OpinionMay 21 2014

Co-op chiefs took the easy way out

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Lord (Paul) Myners loaded the gun, handed it to the Co-op Group’s top brass, stared them down and they blinked first, pointed the weapon to their corporate heads and pulled the trigger.

The Co-op Group’s decisive meeting last Saturday was one that should have drawn a line in the sand over the competing paradigms battling to dominate one of the country’s leading mutual societies. Lord Myners had earlier thrown down the gauntlet, supported by former chief executive Euan Sutherland, accusing the society’s board of all measure of incompetence.

But the real battle went – and continues to go – far beyond a so-called ethical bank that had long lost its way before conventional wisdom determined that it was the merger with Britannia Building Society, the hiring of the debauched Paul Flowers as chairman of the bank and the misguided Project Verde.

All these developments took place under top class and independent financial advice from some of the leading City institutions. Nothing unusual there.

Some may say the rot started under the leadership of Sir Mervyn Pedelty and his misguided attempt to make the Co-op Bank the equal of the big retail banks during his period as CEO between 1997 and 2002. It was then that the Co-op Bank set out its stall as a major player, punching above its weight, trying to keep pace with the big battalions during the boom years.

Sir Mervyn was determined that the Co-op Bank would not be left behind, urged on by all those who praised him for ‘modernising’ the mutual society.

He set about expanding the bank with new products and merged with the Cooperative Insurance Services, creating the Cooperative Financial Services.

Sir Mervyn, who became head of the new organisation, went for expansion and profitability, with a tornado-like force. He launched Smile, the online banking which was relatively successful, eventually launching a full internet banking service, the first in the UK. There was massive growth in the expansion of ATM machines, new outlets and a deal with the Post Office.

Sir Mervyn also tapped in to the growth in residential mortgages, a competitive cash Isa and for his foresight and innovative leadership, he first became an adviser to the department of work and pensions, then received a knighthood for his contribution to financial services.

While paying lip service to ethical standards, Sir Mervyn had lost sight of the important level of service that those who flocked to the Co-op Bank expected.

While paying lip service to ethical standards, Sir Mervyn had lost sight of the important level of service expected of the Co-op Bank

This was the period when the Co-op Bank had clearly abandoned its fundamental values and objectives, leaving a few account holders and members calling out for a change of direction, but to no avail. There are questions to be asked about the merger with the Britannia, but not the ones that Lord Myners and critics of the Co-op Group and, implicitly of mutuality, have been asking.

If the Britannia was a financial bucket case, how was it supervised and regulated? How did auditors sign off its accounts? Who carried out the due diligence on behalf of the Co-op Group/Bank? Did the City regulator oversee any of this?

We have already heard a lot about the appointment of Reverend Paul Flowers as chairman of the bank; heads should roll for this gross incompetence. The first victim of the well orchestrated assault on the Co-op Bank was the wider group itself, and to a large extent that was self-inflicted.

As soon as the scandal broke, the Co-op Group should have got rid of the bank before it contaminated the parent organisation and, in the process wider mutuals and the banking sector generally.

We are now left with a bank that is 20 per cent owned by the Co-op Group with hedge funds calling the shots. Yet, for reasons best know to the government and the City regulator, the remaining body can still pose as a ‘co-operative’.

As the cacophony of noise rang out, what Lord Myners and critics of the co-operative movement forgot was that mutuality meant that members and customers must always come first.

To most members and account holders, customer care is far more important than a huge profit on their investments. A friendly, honest, helpful face at the counter gives customers a renewed confidence that their life savings are in good hands.

These are basic qualities that cannot be replaced by computerised transactions, by call centres in cities thousands of miles away from Britain, nor by bright young executives armed with their business school MBAs looking to shoot out the lights.

Call this top-quality service what you like, compassionate capitalism, new idealism, ethical capitalism, it does not matter; what is important is how that service is delivered. The Co-op Bank started going wrong when Sir Mervyn and his senior executives took their eyes off the ball and started adopting the worst values of Lehman Brothers and the Sir Fred Goodwin-led Royal Bank of Scotland.

They failed to remember that that is not what their customers wanted or admired, and that the principal reason for becoming a Co-op Bank customer was because customers wanted a gentler, softer form of capitalism.

It is this belief that comes up against the values espoused by Lord Myners in his 185-page report on the future of the Co-op Group.

Instead of closing their eyes and committing mass suicide, senior Co-op officials should have faced down Myners, they should have called his bluff, they should have reminded him of the terrible state of most retail banks’ balance sheets.

There is room for the Myner’s model, but not within the framework of the co-operative movement. Co-op Group officials took the easy way out and will pay the price for it.

Hal Austin is editor of Financial Adviser