David Anderson, former Chief Executive of the Co-operative Bank, instigated the merger with Britannia Building Society and he tells the Treasury select committee why the merger happened, what the risks were and what went wrong . . .
Why the merger with Britannia? … “We had been reviewing the strategy for the Co-op’s financial services businesses all together and we had looked at the investments that were needed. We had looked at the continuingly high cost base for the bank and we knew that we had to make very significant investments. We really did not have the distribution reach in order to get a return on those investments, so if we were to make those investments we had to do something. Our plan was twofold. We had a kind of more organic view, which is, 'Let’s work with the food retail business in the Co-op'. We opened branches in food stores and so on to try to develop that, but that was slow-urn and unproven. At the same time the Butterfill Act was becoming law, which for the first time allowed one species of mutual to merge with another. We were very interested in that and the board formed the view that it gave us the opportunity to be involved in consolidation in the building society sector. Britannia was seen as a very complementary fit in terms of distribution reach—the 254 branches—the expertise in mortgages and savings that would help take the bank away from the over-dependence of unsecured lending, which I described earlier, and give us scale to make the investment in IT that we needed."
Why take the risk on merging two mutuals during the height of the financial crisis? … “Because, on the basis of the work we were able to do, we formed the view that the risk of the two organisations together was less than the risk of each separately and less than the risk of our organisation separately. There are minuted comments in the board that that was the conclusion that was reached. We had very full due diligence on the Britannia. We had advisers who had reached the conclusion that there was significant value to the Co-op in the deal. We could see a business case that produced very significant cost synergies that effectively were going to improve the condition of the combined, because that improved the collective profitability."
Why did the Co-operative Bank end up with a capital shortfall of £1.5 billion? … "What influenced the downfall were a lot of things that happened after the merger, including problems that arose in both Britannia books and Co-operative Bank books, including significant management stretch created by merging the financial services business into the group, bidding for the Verde assets, and also difficulties that arose from changes in accounting procedures and regulatory views of capital. As ever, when something goes so disastrously wrong, it tends to be a series of things that come together to create the outcome rather than one thing."
Where has the collapse of the bank left the mutual model in financial services? … "A whole series of events have come together to cause that collapse. Some of it you would have to ascribe to governance issues. I think that in every sector there are businesses that do well and businesses that make mistakes, and I think it is clear that in this case mistakes have been made. I fundamentally disagree with anyone who says that undermines the financial mutual model. It is fair to say that the Co-op as a mutual bank was in a different position to raise capital from … going forward, and that was something that they were in discussion with, I think, the Treasury about. I am not sure. But they were trying to redress that position and get a specific way. It is a particular issue for co-operative banks in the UK that does not apply to co-operative banks in Europe. I believe that successful mutuals are a big part and an important part of our financial landscape and will continue to be so."
On the mis-selling of PPI …. "The Co-op Bank owed an especial duty of care in the products it sold to its customers. I know everyone connected with the bank is deeply disappointed that the bank is caught up in that."
Was the Co-operative Group’s and Co-operative Bank’s governance structure defective? … "I do not believe that that existed at all in the banking board, because we had external professional non-executive directors. In addition to group board democratically elected members, we had five professional non-executive directors on the bank board. That made the boardroom feel like other boardrooms in which I have been involved, to be honest. The group board was different. It had two constituencies. It had its elected members from the democracy, and it also had the chief executives of the largest independent co-operatives, because they had a say in the group as well. That did sometimes create tensions in that boardroom, because there were effectively two groups in there. We did not have that issue in the bank."
What responsibility does he take for problems at the Bank? … “I have made it clear that I feel as though I am responsible for initiating the merger of Britannia and overseeing the process by which that was evaluated. I do not believe the other elements of the problem can be associated with my tenure, in the sense that they happened after I left or before I started.”