Co-op Bank’s road to reform

This time last year, the bank was riding high. Its commercial competitors were being pilloried for their involvement in the manipulation of Libor, the mis-selling of payment protection insurance and for nearly bankrupting the country.

There was widespread talk about the desire for real alternatives to commercial high street banks and the Co-op Bank was seen as one of the leading lights. Here was a bank that had members, not customers. It avoided the kind of high-risk trading activities which so many other high street banks had been seduced by. It had ethical values baked into its very soul.

The lender had been given a shot of energy by all this public celebration. It had already absorbed the Britannia Building Society and had announced growth plans to take over many of the branches of Lloyds. Such a move, it was thought, would make it large enough to compete with the other big high street banks.

At this point everything began to unravel. First, the acquisition of the Lloyds branches fell apart. Then came a Bank of England report which revealed a £1.5bn hole on the bank’s balance sheet. This triggered the third act of the tragedy, during which the bank was ‘bailed in’. The result was that bondholders in the bank became shareholders. For many small bond investors, it meant they were no longer guaranteed relatively high and steady returns. For the bank, it meant that it was no longer owned by the co-operative movement. The majority shareholders were now US hedge funds.

In ownership terms, this meant the Co-op Bank was effectively like any other commercial bank with shareholders looking for a return on their investment. Senior management was insistent the bank would maintain the co-operative values that made it special. But this looked like little more than a bit of ethical window-dressing designed to make the newly commercial bank look cuddlier. Members of the Co-op Bank are not fools. They realised that what was happening was a commercial takeover of their cherished institution, which led many to look for alternatives.

Late last year this tragic story turned into a farce. The Mail on Sunday published a story alleging that Paul Flowers, the chairman of the bank, procured illegal drugs. He was a Methodist minister who chaired an ‘ethical’ financial institution. The behaviour of Reverend Flowers might seem disgraceful, but many commentators realised the real scandal was the fact that an individual with little experience in banking could come to chair one of the largest banks in the country. Mr Flowers was by no means an outlier. The board of the Co-op Bank was full of people with little formal knowledge or experience of banking.

The problems in governance, revealed by the Reverend Flowers affair, led many to ask if the Co-operative Bank had a seriously flawed system of governance. Were the mechanisms of governance in place fit for purpose or had they actually caused the decline of this great institution?