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Co-op merger deal blamed for plight
A scathing report into the near-collapse of the Co-operative Bank has pinned the blame on toxic loans inherited from its disastrous merger with the Britannia and laid bare a "sorry story" of multiple management failures.
The review by former Treasury mandarin Sir Christopher Kelly concluded that the takeover by the Co-op of the UK's second biggest building society "should probably never have happened".
Sir Christopher was damning about the roles of former bank chief executive Neville Richardson, ex-chairman Paul Flowers, and Peter Marks, who was at the time chief executive of the wider Co-op group.
The report painted a picture of the bank's culture in which an "acceptance of mediocrity" took hold and little was done "to discourage the wrong behaviours". Mr Richardson was said to "dislike challenge" - though he denied this.
It also pointed to the inaction of regulators over Mr Flowers - whose appointment despite his lack of experience meant the bank lacked proper oversight at a time of crisis - as well as in relation to the Britannia's pre-merger financial affairs.
Sir Christopher was asked to investigate after the bank was found to have a £1.5 billion hole in its balance sheet which meant that it had to be rescued by bondholders in a move that saw the Co-op group lose overall control of the business.
He said: "This report tells a sorry story of failings in management and governance on many levels.
"The roots of the shortfall lie in a merger between the bank and the Britannia building society which should probably never have happened.
"Both organisations had problems. Bringing them together exacerbated those problems. It might have worked if the merged organisation had first class leadership. Sadly it did not."
The report, which cost £4.4 million to produce, threw the spotlight on Mr Richardson, the Britannia chief executive who took charge of the Co-op bank following the merger in 2009 before leaving in 2011.
Sir Christopher said there was "overwhelming" evidence that it had not been in a good position when he departed, with the bank's capital position only looking reasonable because "problems had been pushed into the future".
A botched IT update which would end up wasting £300 million was "floundering" and there was no plan to deal with bad commercial loans that would come to create most of the Co-op's financial black hole other than "to wait for things to get better".
Sir Christopher found that Mr Richardson had presided over the creation of a high risk investment portfolio while at the Britannia, before doubling his pay to become boss of the newly-expanded Co-op bank where he received £1.2 million in 2010.
It later emerged that the Financial Services Authority (FSA) had been so concerned about the building society, before the merger, that it had been placed on a watch list. The FSA later said that the Britannia would have collapsed were it not for the Co-op.
The report also focused on a later, abortive attempt by the Co-op to buy hundreds of Lloyds branches, known as Project Verde - which was enthusiastically backed by group boss Mr Marks.
He was said to have described the £1.75 billion offer as a "punt" though denied using the language. Sir Christopher said his lack of banking experience and commitment to pushing through the deal "made a dangerous combination".
Its failure would cost the bank £73 million and result in a significant distraction for the embattled lender, the report found.
Sir Christopher said he found no "compelling evidence" that the Co-op had come under political pressure over the deal, after allegations by Mr Flowers. But both the ex-chairman and former Treasury minister Mark Hoban declined to speak to him.
The lion's share of the Co-op's black hole was an £802 million loss on commercial property loans, which was compounded by a £300 million hit from the IT fiasco and £269 million for its involvement in payment protection insurance mis-selling.
Sir Christopher found the group and bank boards "seemed either oblivious to these issues or, if they were aware, failed to take sufficient timely action to mitigate them".
The bank had performed only "cursory" checks on the Britannia's commercial loans ahead of the merger.
Sir Christopher said the Co-op group - whose record £2.5 billion losses for the year were largely the result of the bank's failure - had badly let down its millions of members by its failure to provide "proper stewardship".
The bank's downfall came when, just as the losses were crystallising at the start of 2013, the Bank of England's Prudential Regulation Authority (PRA) ordered it to beef up its balance sheet in line with a new policy in the wake of the financial crisis.
But Sir Christopher cleared regulators of singling out the Co-op and said they had been making "warning noises" about the issue for some time.
The report was based on more than 130 interviews with current and former employees, board members and others, and examination of internal papers and external reports.
His report appeared to back calls for change in the wider Co-op group's democratic structure and said its method of appointing members to the board undoubtedly contributed to "serious failures" in oversight of the bank.
In response to the report, Co-op Bank chief executive Niall Booker apologised for "past failings" and said it had been "working diligently" to address them.
It also revealed it was appointing new auditors, Ernst & Young, ending a 40-year relationship with KPMG amid a regulatory investigation into the Co-op's past accounts in the years leading up to the end of 2012.
The wider Co-op group said the report demonstrated the need for change in its own governance, which has faced with stiff resistance from some within the organisation. Interim chief executive Richard Pennycook said: "It is a sobering assessment."