JP Morgan paid £7m by Co-op Bank for recommending Britannia deal

Regulators should investigate how banks are paid for takeover advice, says Treasury select committee chairman

Regulators should investigate how investment banks are paid for takeover advice, according to the head of the Treasury select committee, after JP Morgan revealedit received £7m for advising the Co-op Bank on its disastrous merger with Britannia Building Society.

The US bank would have received nothing if the deal had not gone ahead, the bank revealed to MPs.

Members of the Treasury select committee said the investment bank had given "a green light" to Co-op'smanagement to do the deal which generated a multimillion pound fee for the US bank.

Tim Wise, one of JP Morgan's top bankers, admitted that the Britannia merger had worked out badly but insisted his bank's advice was sound at the time and that he would never be swayed by the prospect of a large fee.

However, the committee's chair, Andrew Tyrie, said after the hearing that regulators should scrutinise how investment banks are paid for orchestrating takeovers. "A fee structure for the provision of independent advice that heavily incentivises one outcome over others strikes me as inherently problematic. The industry and the regulators will need to look closely at the way such advice is remunerated," he said.

JP Morgan was the financial adviser on the Britannia deal which was announced in early 2009 when the financial system was on the brink of breakdown. Hailed at the time as creating a "super-mutual" to take on the big banks, the deal nearly wrecked the Co-op Bank this year when problem loans surged in Britannia's corporate loan book. Faced with a £1.5bn capital shortfall, the bank is undergoing a restructuring that will see 70% of the business handed to bondholders including US hedge funds.

The investment bank was paid £2m when the Britannia merger was announced and another £5m when the deal completed. Wise admitted the fee was "very significant" but he said clients preferred to pay investment banks success fees instead of smaller guaranteed amounts.

Tyrie told Wise it was "a shed load of money" and added: "It is asking for the objectivity of a saint not to be biased in thinking, as you prepare this advice, that you would like to see one outcome over another."

Stewart Hosie, a Scottish Nationalist member of the committee, read out a letter from JP Morgan to the Co-op board that said: "The terms of the proposed transaction are fair from a financial point of view for the Co-op."

Hosie said: "That is effectively giving the Co-op a green light to proceed."

Wise said it was up to the Co-op's management to use its own commercial judgment in deciding to do the deal.

Under repeated questioning about how large fees might skew investment bankers' advice, Wise said: "I'm afraid I have complete confidence in my own integrity and the impartiality of my advice."

He admitted the public might not agree and said there should be a debate about how investment banks are paid.

Wise said: "I don't think JP Morgan will suffer any reputational damage. Whether we will suffer personal reputational damage … time will tell."

Wise and Conor Hillery of JP Morgan said Co-op's merger with Britannia was undone by the prolonged economic downturn, which hit Britannia's commercial property borrowers, and by the City regulator's decision to tighten its capital rules.

The result was a £1.5bn hole in the Co-op Bank's finances that forced it to raise new cash from its bondholders and to scrap a second proposed deal to buy 631 branches from Lloyds. The group has cleared out its management and its former chairman has been exposed for alleged use of Class A drugs.

Wise admitted JP Morgan "undercooked" its assessment of the Britannia deal's riskiness but he said its tests included stressed scenarios devised by the Bank of England.

Separately, partners from KPMG told the MPs they were paid £1.3m for their work on the Britannia merger.

KPMG's early "due diligence" of Britannia for the Co-op did not include the corporate loans because the information was not available, they said.

KPMG partner Andrew Walker said he told the Co-op to scrutinise the corporate loans in its "phase two" work on Britannia, which the bank carried out itself.

Tyrie said the committee had been subjected to a "straight bat" by KPMG, which has audited the Co-op for 30 years.

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