Financial experts examine what went wrong at the Group

While the difficult situation at the Co-operative tends to be attributed to its policies over the past five years, the crisis needs to be examined within the wider context of the decline of retail societies, thinks Paul Gosling.

“We haven’t got a crisis over the last five years, we’ve got a crisis over the last 60 years,” said the financial journalist at the UKSCS conference in Colchester.

Back in the 1960s co-operative societies were the UK’s largest grocer, with a market share of 30%. They now account for only 5% of the market share. With the abolition of resale price maintenance in 1964, retail societies had to compete on price and did not adjust. Some managers were also managing decline, rather than preventing it, he explained.

Another reason behind the weakening of retail societies is, according to Mr Gosling, the executives’ dominance of non-executives in the last few decades and failure of strategic leadership and disconnection between societies and membership.

“We’ve lost that determination to learn how to run the business”, he told delegates.

The appointment of Peter Marks as the Group’s new chief executive in 2007 led to an expansion strategy based mainly on acquisition. The Co-operative sought to achieve scale and in 2008 it bought Sommerfield, a brand of supermarkets.

Paul Gosling thinks this was a wrong decision, with the Group buying shops it was not going to manage. “Why pay 1.7bn on a failed supermarket business?” he asked. Today the Co-operative has 600 shops that are not occupied, for which it pays for leases. This means these are not assets, but liabilities.

In 2011 the Co-operative Bank was outperforming pro rata the financial returns of societies and the Group, with the bank and financial services accounting for over 200m profits and out of Group’s operating profit of 585m.

“The bank was seen as a great opportunity basically to bail out the retail”, argued Mr Gosling. He thinks the Co-op Bank’s 1.5bn shortfall was partly caused by bad commercial loans by Britannia.

The difficulty of integrating the IT systems of the Co-operative Bank and Britannia, along with the lack of due diligence prior to signing the deal also contributed to the current crisis, he said.

Referring to Sir Christopher Kelly’s review into the governance of the Co-operative Group, Paul Gosling said that the former chief executive of the bank, Neville Richardson, did not have the appropriate experience to run it. “He was appointed just to seal the deal, just like Marks,” he said.

“This is not just about corporate governance, it was the executives that made the wrong decisions and non-executives fell for it. I don’t think that we had one failure and that the failure was the bank. We’ve got a fundamental problem with the Group.”

Last year eight banks have been fined for wrongdoing including Barclays and Royal Bank of Scotland. And while Mr Gosling thinks that the Co-op Bank was not as guilty as others, he believes “it shouldn’t have been guilty at all”.

The financial journalist said it was too early to make the assumption that legal action would not happen. Five reviews into the crisis at the Co-operative Bank are currently being conducted by different bodies.

“When those come out, it becomes very likely that legal action will take place,” he said.

A tale of two banks

Sharing her view of the crisis at the bank, financial writer Frances Coppola referred to it as “a tale of two banks, or rather “a tale of a bank and a building society”.

The Co-operative Bank was a PLC owned by a co-operative and Britannia Building Society was a mutual.

“Had Britannia gone down it would have been rescued because it was a mutual,” she explained.

The Co-operative Bank opened negotiations with Britannia in 2008 and continued these in spite of the emergence of the financial crisis. Auditor KPMG warned that they had been denied access to Britannia’s commercial loans book, but, despite that, GP Morgan advised that the merger should go ahead.

“The auditor is only as good as the information it gets. They wouldn’t take responsibility for information they weren’t given and couldn’t get access to. Some questions could have been asked about their approach to risk management, but is it the auditor’s job to do that, is it maybe a question of what was the regulator doing?” commented Frances Coppola.

Following the 2009 merger of the two, the quality of the loan portfolio continued to deteriorate.

In 2011 3.5bn loans out of a total loan portfolio of 11bn were described as unrated for credit risk, according to Frances Coppola. After the Bank reported its results in 2013, the regulator did not allow it to continue unless it improved its capital.

The purpose of the tier 1 capital requirement is to protect customers. “Should a bank be excluded from measures aimed at protecting customers simply because it is owned by a co-op? I don’t think so”, said Ms Coppola.

She added that the Co-operative Bank was providing financial services to a lot of credit unions and its failure could have cause lack of access to payment processes for these credit unions. Had the crisis at the Co-op Bank happened in 2007 or 2008, there might have been more assistance from Bank of England, she said.

The Bank found itself in a situation where it was not allowed to continue to trade, but the Group, which was not regulated as a financial institution, did not necessarily have to bail it out, explained Ms Coppola.

“Is it consistent with co-operative values and principles that a co-op should own a PLC?” she asked delegates.

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