Co-operative Bank has escaped a £120m fine from the Prudential Regulation Authority for “serious and wide-ranging failings” in its control and risk management framework, as a financial penalty was deemed not to advance the safety and soundness of the firm.
Following an enforcement investigation by the PRA, supported by a team of investigators at the Financial Conduct Authority, into the period from 22 July 2009 to 31 December 2013, the regulator has also issued a public censure against the bank for breaching its listing rules.
The joint investigation found that Co-op Bank fell short of its responsibility to be open with its regulators, failing to co-operate during the period. Specifically, it failed to notify regulators without delay of two intended personnel changes in senior positions.
According to the regulator’s findings, the bank’s control framework was flawed both in design and operation, with inadequacies in risk management policies, capital management and corporate lending procedures.
They also found deficiencies in the management information which the firm produced, which led to the board not being appropriately apprised of key issues, hampered their ability to manage the business effectively.
The Co-op Bank had a culture which encouraged prioritising the short-term financial position of the firm at the cost of taking prudent and sustainable actions for the longer-term, read the regulator’s statement.
In January last year, the FCA and the PRA confirmed they will be undertaking enforcement investigations into events at the Co-operative Bank. Questions were raised over the approvals process that led to the bank’s former chairman Paul Flowers’ appointment, in particular because Mr Flowers had no banking experience prior to his appointment.
Towards the end of 2013, following changes to the board and senior management, Co-op Bank began properly to address the concerns around its risk management framework structures and policies around corporate lending and capital management.
Andrew Bailey, deputy governor for prudential regulation at the Bank of England and chief executive of the PRA, said that Co-op Bank’s failings stand out both for the duration and seriousness of the risk management and control deficiencies uncovered, adding that these were serious transgressions.
“The PRA has not levied a fine in this instance but, if any future enforcement investigation into Co-op Bank found serious and wide-ranging failings, this censure will be a relevant factor in determining the outcome.”
The PRA’s investigations into the role of former senior individuals in events at Co-op Bank are continuing.
Georgina Philippou, acting director of enforcement and market oversight at the FCA, commented that firms have a very basic, but extremely important responsibility to be transparent with their investors and with the regulator, with Co-op Bank falling short of this.
“As a result, investors were left unaware of Co-op Bank’s true capital position and we were left in the dark about intended changes to senior personnel at the bank.
“This is a serious matter, but exceptional circumstances mean a public censure is the appropriate and proportionate response. It is vitally important that Co-op Bank’s capital resources are directed towards improving its resilience.”
In its financial statements for the year ending 31 December 2012, the bank stated that “adequate capitalisation can be maintained at all times even under the most severe stress scenarios, including the revised Financial Services Authority ‘anchor’ stress scenario”.
In fact, since 15 January 2013, the bank did not have sufficient capital to meet its revised capital planning buffer and there was no reasonable basis for stating that it had adequate capital in the most severe stress scenarios.
In April 2014, the bank confirmed it made a loss of £1.3bn for 2013, with the group’s interim executive describing a “disastrous year” following controversies that included the resignation of its chairman Paul Flowers, who was discovered allegedly buying class-A drugs, and Euan Sutherland resigning after only 10 months as chief executive, branding the group “ungovernable”.
peter.walker@ft.com
