The Co-op Bank should never have taken over the Britannia Building Society as the merger, far from creating a “super mutual” just “exacerbated” problems at both lenders, according to a report into the near collapse of the struggling bank, reports The Telegraph.
Former Treasury official Sir Christopher Kelly, who was commissioned by the Co-op Group to look at the circumstances leading up to the discovery last year of a £1.5bn black hole in the balance sheet of its banking arm, said the Britannia deal “should probably never have happened”.
“Both organisation had problems. Bringing them together exacerbated those problems. It might have worked if the merged organisation had received first class leadership. Sadly it did not,” said Sir Christopher in a 150-page report.
He said failings in the governance and management of the Co-op Group and the Co-op Bank were largely to blame for the situation and that insufficient consideration was given to the risks taken by the lender.
He said: “The banking group board failed in its oversight of the executive. The group board failed in its duty as a shareholder to provide effective stewardship of an important member assets. Collectively they badly let down the group’s members.”
In a series of damning findings, Sir Christopher dismissed claims by the Co-op Bank and Britannia’s former chief executive Neville Richardson that the problems in the banks’ loan books only resulted from the inattention of his successors, saying the Co-op should never have got itself in the position where it was managing such a large pool of assets.
“It appears to be true that a set of factors particular to a number of the larger connections did affect the portfolio during 2012. But that is beside the point. The bank would not have held a portfolio so far outside its pre-merger risk appetite had it not acquired it through merger,” said Sir Christopher.
He continued: “Very little attention seems to have been paid post-merger to the fact that the assets were outside the bank’s risk appetite. Nor did the post-merger team do enough to address the bank’s pre-merger shortcomings.”
As well as the capital and loan issues, Sir Christopher pointed to the major IT problems caused by the takeover given that the Co-op Bank had already been in the process of moving to a new core banking system at the time of the deal.
Sir Christopher blamed many of the bank’s subsequent IT problems that ultimately saw it write off more than £200m in spending on inexperienced staff attempting to do a job beyond their capabilities.
“The ex-Britannia executive given responsibility for the post-merger integration and the IT replatforming had managed the integration of the Bristol & West Building Society into Britannia some years previously. But he had not overseen a change programme of the complexity he now faced,” said Sir Christopher.
The Co-op Bank problems led to the Co-op Group ceding control of the business last December, handing over a 70pc stake in the bank to its bondholders after a debt-for-equity swap that was required to prevent the lender’s probable closure.
Since then, the Co-op Bank has had to launch a further £400m rights issue to pay for the cost of various mis-selling scandals and the lender is in the process of investing £500m over the next three years in a completely new IT after making the decision to entirely scrap its current computer systems.
Sir Christopher said the scale and number of problems at the bank highlighted just how badly the business had been managed and said the Co-op Group board had to “accept accountability”.
“The capital shortfall is rooted in a number of specific events. Poor commercial lending, a failed IT project, and mis-selling of PPI accounted for the bulk of it in numerical terms. But the severity of the problem was magnified by failures of management, lack of accountability, a fallible culture and weak governance,” he said in his concluding remarks.
Niall Booker, the former HSBC manager brought in as chief executive to turn around the Co-op Bank, said: “It is clear from the report that there were serious failings in the past. The board will consider the implications of today’s report and, bearing in mind the various external investigations into the same past events which are still ongoing, consider what action it should take, after taking appropriate professional advice.”
He added: “What the Kelly Review shows is that the bank lost its way but what is important is we are making significant progress in putting it back on track and strengthening the bank for the benefit of our customers.
The bank ended a very difficult year with stable liquidity and an improved capital position which we aim to strengthen further through our forthcoming capital raise. Over the past ten months we have also made significant progress in reforming how the bank is governed and managed. The bank’s board looks very different today and is now managed and governed independently to the group.
Richard Pennycook, interim chief executive of the Co-operative Group, described the report as a “sobering assessment” that showed the Group’s loss of control of the Bank “could have been avoided”.
Ursula Lidbetter, chair of the Co-operative Group said: “Sir Christopher Kelly’s report serves as a stark reminder of the scale of change required in the governance of The Co-operative Group – something we have been clear we are already committed to.
“Sir Christopher’s conclusions must strengthen our collective resolve, underlining as they do the urgency of the need for far-reaching fundamental change.”