Co-op Bank censured over ‘serious’ failings but is spared £120m fine

The Co-Operative Bank has been censured by regulators over failings leading up to its near-collapse,

The Co-Operative Bank has been censured by regulators over failings leading up to its near-collapse, but has been spared a potential fine of �120m. - Credit: PA

The Co-operative Bank has been censured by financial regulators over failings surrounding its near-collapse but spared a fine of £120million.

A probe by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) found there had been “serious and widespread failings” in the way the lender was run from July 22 2009 and December 31 2013.

The PRA found flaws in the way the lender assessed risk, potentially weakening the firm and its resilience, as well as deficiencies in failing to keep the board “apprised of key issues”.

It added the bank “had a culture which encouraged prioritising the short-term financial position of the firm at the cost of taking prudent and sustainable actions for the longer-term”.

The report also said the lender failed to deal with regulators openly and failed to notify them of “two intended personnel changes in senior positions”.

It said the failings were “sufficiently serious to warrant a substantial financial penalty” but the PRA said the fine - which would have been about £120 million - would not help its aim to promote the “safety and soundness” of firms it regulates.

PRA chief executive Andrew Bailey, deputy governor of the Bank of England, said: “Firms must have in place strong controls and sound risk management as operating without them undermines safety and soundness.

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“Co-op Bank’s failings stand out both for the duration and seriousness of the risk management and control deficiencies uncovered.

“This was compounded by a lack of openness with their regulator. These were serious transgressions.

“The PRA has not levied a fine in this instance but, if any future enforcement investigation into Co-op Bank found serious and wide-ranging failings, this censure will be a relevant factor in determining the outcome.”

The bank nearly collapsed in 2013 after a £1.5 billion hole was discovered in its balance sheet and had to be rescued by bondholders including US hedge funds after dragging the wider Co-operative group to a £2.5 billion loss.

A report last year blamed the crisis on toxic loans inherited on its disastrous merger with the Britannia as well as laying bare multiple management failings.

Questions have also been raised about the appointment of Methodist minister Paul Flowers - later engulfed in a drugs scandal - as the bank’s chairman.

The PRA’s report today threw the spotlight on the way bosses at the Co-op held discussions leading to the departures of two unnamed “key individuals” in a period from April 2012 to May 2013.

Regulators were “not informed of either of these intended changes in a timely manner” and on one occasion were “provided with an incorrect assurance by Co-Op Bank” when it was asked about one of them.

May 2013 marked the departure of chief executive Barry Tootell and the following month saw Mr Flowers leave.

Meanwhile, the FCA found that the bank had published misleading information about its financial health. The bank had issued a financial statement for 2012 assuring investors that it could maintain enough capital even under severe stress.

But there was “no reasonable basis” for stating this, the FCA said. At the time its predecessor, the Financial Services Authority, had told the bank it did not have enough capital.

Georgina Philippou, 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.”

The FCA said its findings would also have justified a substantial fine but that it and the PRA had considered the fact that the Co-op is engaged in a plan to shore up its capital base.

The lender is rebuilding its balance sheet after it failed a Bank Of England stress test last year.

Regulators said they would continue to probe the role of former senior individuals in events at the lender.

Co-op Bank chairman Dennis Holt apologised on behalf of the bank, adding that it was “a significantly stronger organisation today under the leadership of the current senior management team”.

He said: “The investigations by the regulators into what went wrong at the bank are very important and the Board takes the censures extremely seriously

“The bank has been co-operating fully with the regulatory authorities and the board fully accept the lessons that need to be learnt, but it is important to remember these are not a reflection of how the Bank is run today.

“They relate to historical events and legacy issues and were not decisions made by the current senior management team.”