Will Co-operative’s expansion compromise its ethics?

The Co-operative is the market leader in ethical finance. But at 2 per cent, its market share is not exactly significant. However Thursday’s deal will see this increase to just under 10 per cent of market share, compared to the Big Four’s 85 per cent, and the Co-op bank’s customer base increase to 11m customers.

Lloyds Banking Group was forced to offload the branches to meet European Union rules on state aid following its part-nationalisation. It is expected to make a loss of up to £700m on the sale, but Lloyds said this would be counterbalanced by a lower capital requirement.

Under the deal, the Co-operative will pay £350m initially and a further potential £400m based on performance until 2027 – but the price is far short of the £1.5bn price tag first mooted. Lloyds turned down a higher offer by rival bidder NBNK Investments, which offered £800m, because the Co-op offered a better, safer deal for customers, said a spokeswoman.

All Lloyds customers in Scotland will be transferred to the Co-op, as will all Cheltenham and Gloucester customers, and a few hundred Lloyds branches in England and Wales. (Click here to see this handy Google map showing each and every branch affected.)

For those Lloyds customers whose branches are being transferred, the process will be a lengthy one. The front of retail banks will be rebranded to TSB from spring 2013 and the full Co-op branding may not appear until 2014.

The Co-op will effectively run two separate banking businesses throughout 2013 as they migrate customers’ details on to one banking system, and customers will be able to opt out of transferring if they choose.

Read more: Five banks blazing the ethical trail

Part of a ‘new banking system’

The move was welcomed by the Treasury, which it said formed part of a raft of measures to reform the banking system and improve competition.
Chancellor George Osborne said it was a “step towards creating a new banking system for Britain that gives real choice to customers and supports the economy”.

“The sale of hundreds of Lloyds branches to the Co-operative creates a new challenger bank and promotes mutuals,” he added.

The Co-op is the only bank with a social mission, and launched a comprehensive ethical policy back in 1992 detailing the companies it won’t invest or finance, covering seven human rights areas, five environmental, four international development and five animal welfare.

The Co-operative Group, which includes pharmacy, law, funeral and retail, as well as banking, is a member-owned business, so people who use its services have a say in how its run.

Compromising values?

But at such a huge scale of expansion, will the Co-op be able to cope while still retaining its values? “I think it’s going to be an enormous challenge for them,” Faisel Rahmen, founder of Fair Finance, an alternative finance provider in east London, told Channel 4 News.

“The Co-op is the only bank with a social mission that also has a retail arm. It will be interesting to see whether it can translate its mission to the customers on the shop floor and businesses who need to be confident in their bank and its services.”

The Co-op rejects that the relatively huge expansion will compromise its policies, or customer service. It points to its takeover of 250 Britannia building society branches as evidence that it is ready to expand and the long process of the takeover that will allow the integration to be made properly.

“When Britannia became part of the Co-op, it adopted our ethical policy,” a spokesman told Channel 4 News. “We’ll have to manage it through, but this is the whole reason we believe it’s so exciting – we will be increasing ethical presence on the high street.”

Democratic structure

It is rumoured that the Co-op Group’s board, which is not exclusively run by bankers, was one reason that the FSA delayed approving the deal. This is something categorically denied by the Co-op. “Never once in all of my meetings with the FSA, and there have been plenty, have the FSA raised any questions about our banking board or our group board,” said the Co-op Group CEO Peter Marks.

The board of the Co-op’s banking arm is made up of professionals and bankers, but the 20-strong board of the overall Co-op Group is more diverse to reflect its various sectors. And the Co-op believe this is will be a powerful force for the finance arm’s continued social mission.

“We believe we’ve got a great model for business in our board,” said a spokesman. “It is a powerful way to make sure due diligence is done in our members’ interest.”