Co-op is told it must reform or it will fail again

Tim Wallace
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A SWEEPING investigation into the Co-op Group and Co-op Bank yesterday found years of bad decision making and poor leadership led to the enormous losses at the group and the near-failure of the bank last year.

The report, by Sir Christopher Kelly, found directors and executives failed to take risk management seriously, and that only serious reforms to its structure, such as those proposed by Lord Myners, will save the business.

Kelly warned terrible flaws in the Co-op’s democratic structure meant those in charge had few of the skills needed to run such a large business.

“The board lacked in sufficient numbers members with the experience and capabilities to carry out its functions,” Kelly told City A.M.

“Unless the Co-op finds reforms which produces a board with the right capabilities, they will not succeed.”

The Co-op’s members will vote on Lord Myners’ reforms to its democratic structure at an annual general meeting on 17 May.

Kelly traced the current series of crises at the Co-op Group and Bank back to the ill-fated merger with the Britannia Building Society.

He found the City regulator was already concerned about Britannia’s loan book before the 2009 merger.

But the Co-op’s studies of its finances were “cursory,” with Kelly finding top staff spent just two days looking through the books.

“It cannot have looked at them in any great detail,” his report said, noting the bank often favoured short term profits at the expense of long-term stability.

However, Kelly retains some hope for the Co-op’s future.

“There are plenty of examples in the UK and the world of retailers which own banks, and of successful co-operative enterprises, so there is no reason why there are not models that can work more effectively than the one at present,” he said.

Co-op Group chair Ursula Lidbetter said the report “serves as a stark reminder of the scale of change required ... something we have been clear we are already committed to.”
“We must ensure the mistakes of the past are never again repeated.”

■ The Co-op overestimated its own size and abilities, trying to grow too rapidly with devastating consequences.

■ The directors did not properly understand the business and appointed executives with too little experience.

■ Until the crisis struck the bank, there was no written document explaining the link between the group and bank, leaving neither certain of how to behave.

■ The Co-op Group’s board was elected based on members’ concerns, not on their abilities or experience in running businesses and banks of this scale.

■ The bank had no proper risk control framework, using the “three lines of defence” jargon of the industry but without understanding how to implement it.

■ Warnings and recommendations from the regulator were ignored for years at a time as managers were “complacent.”

■ The bank failed to back up its ethical goals with any force, leading to poor performance and serious costs from PPI mis-selling.