Co-operative Bank could face fines from regulators

The Guardian reports that the bank is now just 20 per cent owned by the Co-operative Group of supermarkets and funeral homes after an emergency fundraising was required to plug a £1.5bn shortfall uncovered in 2013. Control passed to hedge funds and other private investors after the rescue.

On Tuesday, the bank said it would begin settlement talks next month with the Financial Conduct Authority and the Bank of England concerning events between 2008 and 2013.

“The outcome of any settlement discussions is currently uncertain both in the details of any findings and any potential financial penalty,” the bank said.

No details of the scale of any fines have been discussed with the FCA or the Bank of England’s regulation arm, the Prudential Regulation Authority. The regulators have powers to fine institutions and individuals, who could also be banned from working in the City.

“FCA and PRA have recently indicated that their preliminary view is that they are minded to make findings against the bank covering certain decisions, events and processes over the period from mid-2008 to end-2013. Based on their current view, the FCA and PRA have indicated they intend to commence formal settlement discussions in July 2015,” the bank said.

The problems inside the Co-op Bank led to a series of a parliamentary hearings and official reports by the bank and the wider Co-op Group into what went wrong.

A report by Sir Christopher Kelly, a former top civil servant, published in April last year pointed to poor management, bad lending, a flawed culture and an overambitious drive for growth in the years up to the discovery of the capital shortfall. He also concluded that the bank should never have merged with the Britannia Building Society in 2009, just as the banking crisis was talking hold.

The PRA declined to comment on the Co-op’s statement but in January last year the regulator revealed it had started an investigation into the bank and the “role of former senior managers”. Those individuals have not been named.

At one of the parliamentary hearings into the failings at the Co-op bank, the former chairman Paul Flowers, who was also a Methodist minister, was unable to tell the Treasury select committee the size of the bank’s balance sheet. Flowers later pleaded guilty to possession of cocaine, crystal meth and ketamine at Leeds magistrates court after an exposé by the Mail on Sunday.

The Treasury committee – which was investigating the collapse of the Co-op bank’s attempt to buy 632 branches from Lloyds Banking Group – also took evidence from regulators and other former members of the bank’s management team.

The announcement from the Co-op bank about the impending settlement talks is the first update on the ongoing investigations since the PRA and FCA first admitted inquiries were underway in January last year. There was no update on an investigation by the Financial Reporting Council into the accounts, which were audited by KPMG.

Once the outcome of the PRA and FCA investigations are known, the government will face pressure to see through its pledge to commission an independent investigation into what went wrong at the bank.

If the PRA does take action against the Co-op bank it will be only the second time it has used its new powers to fine banks. The first time it issued a financial penalty was in November when it hit Royal Bank of Scotland with a £14m fine related to its IT failures in 2012.

New management has since been installed at the Co-op bank. The new boss Niall Booker said: “The bank has been co-operating fully with the regulatory authorities. The risks of any adverse findings and penalties relating to these past events have been highlighted on multiple occasions previously. We will provide a further update as and when appropriate.”