Independent review finds Co-operative Bank was left “relatively defenceless” by regulators

Ryan Brightwell’s April newsletter from the Customer Union for Ethical Banking, the independent union for Co-operative Bank customers, reports that Mark Zelmer, (right) a former Canadian central banker official, was hired by the UK Treasury and the BoE’s Prudential Regulation Authority to conduct an independent review into the actions of regulators in the run-up to the Co-op Bank’s near-collapse in 2013. It found that the bank’s then-regulator, the Financial Services Authority, left the bank ‘relatively defenceless’ (pages 3 & 32) during the process of the merger with Britannia, by limiting the bank’s ability to walk away from the merger.

KPMG’s audit failings

In the May newsletter it was reported that the Financial Reporting Council (FRC) fined KPMG £5 million for a “series of failings” in auditing the bank: “KPMG’s failure to identify the extent of bad loans made by Britannia in the run-up to its disastrous merger with the Co-op Bank was a major factor in the bank ending up wholly owned by private funds”.

The Customer Union for Ethical Banking welcomed the imposition of this fine but pointed out that this did not address the damage KPMG helped to cause. It proposed that the regulator could instruct KPMG to work with the bank and its customers to develop a plan to return the bank to cooperative ownership – adding “Indeed, the £5 million fine itself would be enough to buy a small but significant stake in the bank and return it to the customers”.

The review published by the Treasury also recorded that the FSA’s write down of IT expenditure over the Review Period, totalling more than £600 million was not fully identified by the stress tests and there should have been a greater and earlier focus by the FSA on reviewing the quality and valuation of the loan book and on ensuring adequate capital was in place to cover potential losses.

Patrick Hosking adds detail, reporting that Mark Zelmer found that the Financial Services Authority’s supervision team:

  • had subjected Co-op Bank’s due diligence process on Britannia to “minimal oversight”;
  • had not paid “enough attention to the refinancing risk” of Britannia’s loan book and the adequacy of its loan loss provisions;
  • had placed too much reliance on risk reviews by outside consultants from PWC, which undertook a credit review review, and on KPMG, the bank’s auditor;

Ryan Brightwell comments that the customers of the bank were let down by management, regulators and auditors alike

He asserts that the priority is to keep campaigning for the bank to be returned to cooperative ownership and to use influence (and Save our Bank’s tiny co-operatively-owned stake in the bank) to make sure customers’ voices are still heard by the bank under its current owners.

Better news

However, he adds, the Zelmer report found an improvement in the bank’s performance in the years since its crisis, noting that:

  • the bank recorded an operating profit of just under £15m in 2018, compared with a loss of £84m the previous year – the first such profit in five years.
  • Mortgage completions were at their highest level since 2010.
  • There was IT investment of £112.9m as the Bank separated its systems from the Co-operative Group.

In an upbeat summary, CEO Andrew Bester said in the Co-op News: 

“In a market that lacks distinctive challenger brands, our commitment to the values of the co-operative movement continues to set us apart and 2019 will see renewed brand investment.”

More information in the FT.





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