into its beleaguered banking operation.
The Financial Services Authority (FSA) granted the company a three-year waiver from being overseen as a “mixed financial holding company” in 2012 in the midst of Co-op Bank’s failed bid to buy Verde, now TSB, from Lloyds Banking Group.
That means the Bank of England’s Prudential Regulation Authority (PRA), one of the two successors to the FSA, cannot now issue what is known as a “qualifying parent undertaking order”, which bondholders argue could have been used to force it to inject more cash into its banking division.
Co-op is finalising plans that will see it inject £1bn into the troubled bank with bondholders providing a further £500m through their holdings being converted into new shares representing a third of a recapitalised bank under the control of Co-op Group.
But hedge funds, which have built up a substantial holding in the bonds, have demanded a better deal and last night the Co-op said it had set up an “independent committee of the board of the Co-operative Bank” led by chairman Richard Pym to consider this.
Campaigners for small savers, many of whom relied on the bonds for income, have written to PRA chief executive Andrew Bailey to demand answers.
They have obtained a letter from Euan Sutherland, the chief executive of Co-operative Group, which says: “Looking . . . at the issue of the powers of the Prudential Regulation Authority (“PRA”) in terms of qualifying parent undertaking orders, these apply to companies designated as an insurance holding company, a financial holding company or a mixed financial holding company. CGL is none of these, so the powers of the Prudential Regulation Authority (“PRA”) and Financial Conduct Authority (“FCA”) to make such directions do not extend to it.”
Mr Sutherland goes on to explain that the FSA discussed Co-op’s status when it was trying to complete the deal with Lloyds. He says in the letter: “The FSA advised CGL that it might fall within the definition of ‘mixed financial holding company’, even in advance of completion of Verde, due to the relative size of its financial institution subsidiaries.
“Following an application from the group’s financial institution subsidiaries, the FSA granted a three-year waiver from CGL being considered a mixed financial holding company and put the matter beyond doubt.”
Mark Taber, who has been campaigning on behalf of retail bondholders, claimed: “Not only was this an incredible waiver to grant in the circumstances, but also its existence was not disclosed to the market, which had every reason to believe that the CGL stood behind its Bank and could be required to do so by the regulator.”
Mr Taber said it was vital the PRA addressed this point because “it is necessary for people to believe that the Co-op is doing as much as it can and it is important bondholders believe that because Co-op isn’t inviting them in. This is a process that has to be consensual and at the moment it isn’t”.
The Co-op declined to comment on the letter last night. A Bank of England spokesman said it would be responding to Mr Taber “in due course”.