Actions of Co-op Methodist are back to haunt the bank

Reverend Paul Flowers (Photo: AP)

Reverend Paul Flowers (Photo: AP)

The melt-down at the Co-operative Bank should not have come as a huge surprise to JC readers.

But serious allegations against the bank’s former chairman, Reverend Paul Flowers, have come as a shock.

His alleged drug-use has disgraced the Co-op Bank and led to his suspension from the Methodist Church and the Labour Party, where until recently he was a respected councillor.

Flowers, a supporter of the boycott campaign, led the Co-op as the first major British commercial organisation to block the sale of goods from Israel’s four big fruit produce groups because of the marketing work they do in the Palestinian territories.

At least one of these Israeli enterprises actively markets production from Palestinian farms and communities in the advanced economies. But that made no difference.

The travails of the Co-op have been well documented. The new management team at the Co-op group — headed by former B&Q chief Euan Sutherland and chaired by banker Richard Pym — won an initial go-ahead from bond holders for a rescue package that seeks to plug the £1.5 billion black hole in the Co-op Bank accounts.

The rescue will mean that 70 per cent of the equity in the recapitalised bank will be in the hands of a group of hedge funds — so technically the Co-op Bank may no longer be a Co-operative anymore.

Most of the problems of the bank date back to the disastrous merger with the Britannia Building Society in 2009 with the aim of creating a super-mutual to rival the main high street banks. Unfortunately, it was a deal done out of desperation as Britannia had a large book of spoiled commercial property loans on its account.

The poor state of the Britannia looks to have escaped the attention of the Co-op group directors including then chief executive Peter Marks, the auditors, the regulators and all those responsible for doing due diligence.

Even more remarkable, as Lord Levene shrewdly has pointed out, the Co-op Bank was allowed to become the preferred bidder for Project Verde, the former surplus 632 Lloyds branches, that have now reappeared on the high street under the historic TSB name.

The only conclusion can be that this was a deal driven by political expediency and the desire by politicians and regulators to create a new force in British banking rather than commercial realities.

As is the current fashion in British public life, there are multiple inquiries going on into the events surrounding the Flowers and the financial implosion at the Co-op Bank.

The Co-op has itself announced an immediate fact-finding mission into how Flowers rose to such an esteemed position at the bank when there were so many unanswered questions about his past.

This is in addition to the commissioned study by former senior civil servant Sir Christopher Kelly.

The Financial Conduct Authority is taking a look at how its predecessor organisation the Financial Services Authority overlooked the shortcomings of the Britannia merger and as importantly reckoned that Flowers was a “fit and proper” person to be running a financial group.

The police are looking into drug allegations.

Furthermore, Chancellor George Osborne is promising an “independent” probe, once the FCA and police have done their work.

Meanwhile, the Treasury Select Committee of the Commons — that did so much good work post the 2007-2008 financial panic — is in the midst on its own probe. Clearly, the whole affair has become deeply political because of the strong relationship between Labour and the Co-operative movement with Shadow Chancellor Ed Balls among the Co-op sponsored MPs.

What has not been widely discussed is the pressure that the Co-op Bank’s problems have placed on the Co-operative Group.

So far it has agreed to sell its life assurance operation to Royal London Mutual for £220 million and has placed its general insurance operation on the market.

It also has been quietly selling off grocery stores, with Waitrose among the buyers.

The Co-op Group itself is heavily indebted, as a result of the purchase of Somerfield supermarket chain for £1.57 billion in July 2008 and is seeking to reduce its debt burden as rapidly as possible.

The organisation is in a race against the clock if it is to survive in its current form and may never again be the force it was in the past.

Alex Brummer is City Editor of the Daily Mail

    Last updated: 11:24am, December 16 2013