Co-op Bank execs face BoE investigation

The Bank of England and the Financial Conduct Authority have confirmed they will launch investigations into the near collapse of the Co-op Bank

Former senior managers of the Co-op Bank are to be investigated by Britain’s two financial regulators over their role in the near failure of the troubled lender that last year discovered a £1.5bn capital shortfall.

The Prudential Regulation Authority (PRA), the Bank of England-run bank supervisor, and the Financial Conduct Authority (FCA) have confirmed they have begun an “enforcement investigation” into the Co-op Bank that will look at the actions of the lender’s “former senior managers”.

The launch of the investigation follows a two-month-long joint inquiry by the PRA and the FCA into the circumstances that led to the Co-op Bank’s troubles that will see the lender’s parent, the Co-op Group, give up control of the business to its bondholders.

The investigation could lead to former manager being fined, suspended and possibly banned from working in the financial services industry. The investigation could also lead to criminal action should the officials find any evidence of wrongdoing by individuals, though this would require a separate police investigation.

The Reverend Paul Flowers, the former chairman of the Co-op Bank, is already the subject of a police investigation into his alleged drug-taking, but will now face a probe into his professional conduct while at the bank, along with other former directors and executives.

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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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Hedge fund sells up after forcing Co-op to cede control of bank

Aurelius sells bonds at profit before crucial vote
Co-op bank admits it is losing current accounts

One of the US hedge funds which forced the Co-operative Group to cede control of its troubled bank has sold its investment ahead of a crucial vote on a rescue £1.5bn fundraising.

Just hours after the Co-operative Bank admitted it was losing current accounts because of concerns over its future as an ethical institution amid the intervention of hedge funds and the scandal over former chairman Paul Flowers, it emerged that the US hedge fund Aurelius had sold its position in the bank's bonds.

Aurelius – best known for forcing Argentina to pay out on its debts – had bought up Co-op bonds as they collapsed in value following the downgrade of the bank to junk status in May. Since then the bonds have risen in value and have now been sold on to another hedge fund, London-based Perry Capital. Perry pledged to continue backing the crucial restructuring of the bank just hours before Friday's deadline to vote on the deal.

The so-called LT2 group of hedge funds, which included Aurelius and has forced the changes on the Co-op Group, made no reference to the crucial change in its membership when it reiterated its support for the restructuring on Thursday morning. If bondholders vote to back the restructuring of the bank, the wider Co-op Group, which includes supermarkets and funeral homes, will end up with just a 30% stake in the bank that bears its name. The deadline for votes is 4.30pm on Friday.

The Co-op, in an unscheduled announcement outlining technical changes to the terms offered to LT2, insisted that its savers – whom it relies on to finance its business – were not moving their cash out of the bank and its deposit base remained stable.

Flowers is on bail until January after being arrested following a Mail on Sunday report that showed a video of the 63-year-old Methodist minister handing over cash to apparently buy drugs. Even before Flowers' arrest there was concern that the intervention of hedge funds in the Co-op fundraising could make it difficult for the bank to maintain its ethical stance.

"These recent events, together with the competitive landscape in which the bank operates, the introduction of seven-day account switching and the associated increased competitor marketing activity at a time when the bank has been constrained in its ability to undertake its own marketing activity, may be a contributing factor to an increase the bank has seen in the switching out of current accounts," Co-op said.

The wording is tougher than that in the prospectus sent to bondholders on 4 November to back the restructuring when it referred to a "material reduction" in the number of people moving their accounts to the bank since the seven-day switching service was introduced in September. At that time it said corporate customers had taken away £1.4bn worth of deposits since the ratings downgrade in May.

The admission by the Co-op bank came as its regulator, Andrew Bailey, chief executive of the Prudential Regulation Authority, said the regulatory approval granted to enable Flowers to become chairman in 2010 was "before his time".

Bailey, who took over the top regulation job in the summer of 2011, said he had required the Co-op bank board to be strengthened and had set out hurdles for the bank to meet if it was to be granted approval for the takeover of 631 branches from Lloyds Banking Group. That deal, called Verde, collapsed this year.

Bailey insisted he did not "know the whole story" about what had happened or about any potential intervention from politicians keen to see the Co-op take over the Lloyds' branches. He added: "The real important thing today is not to deal with Reverend Flowers's antics but to deal with stabilisation and restructuring of the bank."

Lord Myners, City minister during the 2008 banking crisis, called for institutional investors to be represented when bank directors are appointed. "We need a fundamental change in accountability and alignment within the board room. Shareholders had got off scot-free when it came to culpability for bank failures and the cost to the economy," Myners said.

Lloyds looks to lord

The Conservative peer Lord Blackwell is the leading candidate to become the next chairman of the bailed-out Lloyds Banking Group.

The former head of Sir John Major's policy unit, and a serial non-executive director, already has a seat on the bank's board and chairs its insurance arm Scottish Widows. He previously sat on the board of Standard Life and retailers Dixons and was once a partner at the management consultants McKinsey.

The bank, whose chief executive, António Horta-Osório, received a £2.3m bonus last week because of the rally in its shares, has been seeking a successor to Sir Win Bischoff who wants to retire at next year's annual meeting.

The government began to sell its stake in Lloyds in September and now owns a 32% shareholding, which is expected to fall further before the general election through a sell-off to retail investors.

Lloyds would not comment on its next chairman on Thursday.

Article Source : http://www.guardian.co.uk
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