Co-op Bank Review Charts "Sorry Failings"

The Main Findings Of The Co-op Bank Review

Updated: 7:16am UK, Wednesday 30 April 2014

The review by Sir Christopher Kelly into what went wrong at the Co-operative Bank is summarised below:

:: THE REVIEW

The independent review was commissioned in July 2013. It is based on more than 130 interviews of current and former employees, board members and others, as well as examinations of internal papers and external reports.

Its conclusions are scathing. In its own words it is a "sorry story of failings in management and governance".

The review states that contributory factors to the "debacle" include the economic environment and increasing capital requirements by regulators but Sir Christopher Kelly identifies two key areas of failing:

:: BRITANNIA MERGER

It says the Britannia merger of August 2009 "lies at the heart" of the problems at the bank. At the time of the merger, Brittania was the second largest building society in the UK with assets of £35bn, 2.8m customers and 254 branches, compared with Co-Op banks assets of £15bn, 500k customers and 90 branches.

Brittania had more exposure to sub-prime lending (loans to people who may struggle to repay them) than any other building society. The review found out that Brittania would sometimes complete transactions that no other lender would take on.

It was put on a "watch list" by the city regulator, then-called the FSA, but it makes clear neither Britannia, nor the Co-op bank were aware of this.

It calls the due diligence process preceding the merger "cursory" and "startling". Accountancy firm, KPMG was not given access to Brittania premises so could only perform high level checks on the information provided. But adviser JP Morgan Cazenove advised the Co-op that KPMG's due diligence "exceeded that normally undertaken for listed companies".

The bank's board was not alerted to the deteriorating business case of Britannia as property prices plummeted. Something the review calls "a major error of judgement".

:: MANAGEMENT AND CULTURE

It says the executive team of the bank "failed to exercise sufficiently prudent and effective management of capital and risk" and that the board "failed" in its oversight of the executive. Combined it says "they badly let down the Group's members".

The bank's culture accepted mediocrity and "did too little to discourage wrong behaviours". It failed to address poor performance and tolerated under-performers – "something which might take a week in most banks would take months in the Co-operative Bank".

It advises that considering the Group still owns 30% of the bank, the Group board should take on an experienced banker. It notes that both Sainsbury's and Tesco, which are trading companies with banking subsidiaries smaller and less complex than the Co-op Bank, have experienced bankers on their main boards.

Other areas of note:

:: Payment Protection Insurance

In relation to PPI mis-selling it notes that in spite of the fact the Bank had an avowedly ethical policy, it "manifestly failed to treat its customers fairly". Total provisions for PPI compensation up to the end of 2013 were £347m.

:: PROJECT VERDE (LLOYDS BRANCHES)

Paul Flowers, the disgraced former chair of the bank, is called in the report a "wholly unsuitable person to chair the Co-operative Bank board".

Flowers has asserted that the Treasury pressured the bank into buying branches of Lloyds, in the deal known as Project Verde.

Flowers declined to be interviewed by the review but Kelly has found "no compelling evidence of pressure from government ministers or anyone else".

:: CONCLUSION

The report concludes that the circumstances that led to the lessons laid out by the report "must pain all who care about the co-operative movement".

:: CONTEXT

In the past few weeks both the Co-operative Group and the bank have announced major losses.

The group's losses were £2.5bn for 2013 - the worst results in the group's 150-year history, with £2.1bn of that coming from the Co-op Bank.

The bank's figure contained a trading loss of £1.44bn for the year to December, when the group lost control of Co-op Bank to US hedge funds.

The interim chief executive of group, Richard Pennycook, on April 17th called the past year a "disastrous year for the group" - the worst in its history.

:: AGM

On the 17th May there will be an AGM for Co-operative Members. It is expected that the mutual's board will seek backing for Lord Myners' proposals to reform corporate governance.

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