Labour faces 'cash crisis' as Co-op reviews ties to party in wake of Flowers scandal

Millions of pounds in loans and donations to the opposition could be in doubt as inquiry seeks to get to the bottom of the Co-op's failings

Labour could be faced with a major funding crisis ahead of the 2015 general election, as the scandal-hit Co-operative Group reviews its links to the party.

The Sunday Telegraph reported that Ed Miliband’s party could be forced to pay back more than £2 million it has received in loans from the Co-op and a sister bank.

Those loans were secured on favourable terms against future income from union affiliation fees, the newspaper said – ties which Mr Miliband has said he is reconsidering in the wake of alleged union interference in the selection of a Falkirk Labour candidate.

As a result, and with the Co-op Bank set to be bailed out by US hedge funds, as much as £2.4 million worth of loans could be open to renegotiation. These financial links to Labour will reportedly form part of the public inquiry into how the bank came so close to collapse.

Meanwhile, the Observer today revealed that the Co-op is also reconsidering its £850,000 donation to Labour MPs, and could be about to cut it by at least a third.

The money goes to a group of 32 politicians who are members of both the Labour and Co-operative parties, and sources told the newspaper that informal contact had been made to warn them of an impending funding cut.

Barry Sheerman, Labour MP for Huddersfield, told the Observer: “There is no doubt there is going to be a 30 per cent cut across the board.”

The review of the Co-op’s political links comes in the wake of a scandal surrounding Paul Flowers, who was chairman of the bank at the time the loans with Labour were agreed.

The former Labour councillor and Methodist minister was filmed allegedly buying illegal class-A drugs, including crystal meth, and has since been hit with a string of embarrassing revelations about both his private and public life and competencies.

Mr Miliband, writing in the Independent on Sunday, has batted away criticism from the Prime Minister over Labour’s financial links to the Co-op. 

Referring to the row, Mr Miliband writes that on Wednesday Mr Cameron “hit a new low by trying to use the gross errors and misconduct of one man, Paul Flowers, to impugn the integrity of the entire Labour movement.

“We all want proper answers as to what went on at the Co-operative Bank, and the public deserves better than the desperate attempts by the Tory party score the cheapest political points, including ludicrous claims that Labour’s historic links with the Co-op movement were the invention of Rev Flowers,” he said.

The claims of a cash crisis were also refuted today, with a Labour spokesman saying: “Our loans with the Co-operative Bank and Unity Trust Bank are secured and are being repaid in accordance with formal long-term commercial agreements and the Labour Party is on a secure footing for the future.”

The Opposition is set to go on the offensive over the Co-op’s failings, and will launch a fresh push for an annual “validation of competence” check for senior bankers this week when the Financial Services (Banking Reform) Bill returns to the Lords.

Shadow financial secretary Cathy Jamieson said: “Paul Flowers was chairman of the Co-op Bank for three years while David Cameron and George Osborne have been in Government.

“During that time they were not only encouraging the Co-op's failed bid to buy Lloyds branches but also opposing a tougher regime for senior bankers. An annual health check, which ministers resisted on three separate occasions, could have spotted problems and rung alarm bells in this case.

“We will push our amendment again in Parliament this week. After the revelations of the last few days David Cameron and George Osborne should do a U-turn and back it.

“There are now mounting questions for the Government to answer about how the Co-op Bank got into trouble on its watch. George Osborne and his ministers cannot continue to duck them.”

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