The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have reprimanded the Co-operative Bank for rule breaches, management failures and risk defence flaws. The bank has avoided a substantial fine but senior figures, including its former chairman, Paul Flowers, are still under investigation.
The 18 month probe into the Bank was carried out jointly by the two regulators following the near collapse of what was the seventh-largest bank in the UK. In 2009 the Co-operative Bank merged with the Britannia Building Society, and two years later bid for 632 Lloyds Bank branches (Project Verde). However, the toxic nature of the combined Co-op and Britannia balance sheets emerged, leading to the announcement of a £1.5bn shortfall in capital at the Co-operative Bank and the collapse of Project Verde. The Bank was floated on the stock market and the Co-operative Group’s stake in the organisation was reduced to 20%.
The FCA and PRA review scrutinised the period from 2008 onwards, when Co-op Bank and Britannia Building Society negotiations began, and in a statement said they found that the Bank “fell short of its responsibility to be open with its regulators, which is one of the principles that regulated firms must abide by”.
In addition to the joint investigation, the PRA has also published the result of its own action against the Co-op Bank, finding that it failed to comply with Principle Three of the Principles for Businesses between July 2009 and December 2013, which requires a firm to manage its affairs responsibly, with adequate risk management.
The Bank also breached Principle 11, which requires firms to be open and co-operative with regulators, and disclose information of which the regulators might reasonably expect to be aware. In this case it failed to tell the FCA or PRA about intended changes to two senior positions and the reasons behind those changes in the period April 2012 to May 2013. The regulators would expect to be notified of any intended changes to senior individuals without delay to enable the proper consideration and assessment of the management of the organisation. Investigations into senior individuals at the Co-op Bank during this relevant period are on-going.
In addition, the investigation found the Co-operative Bank also made claims in its financial statements for the year ending 31 December 2012 that were false and misleading. The Bank claimed that “adequate capitalisation can be maintained at all times even under the most severe stress scenarios”. However, the regulators found “that there was no reasonable basis” for this claim.
While the Co-op Bank’s failings would normally merit a financial penalty, the FCA and PRA say that “exceptional circumstances” mean this has been avoided.
Georgina Philippou, FCA acting director of enforcement and market oversight, said: “Firms have a very basic but extremely important responsibility to be transparent with their investors and with us, as their regulator, and Co-op Bank fell short of this. As a result, investors were left unaware of Co-op Bank’s true capital position and we were left in the dark about intended changes to senior personnel at the bank.
“This is a serious matter, but exceptional circumstances mean a public censure is the appropriate and proportionate response. It is vitally important that Co-op Bank’s capital resources are directed towards improving its resilience.”