Another Day, Another Two (or Three?) Co-op Bank Inquiries: Keeping Track
All our heads are spinning. Never before has the UK Co-op been the lead story in so many news bulletins for so long. It has not been a good experience.
New investigations and inquiries seem to be proliferating. Here, I’ll have a look at the latest two (or three if PRA & FCA do one each?) and at their legal framework, with a reminder of the others.
1. The Independent Investigation
George Osborne announced today that there is to be an investigation into the problems at the Bank and the way the regulators handled them. The Treasury Statement says:
“It will cover the actions of relevant authorities (regulators and government) and the institution itself, including prudential issues, governance (including the appointment of senior staff) and acquisitions. The period that the investigation will review will start from at least 2008 and run to at least the present time.”
According to the Statement it will be conducted by an independent person. The investigation is under Part 5 of the Financial Services Act 2012. It is specifically under section 77 and is based on the fact that the Treasury considers that it is in the public interest that the FCA or the PRA should investigate events which they are not already investigating.
The events need to concern a person carrying on an authorised activity – in this case the Co-op Bank – and the Treasury will give a formal direction requiring an investigation and report back once that is agreed with the PRA, the FCA and the independent person. The process for conducting the investigation is determined in that formal Direction and the Report is presented to the Treasury and then published – ss 78 & 81. The report will set out the results of the investigation and the lessons for regulators with recommendations to them for changes – s 79.
The formal process of starting it will be delayed until the enforcement investigations being considered by the PRA and the FCA have reached a stage at which they will not be prejudiced by this one and at which issues arising from them can be included for investigation by the independent person – see the text of the Treasury Statement.
That will be some months or years hence.
2. PRA and FCA Enforcement Investigations
The FCA and the PRA have both welcomed the Independent Investigation and confirmed that they will fully support it. In addition they have each said that they are:
“undertaking work to establish whether [they] should commence a formal enforcement investigation and expect[s] to reach a conclusion shortly.”
Investigations by them will be under the powers they have under the Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012. To see the breadth of those powers see Part XI of FSMA 2000 . If any question of market abuse arises see Part VIII for procedures and penalties and for penalties for disciplinary matters see Part XIV, Part XXVI on formal notices and Part IX on appeals.
The areas that might well be subject to investigation could include:
Possible breaches of Listing Rules which include rules about non-disclosure of information. LR 17.3.9, for example, applies to organisations like the Co-op Bank and Co-op Group with debt securities listed under the rules. That applies to them legal rules aimed at “prompt and fair disclosure of relevant information to the market” – see DTR 2. Both the Co-op Group and the Bank had such securities listed.
Whether a false market was created in any of those securities so as to amount to Market Abuse under Part VIII of FSMA 2000 as elaborated by the regulators. That idea includes behaviour likely to mislead market participants about the value of securities – see s118(8) of FSMA 2000 as explained and elaborated in MAR 1.9.
The way the Bank was run. As an authorised person under FSMA 2000 a wide range of regulatory provisions apply to it. They include the Eleven (legally binding) “Principles for Businesses” which include Number 2: “A firm must conduct its business with due care skill and diligence”; Number 5 “A firm must observe proper standards of market conduct”; and Number 11 “A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.” The Prudential Rules about capital and liquidity levels, and the like, have triggered the current recapitalisation plan but earlier breaches of them could be investigated as could issues about senior management and control standards and the fit and proper person regime.
All these rules can be found in the Financial Services Handbook which includes legally binding rules, guidance and explanation from the FCA and the PRA. I’m not suggesting they will all be investigated but this gives a flavour of the main areas likely to be considered by PRA and FCA. On the enforcement side see DEPP especially the penalties available.
Some of those who have appeared before the Treasury Select Committee recently, and some others who have not, may be in the frame for these enforcement investigations and, if the investigation reveals wrongdoing, sanctions under this legislation. One thinks of senior people in the Bank. I imagine many will be dusting off their legal insurance policies and checking out whether they are covered for high costs over a long time if they use lawyers with expertise in these areas.
After all that has settled, the Independent Investigation will get under way.
These two formal legal investigations add to :
3. Kelly Review
4. Group Governance Review
The internal Group Governance review announced by Moira Lees at the Half Yearly Meeting of Co-op Group this month and to report to the AGM in May 2014.
5. The Rest
I leave aside as irrelevant, if colourful, Mr Flowers’ ongoing legal difficulties and miscellaneous associated examinations of emails, expenses claims, and fees paid since his resignation.
Bad News and Opportunities
None of this is good news for the Bank or the Group and it has been used with glee by the right – see Melanie Phillips in this week’s Spectator. Last week’s Mail on Sunday broke the drugs story in a piece of good, if embarrassing, journalism which fitted nicely with the axes they like to grind.
However, these problems may present a great opportunity to start with a clean sheet and revive the Group as an important part of the Co-operative Movement on a new basis.
“This does not mean we have to weaken our co-operative democracy. But it does mean we must take a cold hard look at the way we are operating and ask ourselves if we really are serving the needs of our seven million members and giving them a true voice in our movement.”
A cold hard look without rose tinted glasses is clearly needed. It could be a form of glasnost and re-engagement which is actually very exciting. But, for the Group, all of this depends on the Bank recapitalisation plan being agreed over the next month or so. We must hope for the Group’s sake that it is.
These problems also illustrate the benefits of having strong, if smaller, independent co-ops like Suma, Midlands, Lincolnshire and Midcounties. Initiatives like the Phone Co-op and Co-op Energy also show the way forward in penetrating new areas and serving members directly on a smaller scale.
Surely the lessons that strength lies in diversity within the Co-operative Movement and that economies of scale and grandiose plans can have downsides have now been well and truly learnt?
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, Euan Sutherland
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, The Phone Co-op
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