Warnings about the potential failure for the bid of Lloyds branches were ignored, according to a former Co-operative Bank Chief Executive.
Neville Richardson, who was the Chief Executive of Co-operative Financial Services when the Verde bid was announced in June 2011, told the Treasury Select Committee that a number of big projects and over-stretched management who “took their eye off the ball” were to blame for the failure.
Mr Richardson left two weeks after the announcement and said the deal was presented as a “once-in-a-lifetime” opportunity that had a “logical fit” within the Bank. But, he said: “I’ve always taken the view that it does not make it imperative to carry out a transaction if it was the wrong time.”
He said the 2009 merger between CFS and Britannia still needed to be further embedded. Business as usual was needed too, since the merger had tripled the size of the Bank and the economic environment was “febrile and not improving”. He said: “In these circumstances I was strongly of the view that nothing should be done to distract management from the essential job of running the business. I made my views on this and concerns over management stretch known at several Board meetings in 2011.”
Following the Britannia merger, Mr Richardson said the Board had concluded the life and savings insurance arm was a non-core asset and a programme had started to sell this off. He said a deal had been reached with Royal London before he left in 2011, but it had taken two years to satisfy regulators about the deal.
A complex IT transformation project on the core systems was also ongoing to replace “cumbersome” software, which had never been attempted by a British clearing bank before.
On top of this, the Co-operative Group’s cost-saving initiative, Project Unity, was causing conflict with the financial services side of the business.
He said the project was “putting financial services people under the control of people who are not financial services people” and that it was causing “very major disruption at the time that we were trying to settle in the other programmes”. He added that running two major change programmes simultaneously is asking for trouble, but a third was “asking for failure”.
On Project Unity, Mr Richardson said: “I made my concerns that this would cause serious disruption and distraction to the CFS business known to Len Wardle (Group Chair) and Paul Flowers (CFS Chair) on a number of occasions.
“I felt that the agenda was being driven from the Group, and by [Co-operative Group CEO] Peter Marks in particular. It was not taking into account the risks which would be created in the bank.”
In 2011, the possibility of the Group bidding for the Lloyds branches was presented by Credit Suisse to Mr Richardson and Peter Marks. Said Mr Richardson: “I said no, at that stage, not even to look at an indicative bid, although I was later willing to look at that. The reasons why I said no, were due to capital, liquidity and management stretch.”
By June 2011, a high level review of Verde had been carried out leading to a non-binding bid in July. At that stage, Mr Richardson said the business could not cope with all the ongoing projects simultaneously. He said: “I was deeply concerned that my views were neither being accepted, nor acted upon and felt it was now necessary to bring matters to a head. This I did on 10 July 2011 in a telephone conversation with Paul Flowers (CFS Chair and Group Deputy-Chair) and Rodney Baker Bates (CFS Deputy-Chair), and on 11 July in a face-to-face meeting with Peter Marks.”
He said he told all three people that “to push through all projects simultaneously could lead to disastrous consequences and would be completely to disregard the interests of key stakeholders, namely employees and customers".
This resulted in Mr Richardson’s departure from the Group, which he said was not a resignation, but a mutual understanding that his position had become untenable.
As part of his £4m severance package from the Co-operative Group, which included pension payments, Mr Richardson signed a confidentiality clause forbidding him to speak in public about these reasons. But by speaking to the committee he was able to use parliamentary privilege to reveal these details.
In taking on the Verde project, Mr Richardson believed the Bank had “taken its eye off the ball in running the business”, which impacted operating profits and allowed loans to not be managed properly. And ultimately led to the Prudential Regulation Authority requiring the Bank to fill a capital hole of £1.5bn.
Mr Richardson also denied that Britannia, of which he was Chief Executive, brought any bad debts in the merger that were responsible for the bulk of subsequent losses and the capital hole of £1.5bn. He said that only around a third of the losses incurred by the Bank over past 18 months were from Britannia.
This contradicts evidence previously given by Andrew Bailey, head of the Bank of England's Prudential Regulation Authority, who said the Britannia loans were the "main issue" behind the Co-operative Bank’s capital shortfall. The Bank of England said: “We strongly disagree with Neville Richardson’s view regarding the Britannia loan book situation.”
Mr Richardson did say the regulator has some questions to answer. On the bail-in of bondholders, who will receive a cut of their investments, Mr Richardson said: “Is that bail-in necessary? It’s a question to ask the regulators, that the changes that were imposed on provisioning and on the determination of the so-called black hole in UK banking, £27bn in total, was it necessary to impose that in one go over the period of December 2012 to March 2013?
“What would have been the alternative if it was imposed over a longer period of time? Specifically for the Co-op Bank, and if I look at the results and in saying that Britannia was not a major part to blame, if I look at the figures that gave rise to significant losses, items such as the IT write-off, PPI, Project Verde costs, they add up to very significant figures. But they’re all one-offs, in my opinion. Would it have been possible for the regulator to say because they’re one-offs we’ll give you time to get the capital right?”
On the latest interim results issued by the Co-operative Group, Mr Richardson said: “I feel saddened at the position in which Co-op Bank finds itself and in particular the consequences
for its customers and employees. I feel that many of its current problems could have been avoided and that I made this clear at the appropriate time.
“I am also saddened for the co-operative movement. Making the wrong call on Verde has led to the Co-op Bank shares being listed. If the Rochdale Pioneers had been at Thursday's results announcement I think they'd say that their successors have not lived up to the example they set.”
A spokesman for the Co-operative Group said: “We note the hearing of the Treasury Select Committee. We are very willing to assist the Committee with its deliberations in any way which it would find helpful. We agree with the importance of understanding all the issues, which is why we have established an independent inquiry, the findings of which will be made public."