Co-Operative Bank escapes regulatory fine for past failings

But the bank failed to tell either regulator about intended changes to two senior positions and the reasons for them in the period April 2012 to May 2013.

Co-operative Bank has been spared a fine of at least £120 million despite been found to have misled investors and failing to keep regulators informed as it neared collapse.

The PRA said Co-op’s risk management procedures were flawed in design and operation. Co-op Bank’s failings stand out both for the duration and seriousness of the risk management and control deficiencies uncovered. Though the PRA said in normal circumstances it would demand the bank cough up £120m, it concluded that doing so ‘would not advance the PRA’s statutory objective to promote the safety and soundness of the firms it regulates’. These were serious transgressions.

“The PRA has not levied a fine in this instance but, if any future enforcement investigation into Co-op Bank found serious and wide-ranging failings, this censure will be a relevant factor in determining the outcome”.

Co-op Bank is trying to recover from its near-collapse in 2013, when it was hit by a yawning hole in its finances, a drugs scandal, an exodus of top executives and losses from bad commercial real estate loans. Questions were raised over the approvals process that led to the bank’s former chairman Paul Flowers’ appointment, in particular because Mr Flowers had no banking experience prior to his appointment. Investigations into senior individuals continue, the FCA said.

In addition, when the financial statements were published, there was no reasonable basis for stating that Co-op Bank had adequate capital in the most severe stress scenarios. “Based on their current view, the FCA and PRA have indicated they intend to commence formal settlement discussions in July 2015”, said a company statement.

The censure for serious risk management and transparency failings will be particularly embarrassing for the 143-year old bank, which had built its reputation around its ethical credentials.

“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”, said Georgina Philippou, the FCA’s acting director for enforcement and market oversight. Specifically, it failed to notify regulators without delay of two intended personnel changes in senior positions.

The firm was in line for a £120 million fine, but the FCA decided not to impose the penalty because it would put too great a strain on the bank.

However, in December last year it was the only UK lender to fail the Bank of England’s stress tests.

Dennis Holt, the new chairman of Co-op bank, apologised and stressed that the findings of the FCA and the Bank of England would not have an impact on customer relations.