The Co-op Bank Disaster who is to Blame?

The Co-op Bank Disaster who is to Blame!

Clearly something has gone seriously wrong at the Co-operative Bank but the latest twist in this saga has created far more heat than light. The public pillorying of Paul Flowers, for the Tabloids love it is the perfect story, a Vicar, sex, class A-drugs and rent boys. And that is before the banking connection. Clearly the Tories have enjoyed this big time. The Co-op movement’s historic connection to the Labour Party has made this a great opportunity to attack both the democratic nature of the Co-op and its role as the banker to Labour.

Firstly the Co-op Bank has never been a co-operative. It began life as the Loan and Deposit Department of the Co-operative Wholesale Society back in 1872 and ninety-nine years later it became a plc and a wholly owned subsidiary of the Co-operative Group.

Furthermore the Directors of the Bank have never been elected. They have always been appointed by the main board of the Co-op Group and to overcome any skills gaps they have included a significant number of  what are independent non-executive directors drawn from the financial services and banking industry.

In short Paul Flowers may have been chair of the Bank Board but he was not running the show. Indeed the board had a minority of elected members. To quote the annual report for 2012, “Of the 11 Non-Executive Directors four are elected members of the Co-operative Group Board, two are Co-operative Group Executives and five are independent and recruited for their specific financial services experience and expertise.”

All the key roles on the operational sub-committees of the board where taken by banking professionals of some standing. 

In the 2012 annual report you will see that the Chair of the Risk Committee which had responsibility for “the management and control of all significant risks, including technical, operational, business model and external risks”, was Merlyn Lowther.  Her name maybe familiar indeed you may have her signature in your wallet. As chief cashier of the Bank of England her signature was on our bank notes for four years. She joined the Bank of England Economics Division in 1975 and had worked her way up to chief cashier by 1993.

Then there is the Exposures Committee, responsible for sanctioning “large counter party transactions, manage large exposure positions and consider risk management of exposures”. This was chaired by Peter Harvey who had been the chief executive of UK Business Banking at Barclays PLC as part of long career at Barclays.

There is also William Hewitt former Group Finance Director of the RAC who was chair of the Audit Committee.  Then there are the external auditors KPMG. The Bank was given a clean audit including a review of their corporate governance statements by Andrew Walker an Audit and Transactions Services partner in KPMG’s Financial Services practice.  He specialises in the retail financial services sector, in particular building societies, credit cards and consumer finance.

Andrew has worked extensively on IFRS (For those who don’t know these are International Financial Reporting Standards) for most of his audit clients and has detailed experience and insight of application of standards in complex, subjective areas such as impairment, fair value and hedging.  He has acted as the expert on a major claim in connection with credit card and internet systems.  He has also led reviews in connection with OFT investigations in the banking and consumer finance sectors.

Oh and don’t forget the advisers who facilitated the merger with Britannia said to be Tim Webb of J.P. Morgan Cazenove. According to their website Tim is an exceptional banker. He represents “the stability of our management team and the depth of talent that allows us to maintain consistent service to clients year after year”.

It must be clear to everyone now that that deal was the mutual equivalent of Lloyds and HBOS.  The Co-op Bank was a prudently run fairly boring bank indeed there had been a time when the board consisted was solely of elected members who were completely risk averse.

Britannia it now appears believed there would never be a recession and the housing market and the commercial property market would ever stall and was loaded with all sorts of toxic debts. Now we all know the consequences of that lethal cocktail.

The other board members included Neville Richardson the former CEO of that Building Society. Then there was Peter Marks the Co-op Group CEO determined to grow the business by acquisition at apparently any price the stage is set for a total disaster.

Far be it from me to try and defend Paul Flowers. His performance at the select committee was not brilliant but he was not the worst performer by any measure. However hs apparently dissolute private life style has provided the tabloids with a great story and Cameron and Osborne a stick to beat the Labour Party with. But the collapse of the Co-op Bank is not the fault of the elected members of the Group Board or of the four elected members on the Bank Board.

It was the professional bankers and financial advisers that that cooked up the deals that bought the bank low. The Co-op Bank is in the brown sticky stuff because it was a Bank not because it was a Co-operative.