Why did regulator ignore Co-op Bank's financial experts?


Regulators' defence against the charge that they should never have permitted Rev Paul Flowers to become chairman of Co-op Bank in 2010, on the basis that he had almost no relevant financial or commercial experience, is that they forced Co-op Bank to surround Flowers with a couple of financially experienced deputy chairmen (see the latter part of an earlier post).

And for the avoidance of doubt, that is what both the Financial Conduct Authority and the Prudential Regulation Authority have said to me - they are the successor bodies to the Financial Services Authority, which was the regulator of the time, and they continue to employ most of the people who previously worked for the FSA.

In the event, Co-op Bank appointed David Davies, a former chief executive of Pearl Assurance, and Rodney Baker-Bates, ex chair of Britannia Building Society (which Co-op Bank merged with in 2009) and a former senior executive of the Pru and the BBC, to the deputy chair posts.

Now here's the bloomin' odd thing.

If their appointments were so materially important to the FSA, you would have expected the regulators to pay especially close attention to their views on all materially important events at Co-op Bank.

But that does not appear to have happened, in respect of the most materially important ambition of the Co-op Bank in recent years, which was to acquire more than 600 branches from Lloyds and more than double in size.

The important point is that both Davies and Baker-Bates were against this takeover. They felt that Co-op Bank was biting off more than it could possibly safely chew.

According to a source, Davies and Baker-Bates were "trenchant in their opposition to the transaction for months".

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If it was so important to the FSA for Baker-Bates and Davies to be appointed, why on earth did the regulator not take heed of their opposition to the takeover of Lloyds' branches?”

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They manifested their opposition to the deal in a formal way - they voted against the takeover just days before Co-op Group was announced as the preferred bidder for the Lloyds branches in July 2012.

As you may have deduced, Davies and Baker-Bates were outvoted on the Co-op Bank board. And the board of Co-op Bank's owner, Co-op Group, which had the ultimate power to decide whether to do the deal, voted for the deal too.

That is why the deal with Lloyds was duly announced as going ahead on 19 July 2012.

So here is the question. If it was so important to the FSA for Baker-Bates and Davies to be appointed, why on earth did the regulator not take heed of their opposition to the takeover of Lloyds' branches?

Why did the FSA allow Co-op Bank to continue deploying large amounts of time and money, for another nine months, on trying to execute this massive - and many would say foolhardy - expansion plan (it would not be till the end of April 2013 that Co-op Bank dropped the takeover).

And it is not just that the FSA's two experts on the board voted against the deal. One of them, Baker-Bates, actually decided to quit the bank board, largely because - I am told - he was opposed to the Lloyds' deal.

Now regulators tell me that Baker-Bates left the Co-op Bank board as part of a restructuring of the board, when it required Co-op Bank to reduce board numbers.

But if that's so, it seems a bit bonkers - because although large boards are often unwieldy, slimming down the Co-op Bank board by seeing the departure of that rarest of things, a board member who understood banking, would seem very odd.

Anyway I understand that Baker-Bates explained his concerns about how the takeover was seriously undermining management resources in his formal exit interview with the FSA in September 2012 - some eight months before the deal collapsed.

Now regulators' position on all this is that they could not have formally overturned a commercial decision by Co-op Group and Co-op Bank to do the Lloyds deal. So to that extent, it does not matter whether Davies and Baker-Bates were opposed to it and supposedly more expert than other board members.

But if that's so, why bother to have them appointed in the first place?

That said, regulators insist that they set strict conditions for doing the deal, which Co-op Bank never met (and see this previous post).

And they would also point out that the takeover never actually happened.

But the fact that the deal collapsed does not demonstrate that no harm was done.

We now know that Co-op Bank was very poorly managed from 2010 through to 2013. And that poor management led to massive wasted expenditure on an ambitious IT project and a failure to keep tabs on billions of pounds of loans that were going bad.

Management was over-stretched even without the distraction of trying to almost treble in size via the takeover. The attempted deal with Lloyds meant the process of strengthening a weakened bank was holed - and by the summer of this year, Co-op Bank was on the brink of collapse (as you know, we are now at a critical stage in the bank's rescue).

So, here is the conundrum (again) - why would regulators insist on the appointment of two expert deputy chairmen if they were unable or unwilling to subsequently use these experts' opposition to a massive transaction as reason to nip that transaction in the bud?

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 305.

    BarryDavies @302
    'replacing regulator'

    To 'regulate' those with power (like us only worse, gripped by conflict of interest, conscripts to Devil's work in fear & greed & corruption) we need to see the Second Coming (of Christ in power), a realit living up to billing (any not for humble partnership off to warmer climes). Of course we could just educate for equal partnership, SELF-regulation

  • rate this

    Comment number 304.

    Where was the FSA in the collapse in '08? Useless bunch of overpaid bureaucratic wasters who are indelibly culpable in the disastrous collapse of our greed ridden banks

  • rate this

    Comment number 303.

    It's probably inevitable that the relationship between regulators and those supposed to be regulated will become too cosy; not least because the latter are far better informed than the former and know how to schmooze them. The luckiest regulator has to be 'Monitor' responsible for overseeing NHS Foundation Trusts outside of DH control but never challenged re the Mid-Staffs;Basildon etc scandals.

  • rate this

    Comment number 302.

    It would seem to be a case of replacing the regulator as it clearly isn't fit for purpose, pretty much like every outsourced service in the country.

  • rate this

    Comment number 301.

    You have asked a very good question.
    Do you think the British Public need a very good answer?
    Or is it OK for people to avoid giving us the answer?

  • rate this

    Comment number 300.

  • rate this

    Comment number 299.

    Perhaps nobody looked too hard as somebodyelse welcomed the takeover. No, that wouldnt occur would it

    Anyway, when it all goes wrong you can say sorry with flowers

    Unless the idea makes you snort with derision

    Its all a nice deflection from looking at bigger stuff

    After all can somebody give some estimate of the cost of this panto to the taxpayer compared with other pantos

  • rate this

    Comment number 298.

    not reassured @293
    "need banks we can trust"
    Ditto governments, schools, hospitals, newspapers

    Trust will remain substantially irrational, more for comfort's sake (and played on as such), until we can reasonably trust the people, the staff of all those institutions & enterprises, namely ourselves: possible NOT by super-regulation but by SELF-regulation, by ourselves in equal partnership or never

  • rate this

    Comment number 297.

    JfH @258
    "income inequality & fair burden
    root of (excess) freezing grannies"

    You keep agreeing such - time for urgent thought & action - but keep referring to your accountant's notes saying 'Minimum Wage, Max x20', as if such merely gestural treatment - ignoring the mathematical basis of our corruption - might, with the efficacy of a medieval potion for plague, 'somehow' ward-off our symptoms

  • rate this

    Comment number 296.

    " Labour the party of sleaze except both the BBC and Sky are whitewashing them"

    The regulation is all Tory. Sorry. This all happened after Labour left office.

    And you reckon SKY of all people are whitewashing Labour?

    Beyond parody even as a concept...

    Please, explain more. I can't wait

  • rate this

    Comment number 295.

    The reason for the lax regulation is that Labour were doing very well out of the Co-op thanks to Flowers. Loans with miniscule interest rates, personal loan to Ed Balls, etc etc. I wonder where Labour are going to get their money now? Unions in trouble (which hasn't been investigated) and now their favourite bank. Labour the party of sleaze except both the BBC and Sky are whitewashing them.

  • rate this

    Comment number 294.

    Why is it considered far worse to take recreational drugs when running a bank than to lie, cheat and steal money from bank customers and then defraud the public purse as well?

    The regulators are worthless (or are they taking backhanders?), & so are the police - even when wrongdoing comes to light nobody gets arrested.

  • rate this

    Comment number 293.

    restoremercantile banks and High street banks separated from the global banking system, with a regulator which is independent. What's happened to the previous call for this ? The major banks have ridden rough shod over us knowing that most of us have to do most financial dealings through them. Like energy firms. We need banks we can trust. Building societies and small banks are being squeezed.

  • rate this

    Comment number 292.

    JGM why don't you start petitioning for a thorough investigation of the financial services crisis & its ruinous effect on the UK

    Then it will be possible to apportion blame between G. Brown and the CoL and who knows maybe possibly to start instituting some investigation into the biggest peacetime catastrophe in our history.

    For which nobody (except the general population) suffered any penalty

  • rate this

    Comment number 291.

    Well it looks like these two august pillars of banking society had no discernible effect on Flowers behavior.

    Conversely you have to ask whether Flowers had an effect on Davies and Baker-Bates. How much did he corrupt them?

    Who is keeping an eye on them?

    They are all bankers after all.
    A most trustworthy section of society. Yeah right..

    Perhaps they were all in it together....

  • rate this

    Comment number 290.

    You could ask the same question of this dog of an incompetent govt: why did they allow a towel re-folder at No.11? Same answer: surrounded by their mates: same result: disaster. The Regulators are all useless - they should be got rid off, and made accountable to a Cabinet Post with powers to act, otherwise they are just a cozy talking shop!

  • rate this

    Comment number 289.

    Everyday we read about more incompetence, servitude, cosy cartels between business and politicians and yes and the only people with an idea appear to be the various MP committees that are cross party and get down to the truth. Everyday the call for a constitutional revolution grows. I meet many examples of people young & old that would not allow this incompetence if we were meritocratic.

  • rate this

    Comment number 288.

    Well, the general theory where i work is that the FSA (as was) was staffed by people who weren't good enough to work in banks, so this news isnt greeted with disbelief

  • rate this

    Comment number 287.

    JGM You're suggesting I am applying different standards between Lloyds & the Co-op. I'm not. Not remotely. Osborne however and his army of payrolled City MPs ARE. Much as it annoys you, the incoming 2010 govt said it was all OK - all that dodgy 07/08 stuff - not me

    But the co-op needs investigating & it is very likely to bite Georgie on the backside - which makes it both hypocritical AND funny.

  • rate this

    Comment number 286.

    The folk who most need investigating are the ex. and current directors of the Co op who made the decisions that caused the banks collapse.

    The regulators clearly did not do a good (any) job but all this political posturing and pfaff merely detracts from the main culprits.

    Don't forget that there are some 100,000 employees who's jobs are on the line because of these idiot directors!


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