Co-op Congress 2013

So we all trooped down to Cardiff, including Richard Baggley, the editor of the Morning Star,  for what should have been a really up beat Co-op Congress.  The venue was great that wonderful Industrial and Provident Society, Glamorgan County Cricket Club and the Swalec Stadium. After all no less than the Financial Times had said that there is a “co-operative revival underway” and all the data is going in the right direction.  The number of co-ops in the UK continues to grow up 4% from last year to 6,169, turnover is up 3.3% to £36.7 billion, memberships up by 13.7% to 15.4 million. A staggering 23% increase in turnover since 2008. So why was the mood of the Congress relatively flat? Sadly it was overshadowed by events at the Co-operative Bank.
The Co-op bank began life in 1872 as the Loan and Deposit Department of the Co-operative Wholesale Society. It lent capital and banked the profits of hundreds of co-operative retail societies across the country. It became the CWS Bank four years later but did not become a registered company until 1971.  In UK law it is not possible for an institution issuing withdraw able shares (like a co-op) to become a bank and many feel this effectively stops there being a genuinely co-operative bank in UK law.
So the obvious solution was to set up the Bank as a plc with only one shareholder the CWS or what is today called the Co-operative Group. When it was run by died in the wool co-operators like Terry Thomas, now Lord Thomas of Macclesfield, the bank built on its strengths of free banking and interest on current accounts to launch an ethical policy in 1992.
It is difficult to overestimate the impact this had in the City, because obviously if the Co-op was the “ethical” bank all the rest where plainly unethical. This partly helps to explain the apparent glee from some that the “ethical bank” has come unstuck.
And into trouble it has most certainly run. Trouble that stems from the merger with the Britannia Building Society that looks in retrospect  more like a reverse takeover. With Neville Richardson of Britannia becoming the CEO of the now united Co-operative Financial Services.
The relationship between the Bank and the Group has always been a little unclear. In the Co-op Group rule book there are only five sentences on the relationship with subsidiaries of which the Bank is one and whilst there is a long list of rules on reporting to members there is nothing about this for subsidiaries.
Now the disaster that has befallen the bank is essentially the result of a relatively small number of commercial property loans that the Britannia entered into. Small in number but not in value there are it seems £1.7 billion of impaired loans.
These bad loans are compounded by the banks low capital ratio which is hard to do anything about because of the low profitability of the combined institution. Also as if this was not enough Britannia had twice the industry average at 10%, of residential property loans that have a loan to value ration of more than 100% i.e. are more than the property is worth.
Now the man we one would have thought was wise to all this activity, Neville Richardson, left the bank with a payoff of some £4.6million. When we add to this the fact the Bank was caught up in the PPI miss-selling saga no wonder members are angry and confused.  If the bank was in this condition why on earth did the Group waste £60 million pursuing branches of Lloyds TSB.
Now the rescue plan is a bit complicated but in short the bank needs to raise £1.5billion of extra capital. The most controversial part of this plan is to swop some of the interest bearing bonds held in the bank into shares that can be listed on the stock exchange. Personally I think this is quite an imaginative idea which exploits the fact that the Bank is a plc. However some think it is the thin end of the wedge of losing control of the bank. For me this has the virtue that the Co-op group avoids having to sell selling other profitable businesses to bail out the Bank.
This sad saga is far from finished.  Some argue that it shows the challenges Co-ops have always had raising capital but I think this is a side issue. This is a problem of governance.  Paul Flowers who was chair of Banking Group has “stepped down” but more heads will need to roll if the anger of members at this debacle at what was the Jewel in Crown of UK co-operation is to be assuaged.
And once stabilised we need to be reassured that these new bankers who have been called into re-right the ship will be accountable to members and have co-operative values and principles running through everything they do.