“badly let down the group’s members”, Sir Christopher Kelly’s review into the £1.5bn capital shortfall discovered at The Co-operative Bank last year has concluded.
Sir Christopher’s independent review was commissioned by The Co-op Group in July last year to understand what happened at the Bank.
In his final report, released this morning and described as a “sorry story of failings on a number of levels”, Sir Christopher blamed nine factors for “the debacle of the capital shortfall and the subsequent restructuring”. These included the merger with Britannia Building Society in 2009, “fundamental weaknesses” in governance and management risk, PPI mis-selling, and a “flawed” culture.
He said the merger of The Co-op Bank with Britannia Building Society was “a major source of the Bank’s subsequent difficulties”.
“I am surprised that a board which did possess a small number of experienced and well-regarded individuals nevertheless failed to raise more concerns about the way the bank was being managed”
Sir Christopher Kelly
The merger took place against “a background of deteriorating economic conditions and falling asset prices” and “the due diligence performed on what turned out to be the most risky part of the acquired assets – the corporate loan book and in particular the commercial real estate lending – had been cursory”.
On corporate governance, Sir Christopher concluded there was no clear strategy for the Bank and the group board had failed to “exercise stewardship of one of the Group’s major assets”.
He also said the chair of the Bank – Paul Flowers who stepped down last year and was this month arrested for possession of class A and C drugs – “manifestly did not have the appropriate experience”.
“The regulator did not object. But it was the group board’s appointment, not the FSA’s,” he added.
And in a further criticism of the group board, Sir Christopher said: “I am surprised that a board which did possess a small number of experienced and well-regarded individuals nevertheless failed to raise more concerns about the way the bank was being managed… and failed to call a halt to the Verde negotiations despite the doubts many of the board members appear to have had about it.”
Project Verde, The Co-op’s attempt to take over 632 Lloyds Bank branches, collapsed in April 2013.
Sir Christopher concluded: “The capital shortfall is rooted in a number of specific events. Poor commercial lending, a failed IT project and mis-selling of PPI accounted for the bulk of its numerical terms. But the severity of the problem was magnified by failures of management, lack of capability, a failed culture and weak governance.”
The review was welcomed by The Co-op Group.
“Following the wake-up call of our recently announced £2.5bn loss, Sir Christopher Kelly’s report today lays bare the failings of management and governance that caused it,” said interim Co-op Group CEO Richard Pennycook.
“The management that instigated this disaster for the Group are no longer in place; the flawed governance structure that failed to apply the right checks and balances, however, remains”
“It is a sobering assessment which shows clearly that The Co-op Group’s loss of control of its Bank could have been avoided. The management that instigated this disaster for the Group are no longer in place; the flawed governance structure that failed to apply the right checks and balances, however, remains. Our colleagues, our members and our customers now look to the Group and regional boards to deliver the reforms which are so clearly necessary.”
Chair Ursula Lidbetter added: “Sir Christopher Kelly’s report serves as a stark reminder of the scale of change required in the governance of The Co-op Group – something we have been clear we are already committed to. We thank him for his detailed and thorough work.
“The Group board is leading the governance reform process and is putting a resolution containing four key principles to our membership next month. The Board awaits with keen interest the governance review to be published shortly by Lord Myners. Sir Christopher’s conclusions must strengthen our collective resolve, underlining as they do the urgency of the need for far-reaching fundamental change. We must ensure the mistakes of the past are never again repeated.”
Sir Christopher’s report is the first of seven investigations surrounding The Co-op Group. The others are by Lord Paul Myners, the Treasury Select Committee, the Financial Conduct Authority, the Prudential Regulation Authority, HM Treasury and the police.
Board member departs
Meanwhile, Stuart Ramsay, a computer technician and elected member of The Co-op Group board, stepped down last night. He is understood to have left following an investigation into how details of former group CEO Euan Sutherland’s pay package were leaked to the media. Sutherland stepped down following the leak last month.
In a brief statement, The Co-op Group said: “Following an independent report, and at the request of the board, Stuart Ramsay has left the board of The Co-op Group with immediate effect.”
Ramsay was due to step down at the group’s agm on 17 May. The society announced earlier this month he would not stand for re-election.