Treasury Co-op probe as Flowers arrested over drugs

Chancellor George Osborne has launched an independent inquiry into the scandal-ridden Co-operative Bank, the same day the man who sparked the crisis, Paul Flowers, was arrested by police over allegations he handed over money for cocaine and crystal meth.

The investigation will delve into the appointment of Mr Flowers, who was chairman of the Co-op Bank, as well as the circumstances leading up to its near-collapse earlier this year after the discovery of a £1.5bn hole in its accounts.

It will also probe the role of the two main banking regulators, the Financial Conduct Authority and the Prudential Regulatory Authority, which sits inside the Bank of England. Both have been widely criticised for not spotting the problems inside the Co-op before it was too late.

And it will look at the role of the government, which has also been criticised for appearing to actively encourage the Co-op to attempt to buy 600 bank branches from Lloyds Bank, even as its own finances were sharply deteriorating.

But the Treasury has left itself open to reproach after it emerged that the person who will run the independent investigation – which will cover events from 2008 to the present day – is to be appointed by the regulators themselves and approved by the Treasury.

Separately, both financial regulators are understood to be close to announcing their own investigations, the outcomes of which would delay the start of the chancellor’s independent probe because any probe could not prejudice official enforcement action, the Treasury said.

Read more: the Co-op, Paul Flowers and Labour – what we know

Drugs arrest

The news comes as earlier on Friday, West Yorkshire police said officers arrested 63-year-old Paul Flowers in the Merseyside area on Thursday night, and he is now being questioned by detectives at a police station in West Yorkshire.

Mr Flowers, a former Methodist minister, was suspended by both the church and the Labour party after he was filmed handing over £300, apparently for cocaine and crystal meth.

The revelation also led to the resignation of Len Wardle, the chairman of the Co-operative Group, who admitted it was he who had nominated Mr Flowers to become chairman of the Co-op Bank in 2010.

Mr Flowers held that position until earlier this year, when he was ousted following the near collapse of the bank after it was forced to reveal a £1.5bn black hole.

Since the secret drugs filming, the allegations surrounding Mr Flowers have been coming thick and fast. It has now been revealed he was forced to resign as a Labour councillor in Bradford in 2011 after the discovery of pornographic images on his computer. He was also forced to resign as a trustee from the drugs charity Lifeline in 2004 after allegedly lodging false expense claims.

Read more from Siobhan Kennedy: the crystal Methodist and the proud Co-operator

‘Lavish’ expenses claims

Last night, it also emerged that Mr Flowers was the subject of an inquiry into “lavish” expenses claims at the Co-op Group where he also held the role of deputy chairman. That prompted his resignation from the group’s board in June, the same time he was ousted as chairman of the bank.

The Co-op Group is now seeking to recover contractual payments made to Mr Flowers since June, and he has been told to hand back £31,000. Further payments which were due to him between now and 2016, have been cancelled.

“When Paul Flowers relinquished his responsibilities in June, it was agreed, as per his contractual obligations, that his fees for the rest of his period of office would be paid,” the bank said in a statement. “Following recent revelations, the board stopped all payments with immediate effect and no further payments will be made.

An “internal fact-finding review” – looking at emails and other evidence – is being carried out by the bank. Any suspicious or inappropriate emails from Mr Flowers will be handed over to the relevant authorities.