Co-op Bank to escape penalties for failures

The City’s two watchdog’s the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) have publicly censured the Co-operative Bank failings including hiding the truth about its capital position.

According to the regulator’s findings, the bank’s control framework was flawed both in design and operation, with inadequacies in risk management policies, capital management and corporate lending procedures.

These failings occurred between 22 July 2009 and 31 December 2013.

Usually, the breach of financial rules would carry a £120m (€169.4m, $186m) fine. The bank came close to collapse in 2013 after its credit rating was downgraded by six notches on the back of a £600m loss, but regulators thought a public dressing down would be retribution enough. In the early part of 2014, the bank lost 28,000 customers.

The PRA said it would have levied a £120 million fine against the bank and the FCA has not disclosed the level of fine it would have imposed, opting instead for a public censure.

“The regulators would expect to be notified of any intended changes to senior individuals without delay to enable us to properly consider and assess the management of the firm”, the FCA says.

After failing the tests, the Co-op Bank said it would adjust the turnaround strategy, which included accelerating its plan to sell off or run down the £6.6bn book of bad loans from the pre-crash era.

The PRA found the bank failed to manage its affairs responsibly, with adequate risk management, breaking Principle Three of the PRA’s code of conduct.

The Co-op 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, read the regulator’s statement.

The FCA also said the regulator was not informed of changes to senior management between April 2012 to May 2013.

Georgina Philippou, FCAnacting 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”. Former chairman Paul Flowers, a Methodist minister, was nicknamed the “Crystal Methodist” after it emerged he had try to buy methamphetimine and ketamine in Manchester. Parliament’s Treasury Committee blamed the bank’s management, auditor KPMG LLP and the Financial Services Authority, the FCA’s predecessor, for failing to spot the shortfall.

‘The investigations by the regulators into what went wrong at the bank are very important and the board takes the censures extremely seriously.

Niall Booker, the Co-op Bank’s chief executive, said in June that it had highlighted “the risks of any adverse findings and penalties relating to these past events…on multiple occasions”.