Strategy & Operations » Governance » FCA and PRA censure Co-op bank and waive £120m fine

THE FINANCIAL CONDUCT AUTHORITY (FCA) has let the Co-operative Bank avoid paying a £120m fine as punishment for the numerous failings that led to its emergency bailout after the 2013 discovery a £1.5bn black hole in its accounts.

Despite the FCA’s probe into the bank and finding that it had misled investors, Georgina Philippou, the financial watchdog’s acting director of enforcement, said there were exceptional circumstances which meant public censure was both “appropriate and proportionate”.

“Firms have a very basic but extremely important responsibility to be transparent with their investors and with us, as their regulator, and Co-op Bank fell short of this. As a result, investors were left unaware of Co-op Bank’s true capital position and we were left in the dark about intended changes to senior personnel at the bank.

“This is a serious matter, but exceptional circumstances mean a public censure is the appropriate and proportionate response. It is vitally important that Co-op Bank’s capital resources are directed towards improving its resilience.”

In the joint probe with the Prudential Regulation Authority (PRA), the FCA also found that Co-op Bank “fell short of its responsibility to be open with its regulators”, which is “one of the principles that regulated firms must abide by”.

Co-op Bank chairman, Dennis Holt, expressed his remorse for the bank’s “legacy” issues which he put down the previous management team, stating that disgraced bank was now a “significantly stronger organisation today under the leadership of the current senior management team”.

The PRA found a litany of corporate failures at the Co-op Bank. Among them were its control framework – deemed to be “flawed both in design and operation” – while there were significant “inadequacies in the firm’s risk management framework policies and in its capital management and corporate lending policies and procedures”.

This meant that the bank “did not adequately consider the level of risk it assumed and therefore did not have the capability to manage that risk. This in turn had the potential to weaken the firm and reduce its resilience”.

The PRA also found deficiencies in the management information which the firm produced. These deficiencies led to the Co-op Bank’s board “not being appropriately apprised of key issues, which hampered its ability to manage the business effectively”.

A culture which encouraged prioritising the short-term financial position of the firm at the cost of taking prudent and sustainable actions for the longer-term, was another key failing uncovered by the PRA.

It also failed to deal with the FSA and the PRA, “in an open and cooperative manner”.

The PRA said that towards the end of 2013, following changes to its board and senior management, the bank began to “properly to address the concerns around its risk management framework structures and policies and procedures around corporate lending and capital management”.

Andrew Bailey, deputy governor, Prudential Regulation, Bank of England and CEO of the PRA said: “The Co-op Bank’s failings stand out both for the duration and seriousness of the risk management and control deficiencies uncovered. This was compounded by a lack of openness with their regulator. These were serious transgressions. The PRA has not levied a fine in this instance but, if any future enforcement investigation into Co-op Bank found serious and wide-ranging failings, this censure will be a relevant factor in determining the outcome.”

The FRC is still investigating KPMG’s role in the preparation, approval and audit of the Co-op Bank’s financial statements up to and including the year ended 31 December 2012.