Co-op probe after drugs allegations


Branches Of Co-operative Bank To Be Cut By 15 Percent

The Co-operative Group has launched a fact-finding probe and a root-and-branch review of its structure after "serious and wide-ranging" allegations about the behaviour of its former banking chairman.

Paul Flowers, a Methodist minister who led the Co-operative bank for three years, is facing a police inquiry after he was reportedly caught buying and using illegal drugs including crystal meth, crack cocaine and ketamine.

The former councillor has been suspended by the Labour Party and the Methodist Church and apologised after being filmed buying the substances days after being grilled by the Treasury Select Committee over the bank's disastrous performance.

The wider Co-operative group said in a statement: "Given the serious and wide-ranging nature of recent allegations, the new executive management team has started a fact-finding process to look into any inappropriate behaviour at the Co-operative Group or the Co-operative Bank and to take action as necessary.

"In addition, the board of the Co-operative Group has launched a root and branch review of the democratic structure of the organisation.

"We need to modernise to ensure that the interests of all our seven million members are properly and directly represented in the oversight of our business activities."

There were no further details about what if any "inappropriate behaviour" there may have been at the bank or wider group, or about how far back the fact-finding probe would go.

Meanwhile the review of the group's structure comes as chief executive Euan Sutherland - who took over in May - is already looking at how it consults members and the latest scandal is thought to have crystallised the need for action

The funerals to supermarket group, which employs 100,000 people, plunged to £559 million losses in the first half of the year, weighed down by its banking arm.

In July, it appointed former Treasury mandarin Sir Christopher Kelly to head an independent investigation into what went wrong at the bank. He will report back at the mutual's annual meeting in May.

Andrew Tyrie, chair of the committee that grilled Mr Flowers earlier this month, said the latest scandal showed the need for regulations on senior bankers to be tightened, calling for continuing and "intrusive" supervision of their suitability.

At the committee hearing, questions had been asked about the former bank chairman's fitness for the job, as he was challenged by MPs about his apparent lack of experience and knowledge of the workings of the organisation he led.

Mr Tyrie said it was already clear before the weekend's revelations that Mr Flowers had been "manifestly unsuitable" for the role.

The Co-operative bank is now trying to plug a £1.5 billion gap in its finances and Mr Tyrie said regulatory supervision of it had been a "complete disaster".

Mr Tyrie chairs the parliamentary commission on banking standards (PCBS), which is calling for the
approved persons regime (APR) that regulates senior industry figures to be scrapped and replaced.

He told BBC Radio 4's The World At One: "What we need is a new system that vets a much smaller number of very senior people with, if necessary, intrusive supervision of their continued suitability over time.

"Another failure of the APR was that it just looked at them once and then scarcely did anything else afterwards.

"It needs to identify the specific responsibilities that each individual senior person has and really is responsible for in that bank, and then make sure that they are fit for purpose, that they are capable of facing those individual challenges."

Later, Mr Tyrie added: "This latest episode over the chairmanship of the Co-op illustrates how much there is to do to reform the regulatory approval process for bankers, especially those at the top of our banks, and how important it is that fundamental reform take place."

He said the approved persons regime had "degenerated into little more than a bureaucratic box-ticking exercise" and that its shortcomings were already obvious four years ago.

Mr Tyrie said: "The commission has recommended radical reform, replacing the failed system with vigorous and continuous supervision for senior persons which identifies who is really responsible for what and which makes them individually accountable."

"Alongside it, licences should be issued to all those employees, and only those employees, who could pose a serious risk to the bank, its reputation, or its customers.

"It is crucial that this opportunity is now seized. It would be a disaster were we to lapse back into the bad habits of old."

Regulators have said that Mr Flowers went through the appropriate process when he joined the Co-op's board as a non-executive director. But he did not face further scrutiny when he became its chairman.

The Financial Services Authority, which was the regulator at the time he was appointed, has been superseded, with the Financial Conduct Authority (FCA) taking on some of its responsibilities.

An FCA spokesman said: "Paul Flowers underwent the appropriate interview process when originally coming on to the Co-op board.

"The FCA supports the proposal by the PCBS to introduce a senior persons regime to ensure personal accountability and that people with the right skills and attributes hold positions of importance."

The Co-operative Bank discovered a massive gap in its finances following the purchase of Britannia Building Society in 2009 and abortive attempts to take on hundreds of Lloyds branches.

It faces a rescue which will see 50 branches close and investors including US hedge funds take control of 70% of the business, leaving the wider Co-operative Group with just 30% - described as a "tragedy" by former group chief executive Peter Marks.

A Labour spokesman said: "In the light of recent reports, we have today suspended Paul Flowers as a member of the Labour Party for bringing the party into disrepute."

Treasury Select Committee member Jesse Norman told Channel 4 News Mr Flowers had "embarrassed and betrayed" both himself and the bank.

He said: "Within this terrible story there is one fact, which is that the Reverend Flowers, as he called himself, was completely incompetent to be in the position of chairman of a bank.

"It wasn't simply that he didn't seem to know the first thing about the bank, it was that he didn't appear to have any interest in it."

The Tory MP added: "This man had no experience of running any other business yet for political reasons within the Co-operative movement he finds himself at the head of the Co-op bank.

"The tragedy is that he has embarrassed and betrayed not merely himself but also the Co-op, the bank and the Co-operative movement more generally."

Asked if had any inkling of Mr Flowers' plans after his appearance at the select committee, Mr Norman said: "You have no idea about these characters. Who knows what evil lurks, it's just extraordinary.

"One thing that did come through was he was not really on top of his brief. That's the bit we saw most evidently, no one could have speculated anything else I think."

Mr Tyrie told BBC2's Newsnight: "We will never know why it was that he seemed, in a sense, slightly short of the odd fact about the bank that he was running.

"It is extraordinary that he had no idea at all about the asset base of his own bank after several years as chairman."