Osborne Orders Probe Into Co-Op Bank After Flowers Scandal

U.K. Chancellor of the Exchequer George Osborne ordered an independent inquiry into events at Co-operative Bank Plc after the lender’s parent ceded control and former Chairman Paul Flowers was arrested.

Agreement was reached on the investigation with the Prudential Regulation Authority and the Financial Conduct Authority, the Treasury in London said in an e-mailed statement yesterday. It will be led by an independent person appointed by the regulators.

Co-Operative Group Ltd., the bank’s parent, relinquished control of the lender to bondholders last month to help plug a 1.5 billion-pound ($2.4 billion) capital shortfall. The company’s chairman, Len Wardle, resigned this week after leading the board that appointed Flowers.

The investigation, using powers under last year’s Financial Services Act, won’t start until it’s clear it won’t prejudice any actions the relevant authorities may take, the Treasury said. That would include inquiries by the police as well as potential probes by the FCA and the PRA.

Flowers, 63, was arrested two days ago as part of a drug probe after he was filmed buying crack cocaine by a U.K. newspaper, said a person with knowledge of the matter who asked not to be identified because the investigation was confidential. West Yorkshire Police said in a statement that a 63-year-old man had been detained in a “drugs-supply investigation.”

Crack Cocaine

The Mail on Sunday reported Nov. 17 that Flowers bought crystal methamphetamine and crack cocaine in Leeds, northern England. Flowers, who is a Methodist minister, was Co-Op Bank’s chairman from March 2010 until June of this year.

“This year has been incredibly difficult, with a death in the family and the pressures of my role with the Co-Operative Bank,” Flowers said in a Nov. 17 statement. “At the lowest point in this terrible period, I did things that were stupid and wrong. I am sorry for this, and I am seeking professional help, and apologize to all I have hurt or failed by my actions.”

His home in Bradford, near Leeds, was searched on Nov. 19 as part of the police investigation.

Patrick Tooher, a spokesman for Co-Op Bank, didn’t immediately respond to a voice-mail message seeking comment on the Treasury’s announcement.

‘Difficult Times’

The bank, based in Manchester, northwest England, said in a statement Nov. 19 it’s facing “difficult times,” though it will emerge “stronger than ever.”

Regulators pressed Co-Operative Group, which has businesses ranging from supermarkets to funeral parlors, to close the capital shortfall at the bank following the failure of its bid for more than 600 branches owned by Lloyds Banking Group Plc (LLOY), a deal that would have more than doubled its number of outlets.

In testimony to Parliament’s Treasury Committee earlier this month, Flowers said he didn’t have the skills of a banker, when asked about his financial experience. He’d worked for four years at Westminster Bank, a forerunner to Royal Bank of Scotland Group Plc’s NatWest bank, before becoming a Methodist minister, and his expertise was probably “out of date,” he said.

Co-Op Bank will close about 50 of its 324 branches by the end of 2014, it said Nov. 4 when it announced the deal under which creditors will own about 70 percent of the company. It will cut a “significant” number of jobs among its 7,800 staff.

Britannia Assets

Bank of England Deputy Governor Andrew Bailey told lawmakers in July the “main issue” that brought down Co-Op Bank was the assets it acquired from Britannia Building Society in 2009. Those souring loans prompted the lender to report a fourfold increase in impairments in 2012 and a pretax loss of 673.7 million pounds.

The FCA and PRA welcomed the Treasury’s announcement and said they will make their “full resources” available to support the inquiry.

“The timing of the investigation must not prejudice any other criminal or regulatory proceedings,” the two regulators said. Both said they are “undertaking work” to establish whether they should start “a formal enforcement investigation” and expect to make a decision soon.

‘Higher Standards’

“The government is determined to create a stronger and safer banking system; a key part of this is reforming the regulatory regime for senior managers,” the Treasury said. “The government’s Banking Reform Bill, which is currently passing through the House of Lords, will introduce a new senior managers’ regime, subjecting decision makers in banks to higher standards that means if they fail in their duties they will be held to account.”

“The Co-Op Bank’s problems appear to have developed over many years,” Treasury Committee Chairman Andrew Tyrie, from Osborne’s Conservative Party, said in an e-mailed statement. “The scope of the review will need to be wide. It should examine the role of the regulators and the appropriateness of the Co-Op’s unique business model for running large banks.”

To contact the reporter on this story: Thomas Penny in London at tpenny@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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