The independent review chaired by Sir Christopher Kelly into the events that led to the Co-operative Bank reporting a capital shortfall of £1.5bn has been published today. The Review was commissioned jointly by the Group and the Bank in July 2013.
The Report describes in some detail what happened, identifies the root causes and draws the lessons. It looks at the decision to merge the Co-operative Bank with the Britannia Building Society in 2009, the abortive attempt to replace the Banking Group’s IT platform, the proposed acquisition of the Verde assets from Lloyds Banking Group, and the attempt to bring the Bank closer to the Group under Project Unity. It also examines the Bank’s management of its loan book, its approach to risk management and capital, its sales of payment protection insurance, the governance of the Bank and the Group and a number of other issues.
The Report is based on more than 130 interviews with current and former employees, Board members and others and on the examination of internal papers and external reports. The Review has also received written evidence from a number of individuals and organisations. It has been carried out independently from all other reviews touching on the same events.
Sir Christopher Kelly said: “This report tells a sorry story of failings in management and governance on many levels.
“The roots of the shortfall lie in a merger between the Bank and the Britannia Building Society which should probably never have happened. Both organisations had problems. Bringing them together exacerbated those problems. It might have worked if the merged organisation had received first class leadership. Sadly it did not. The Co-operative Bank executive management failed to exercise sufficiently prudent and effective management of capital and risk. The Banking Group Board failed in its oversight of the Executive. The Group Board failed in its duty as a shareholder to provide effective stewardship of an important member asset. Collectively they badly let down the Group’s members.
“The lessons we set out are far from novel. It does no credit to those involved that they must be learnt again. I hope my report will help the Group and the Bank in their efforts to rebuild organisations of which their members and customers can once again be proud.”
Kelly highlighted a number of problems in the merger with Britannia Building Society. Its balance sheet comprised two main components – a low-risk Member Business and a higher-risk specialist business, Britannia Capital Investment Group (BCIG).
The Member Business accounted for roughly half of the lending and had low margins. It offered simple, competitively-priced mortgages and savings products. Its loans were high quality, with an average loan-to-value ratio at the end of 2008 of below 40%. The other half of the lending, BCIG, contributed 75% of Britannia’s profit before tax in the five years prior to merger.
BCIG invested in sub-prime assets, intermediary residential lending (including non-conforming, buy-to-let, and self-certified mortgages brought together via specialist lender Platform), intermediary-purchased residential mortgage portfolios and commercial lending.
While other building societies had also moved into non-traditional forms of lending in the search for yield, the report said Britannia was unusual in the extent to which it had done so. BCIG accounted for around half its loan book. It also constituted over 90% of its risk-weighted assets. No other large building society had as much exposure to sub-prime lending. Its overall impairment and arrears profile was one of the worst in the sector, with several interviewees telling the Review that Britannia would sometimes complete transactions which no other lender would take on.
