What’s gone wrong at the Co-op Bank? The key questions
The Co-op has a proud history, but after the resignation of its chairman, the Paul Flowers affair and the proposed financial rescue by US hedge funds, Channel 4 News looks at what the future holds.
Not so long ago, with Britain’s major high street banks damned for their unethical mis-selling practices, the Co-op was seen as the saviour of a financial sector that was in state of permanent crisis. But does Britain’s leading ethical bank still deserve these plaudits?
Why did Len Wardle resign?
Len Wardle announced his resignation as Co-op Group chairman on Tuesday, saying that “recent revelations about the behaviour of Paul Flowers, the former chair of the Co-operative Bank, have raised a number of serious questions for both the bank and the group”.
Mr Wardle, who became chairman in 2007 and was due to stand down in 2014, decided to go early because he “led the board that appointed Paul Flowers to lead the bank board”.
What did Paul Flowers do?
The Mail on Sunday alleges that Paul Flowers, a Methodist minister and former Labour councillor, bought and used illegal drugs, including cocaine, ketamine and crystal meth.
He apologised after being filmed by the newspaper following an embarrassing performance in front of MPs on the Treasury select committee a few days beforehand.
He was grilled about the Co-op Bank’s financial problems and left chairman Andrew Tyrie astonished when he said the company had assets of just £3bn when he left in June 2012 (the real figure was £48bn).
As chairman, Mr Flowers presided over the Co-op’s aborted plans to buy more than 600 Lloyds branches, a deal that came unstuck because of the bank’s weak finances.
Why does the bank have a £1.5bn hole?
The Co-op merged with Britannia building society in 2009, a year before Mr Flowers was appointed chairman. Bad debts stemming from the deal resulted in losses of £662m in 2012-13.
Shortly after revealing these losses, the bank dramatically announced it was withdrawing from a £750m deal to take over 600 branches of part-nationalised Lloyds.
The Co-op had described the proposed takeover, which would have seen it grow to almost 1,000 branches, as the “biggest shake-up in high street banking in a generation”, giving it 7 per cent of the current account market.
Chancellor George Osborne had also welcomed it, saying it was a “step towards creating a new banking system for Britain”, with the Co-op as the “challenger bank”.
The state of the Co-op Bank’s finances has become clearer over time, with a £1.5bn shortfall in its balance sheet.
(Employees at the Co-operative Wholesale Society’s margarine factory in Manchester, 1929)
Who is bailing out the bank?
If the Co-op has its way, this £1.5bn shortfall will be plugged by floating the business on the stock market.
Like the rest of the Co-op Group, 100 per cent of the banking arm is currently owned by its members – but not for much longer if the flotation goes ahead.
The Co-op Bank is proposing that members hold on to 30 per cent of the company, making them the biggest single shareholder, with 35 per cent taken over by US hedge funds and the remaining 35 per cent by other funds (such as pension schemes).
We will know by the end of 2013 if the deal goes through. If investors agree, the bank will be floated in 2014. If not, it will be put into “restitution”, with the Bank of England deciding on its future.
Will the Co-op still be an ‘ethical’ bank?
The Co-op Bank was founded in 1872, with its customer-led ethical policy launched in 1992, embracing human rights, the environment, international development and animal welfare.
Members, who have one vote each regardless of how much they invest, have a say in how the business is run.
They are expected to subscribe to the company’s mission “from helping the community to changing the world”, and share any profits that are made.
The bank says its new rules enshrine the Co-op Group’s values and ethics and that its members “will have significant influence over how the bank operates” if it is floated.
What is indisputable is that the bank would no longer be able to say that it is wholly owned by its members. Nor would its members be able to out-vote other shareholders, including the “money men” from hedge funds Aurelius Capital Management and Silver Point Capital.
Many people were drawn to the Co-op as an alternative to the major high street banks, blamed for plunging Britain into recession. Should they take their money elsewhere?
The Ethical Consumer website says the Co-op’s “status as an ethical bank is at risk” and that the best option would be for it to return to mutual ownership as soon as possible.
But it advises against switching now, saying that staying put makes it more likely that the bank’s ethical policy is “set in stone”.
It adds: “We believe a coalition of interests can be built that will bring the bank back under majority co-operative ownership and control in some form, so that again it can fairly claim the name.”
Where does this leave the Co-op Group?
The Co-op Group is the UK’s largest mutual business, with over 7 million customer members, 100,000 employees and annual turnover of more than £13bn.
It is the UK’s biggest funeral provider, third largest chemist chain and fifth biggest food retailer.
The bank is a separate entity. It is its future that is being discussed at the moment, not that of the Co-op Group.