Watchdog could look at Co-op statements about bank's strength

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City watchdogs could launch an investigation into the Co-op and its bosses over statements made by executives before the revelation that the Co-op Bank was in a £1.5bn hole, MPs on the Treasury Select Committee were told yesterday.

Questioning Martin Wheatley, the head of the Financial Conduct Authority, the Conservative MP Jesse Norman said there was now an “enormous cascade of evidence to suggest that a series of misleading statements were made and that there may have been a false market in the [Co-op Bank] bonds let alone the state of the bank.”

He asked Mr Wheatley whether, as a result, he would launch an investigation into whether Co-op’s chairman Len Wardle and some Co-op managers were “fit and proper”, and pointed to a series of bullish statements made about Co-op Bank’s financial strength in its 2010 and 2011 annual reports, and in an interview given by Mr Wardle.

Mr Wheatley replied: “Where there are suspicious circumstances we would launch an investigation.”

Mr Norman said that sounded as though Mr Wheatley “would take very seriously whether they were fit and proper”. Mr Wheatley replied: “Yes.” 

Bondholders, many of them small savers, stand to collectively lose a substantial chunk of the £500m they invested when their bonds are turned into shares representing a third of a re-capitalised Co-op Bank. The other £1bn is being put up by the Co-operative Group, the bank’s parent.

As such, it will be the first bank to fall into difficulties in recent years not to require a state bailout. But bondholders are furious, arguing that they were misled about the condition of Co-op Bank. Critics of the plan have argued that Co-operative Group should put up all the money to rescue the bank, perhaps through more sell offs such as its profitable funerals business. Others have said that if bond holders are forced to lose out, then Co-op should not be allowed to remain as a majority shareholder in the bank. 

Mr Wheatley refused to say whether the board of the Prudential Regulation Authority, of which he is a member, had discussed ordering Co-op to fund the entire shortfall.

“I don’t think I can disclose what conversations have happened within the PRA board with regards to that,” he said. But he added: “If the Co-op Group were able to (meet the shortfall) that would be a preferable outcome.”

He said he “would hope” bond holders would be given a true picture of the Co-op’s situation when the “offer” that will see the forced conversion of bonds into to shares is published.

Speaking after the meeting, Mr Norman told The Independent: “I think the hearing established that the Co-op still has some serious questions to answer. Why has the Co-op not done more to support the Co-op Bank? Has there been a false market in Co-op bonds? Have some members of the Co-op board and management misled the public about the true status of the bank’s capital position, and how far should those involved be considered by the FCA as fit and proper persons.”

Co-op has long argued that the offer on the table is the only one available to bond holders and that without it Co-op Bank would be bust. The group has said that its shareholding in the bank has effectively been wiped out and the £1bn of funds it is putting into the bank represents “new money” raised through means such as the disposal of its insurance and fund management businesses.