Investigating the crime

One of my guilty pleasures is that I like watching crime dramas.  I don’t want to see the blood and guts, but there is the pleasure of working out who was the guilty party.  In real life there is often more than one guilty person – not just the individual who carried out the awful deed, but those responsible for an unresolved crisis and others who looked the other way, missing the signals of growing tension.


The dynamics of a good crime thriller are currently in play at the House of Commons Treasury Select Committee.  Some readers may be shocked at the thought of real drama taking place in the corridors of Westminster, but seriously – it is.


There are two Treasury Select Committee inquiries taking place at present.  One deals with an ongoing crisis at the Royal Bank of Scotland – on which I report for other media.  The second, as our movement knows only too well, is investigating the Co-operative Bank and its Project Verde bid for Lloyds branches (now rebranded TSB).


In the most realistic crime dramas, the detective work is revealed as less inspiration and more about searching through the forensic details.  Here good police detective work finds its parallel at the Treasury Select Committee (the TSC).  One of the reports recently submitted to the committee is equivalent to dynamite – it blows open a hole in the secrecy of the last three years and reveals truths of which we could only previously have guessed.


The biggest shock is that way back in 2011, the regulator complained to the bank of serious financial reporting failures.  Yet it was only last year that this was revealed publicly – and then because of credit ratings agency Moody’s critical analysis.


The minutes of a meeting in July 2011 between the regulator and the bank’s full board and senior management team show that Andrew Bailey, the FSA’s director of regulation for banks and building societies, “wished to use the opportunity to provide the Board with strong messages about the bank’s capital position, the serious concerns that FSA retained following the significant misreporting of its liquidity position and on the weaknesses in CFS’ risk management”.


Bailey explained “it had come to light that CFS had significantly overstated its liquidity position by misreporting the maturity of corporate accounts”.  For the sake of balance, we should add that the bank apparently rejected the accusation, with the minutes recording that then chief executive Neville Richardson responding that “he was affronted by FSA’s accusation that there had been wilful misreporting of the liquidity position”.


In that same meeting, the regulator made clear that it did not believe the Co-op Bank was up to the job of taking over 632 Lloyds branches under Project Verde.  Bailey “used the misreporting of the liquidity position to illustrate the deficiencies that existed in CFS’ risk management. He said these were not acceptable and were indicative of weaknesses in the group’s broader risk management capacity and called into question its ability to entertain transactions such as Verde.”


These exchanges cut out much of the verbiage of recent months and demonstrate some hard truths and some even tougher questions about why decisive action was not taken much earlier, by the regulator, by the bank’s board of directors and by the Group’s board of directors and senior management.  Two and a half years ago, the people who needed to know did know that the bank was not capable of effectively carrying out the Verde acquisition and, moreover, that the regulator believed there was serious financial misreporting by the bank.


No doubt, those involved in the management of the bank at the time and its auditor, KPMG, will challenge allegations about misreporting.  In recent days the regulator of the accountancy profession, the Financial Reporting Council, announced it will conduct an investigation into KPMG’s auditing of the Co-op Bank.  A spokesman for KPMG responded that given the public interest and other inquiries taking place into the bank, it was no surprise this was being extended to the bank’s audits.  He added: “As auditor to the bank we believe that we have provided, and continue to provide, robust audits which provide rigorous challenge to the judgements and disclosures proposed by the bank’s management.”


Just as shocking as the financial misreporting is the revelation from the minutes of these meetings that the scale of the capital shortfall at the bank was known by its board and by the regulator a long time before this entered the public domain.


Again at a meeting in July 2011, the FSA told the bank regarding its capital adequacy that the “CFS’ position was low relative to its peers. Although the bank met its regulatory requirements, its level of capital meant its ability to withstand shocks was limited. Since it had limited access to capital, it was reliant on the broader Co-operative Group for support.”


Without taking on Project Verde, the bank needed to raise an extra £900m in capital, said the regulator.  If it proceeded with Project Verde, it would need an extra £2bn.  This had to be capital available to absorb losses, so the finance on offer from Lloyds itself to oil the wheels of the deal would not assist with this.


With access to this information, it becomes clear why one of the two experts placed on the board by the regulator chose to resign a year later and why the second expert expressed his desire to also leave.  What is unclear is why the boards of the bank and the Group did not at that point abort the Verde negotiations and accept this was an acquisition too far.  Nor is it obvious why the regulator did not take more assertive and interventionist action.


Options were considered by the Group to raise the necessary capital.  One was disposal of the pharmacy business, which was suffering from low margins.  Other disposals were discussed, as was the issuing of a members’ bond.  As far as the regulator was concerned, a preferred approach would have been for the bank to improve its operational scale by merging with a European mutual bank, such as Rabobank.  The Co-op Bank’s then chairman, Paul Flowers, said that while he would deny this in public, the bank was willing in practice to consider this option.


But the minutes also reveal the problems at senior management level within the bank and Group.  There was clearly serious tension between the Group chief executive, Peter Marks, and the bank’s CEO, Neville Richardson.  The minutes might infer this went beyond tension into animosity.


Richardson’s departure was in essence because he could not accept the situation in which he reported to Marks.  This, in turn, might be expected to lead the TSC to consider whether Marks strayed beyond his remit in his relationship with the bank.


During a second meeting in July 2011, the regulator expressed blunt views about the strength of the senior management at the bank and the weak state of the Britannia Building Society, prior to its acquisition by the Co-op.  “[Bailey] set out his view that Britannia would have failed had it not been for the Co-op and Richardson had been lucky to survive, not least as CEO of the merged entity. He

said that FSA continued to have issues with the effectiveness of the Group’s Risk Management and controls and he was not persuaded that Richardson had ever grasped those issues. Consequently, [Bailey] was unconvinced that Richardson would ever fix them.”


At that point, Richardson had agreed to leave and was on ‘gardening leave’.  Richardson had a long term plan to retire at age 55 and was leaving only a short time before that.  Yet his pay-off was generous – one year’s salary, plus benefits, and an extra payment of £150,000.  The 2011 accounts for the bank show that Richardson was paid total remuneration in excess of £1.1m in the 2010 year, falling to £518,000 in the 2011 year, which included basic pay of £398,000, plus benefits of £3,000.  He was on paid gardening leave until the end of the calendar year.  That suggests, by my calculation, that Richardson was paid about £750,000 as a pay-off.


There has been a widespread view that Richardson was appointed as a condition of the merger between the bank and Britannia.  Richardson negotiated from a weak position, he was chief executive of the loss making entity being acquired, which in the view of the regulator would otherwise have collapsed.


Barry Tootell, finance director under Richardson and subsequently interim chief executive, told the regulator: “Richardson had not been the most suitable candidate for CEO of the merged CFS-Britannia entity, which he [Tootell] felt should have been David Anderson [previously chief executive of CFS]. [Tootell’s] view was that it had been an acquisition not a merger but Richardson’s position as CEO was a requirement of the deal proceeding.”


Meanwhile, the murder mystery of who killed mutuality at the Co-op Bank is not quite over.  However, a lot more clarity is emerging from the fog of the recent past.

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