Q&A: What is the co-operative movement?

co-op bank

The Co-operative Group has made headlines over the resignation of its chairman, a film of its former banking head allegedly buying drugs and a rescue deal handing 70% ownership to private investors.

But what exactly is the co-operative movement and will it be possible to maintain the spirit of the group through all the changes?

What is the co-operative movement?

The history of the co-operative movement in Britain can be traced to the north of England in the mid-19th Century, when co-operative consumer societies flourished in the region.

These groups were owned by their members - usually small retailers who sold a variety of goods in their local communities - who came together because they wanted to combine their buying power.

The Co-operative Wholesale Society formed in 1863. It has come to be called the Co-operative Group, and is the flagship organisation in the co-operative movement.

Gillian Lonergan, head of heritage resources at the Co-operative Heritage Trust, says that in the 19th Century there were as many as 1,000 co-operative societies in Britain.

The Co-operative Group started out selling wholesale foods and other goods to its members.

"It expanded to manufacturing and its first products were biscuits and boots," Ms Lonergan says.

Soon, a division for loans and deposits developed. Founded in 1872, this part of the group turned into what is now called the Co-operative Bank.

Then, in 1917 the Co-operative Party was formed. It represents the political arm of the co-operative movement and has been a sister party of Labour since 1927.

Although the banking business has been in the news lately, for most of the Co-operative Group's history, banking was only one of many businesses it operated.

What businesses does the Co-operative Group run?

Today, the Co-operative Group has important food, pharmacy, funeral provider, insurance, electrical, travel and legal businesses, in addition to the bank.

It is the largest "mutual" business in the UK, owned by its more than seven million customers and members.

The grocer, called the Co-operative Food, is the fifth-largest food retail business in the UK.

The Co-operative Group is also the biggest funeral provider and owns the country's third-largest chain of pharmacies.

According to its website, the Co-operative Group runs 4,800 retail points, employs more than 100,000 people and has an annual turnover of more than £13bn.

The Co-operative Bank is part of the group.

In the beginning, the banking division gave loans to and held deposits for members only, but soon expanded its services to operate much like a bank.

The Co-operative Bank was not registered as a company until 1971.

It joined the Committee of London Clearing Banks in 1975 and was then able to perform services such as issuing and cashing cheques to individual customers.

The last decade has seen a period of rapid expansion for the Co-operative Bank.

In 2002, it brought together its banking and insurance branches and in 2009, it merged with the Britannia building society - a move that many analysts say has been nothing short of disastrous for the group.

It also tried to buy hundreds of bank branches from Lloyds in 2012, but that deal never went through.

In November, a group of private investors had to rescue the bank with a capital injection of nearly £1bn. The investors now have a 70% stake, leaving just 30% ownership for its customers.

Image caption Shadow Chancellor Ed Balls received £50,000 from the Co-operative Party in 2012

What is the Co-operative Party?

The political arm of the co-operative movement is called the Co-operative Party.

The Co-operative Party receives much of its funding from the Co-operative Group - £1m in 2012, according to the Electoral Commission - but the group donates money directly to Labour as well.

In the current parliament, there are 32 MPs who stand on a joint Labour-Co-operative Party platform.

Among them is shadow chancellor Ed Balls, who received a donation of £50,000 from the Co-operative Party in March 2012.

According to the Electoral Commission's website, the Co-operative Group donated £62,000 to Labour in 2012.

The commission also says Labour has a number of outstanding loans from the Co-operative Bank.

The loans come to a total of £1,363,500, although the commission does not say how much has been repaid.

The Co-operative Party says it is also represented in the Scottish Parliament and the Welsh national assembly, as well as on more than 350 local councils.

What troubles is the Co-operative Bank facing?

The Co-operative Bank has been mired in deep financial trouble, stemming from the merger with the Britannia building society in 2009.

The bank sustained huge losses - it had to write off about £500m of bad loans, and lost even more money on an expensive IT project.

It was eventually left with a £1.5bn capital shortfall.

In November, it announced that a group of private investors, made up mostly of hedge funds, would inject nearly £1bn into the bank for a 70% ownership stake.

Peter Hunt, chief executive of Mutuo, says it is regrettable that the bank had to accept such a deal, but rules in the UK prevent the bank from raising capital from its own customers.

"The whole point is that [mutuals] raise capital slowly," Mr Hunt says. "But it means they can't really respond to losses."

The Co-operative Bank's poor financial health was discovered in 2012, when it was trying to acquire more than 600 branches from Lloyds - a deal that never went through.

Image caption Rev Paul Flowers has admitted he did not have experience in banking

What are the allegations against its former banking boss?

Just as the Co-operative Bank started moving ahead after the announcement of the rescue deal, it was revealed that its former boss, Rev Paul Flowers, was filmed allegedly buying drugs.

The chairman of the Co-operative Group, Len Wardle, resigned on Tuesday, days after the video of Mr Flowers emerged in the Mail on Sunday.

Questions have been raised over whether Mr Flowers, who took over after the 2009 merger with Britannia, was an appropriate leader for the large bank, especially since he did not have prior experience in banking.

Rev Flowers served as a minister in the Methodist church for more than 40 years and was a Labour councillor on Bradford's city council, and rose through the ranks of the Co-operative Group before joining its board in 2008.

What next for the Co-operative Bank?

In light of the allegations against Mr Flowers, the Co-operative Group has launched a fact-finding investigation into what happened and is reviewing its group structure, "because we need to modernise to make sure the interests of all members are properly represented".

Meanwhile, the Treasury Committee is holding an inquiry into the so-called Project Verde - the attempt to sell 632 Lloyds branches and how the Co-operative Bank's bid for them collapsed.

Former Co-operative Bank executives, including Mr Flowers, are expected to testify before the committee.

It is also expected that former financial regulators will be questioned about how Mr Flowers was vetted for the post to head the Co-operative Bank and why it was decided he had the appropriate experience for the role.

Mutuo's Mr Hunt says: "It's important to learn whatever lessons can be learned from all of this. It's possible we're talking about one unusual individual.

"But if we're talking about less qualified people becoming heads of banking boards - which is what some people are suggesting - then it's quite right for people to take a second look.

"[Co-operative Bank] still has many difficult months ahead. I think it's already taken a lot of the steps it needs to take to strengthen the business.

"I'd like to think they're on the right track."

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