Co-op Bank escapes massive fine but feels the wrath of regulators

The City’s financial regulators have delivered a damning verdict on the Co-operative Bank after an 18-month investigation, accusing the lender’s previous management team of “serious transgressions”.

They also revealed that investigations into “senior individuals” at the bank in the years leading up to its near collapse in 2013 are still ongoing.

However, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) decided against imposing fines on the bank, which has always trumpeted its ethical credentials, judging that a levy would merely impede its efforts to rebuild an adequate capital safer buffer.

The PRA said that, otherwise, it would have imposed a huge financial penalty of £120m on the bank.

The Co-op Bank, previously wholly owned by the Co-op Group, had to be bailed out by a consortium of hedge funds in 2013 after a £1.5bn black hole was uncovered in its finances.

The rescue was the culmination of years of mismanagement as the lender struggled to digest the Britannia building society, which it swallowed in 2009. The bank’s bid to buy 632 branches from Lloyds was also scuppered by the capital shortfall.

In a public censure, the PRA accused the bank’s management of being unable to handle risks, fostering a short-termist culture and a “lack of openness” with the regulator between July 2009 and the end of 2013.

These included not keeping the regulator informed of senior personnel changes. Ex-chairman Paul Flowers, known as the “Crystal Methodist”, resigned in a drug scandal in 2013.

Andrew Bailey. the chief executive of the PRA, 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.”

Georgina Philippou, acting director of enforcement and market oversight at the FCA, was equally scathing. “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.”

The chair of the Co-op Bank, Dennis Holt, offered his apologies to customers for past failing and stressed that the lender was now much better run than in the past.

“We understand the details of the findings may once again cause customers concern, but there is no impact on the resilience of the Bank, its strategic plan or on the quality of service we provide customers” he said.

The Co-Op Group today has only a 20 per cent holding in the bank. The consortium of hedge fund owners, however, have pledged to maintain the bank’s traditional ethical lending practices.

The Financial Reporting Council, the accountancy regulator, is still looking into the Co-op Bank’s accounts back to 2008, which were audited by KPMG. Last year, the Co-op Bank dropped KPMG as its auditor, ending a relationship of 40 years.

Not so Co-operative: The Bank’s sins

The Co-op Bank was guilty of three major sins. First, there were serious systems and control failures, meaning the bank’s board was not kept informed of operational decisions. Second, it misrepresented the adequacy of its capital buffer.

In a financial statement on 21 March 2013, the bank said it had enough equity on its balance sheet to pass all regulatory stress tests. However, the FCA said “there was no reasonable basis for stating that [it] had adequate capital in the most severe stress scenarios”. Thus the Co-op Bank breached the FCA’s listing rule which says financial institutions should not publish misleading information.

Third, the bank was not “open and co-operative” with its regulators. The FCA says the bank failed to notify either it or the Bank of England-based Prudential Regulation Authority (PRA) that it intended to change two senior executives between April 2012 and May 2013. According to the FCA, this breached a key principle of the UK listing regime.