AN independent investigation into the near collapse of the Co-op Bank was announced last night as its disgraced former chairman Paul Flowers was bailed by police in connection with an “ongoing drug supply investigation”.
The Treasury-led probe will add to an enforcement investigation into whether there were adequate systems and controls in place at the bank and if there was any wrongdoing by individuals, which could lead to fines and censures.
It was announced by Chancellor George Osborne on the same day the Co-op Bank’s former chairman was questioned by police. He was bailed until the New Year while inquiries continue.
Flowers, 63, a Bradford Methodist minister and former city councillor who was suspended by both the church and the Labour Party following allegations that he bought and used illegal drugs, was detained by West Yorkshire Police late on Thursday in the Merseyside area and taken to a police station in West Yorkshire.
He stepped down as Co-op Bank chairman in June and questions have since been asked about his competence amid claims of illegal drug use, inappropriate expenses, drink-driving and pornographic material on a council computer.
His defence solicitor, Andy Hollas, who was surrounded by reporters as he emerged from Stainbeck police station in Leeds, refused to say where his client had been since allegations about him emerged last weekend.
Asked how Flowers was feeling, he said: “I think a rather ponderous frame of mind – I think anyone in his situation would be.”
Details of the new inquiry came after the eight-strong board of the Prudential Regulation Authority discussed the Co-op at its regular meeting yesterday.
The review ordered by Mr Osborne uses new powers under the Financial Services Act and follows calls from Prime Minister David Cameron for an inquiry into the bank’s ailing finances and the decision to appoint Flowers.
It will have a wider scope than the enforcement investigation, looking at mistakes made in the run-up to the Co-op Bank’s woes and the £1.5bn black hole in its finances, dating back to at least 2008.
This will cover its takeover of Britannia Building Society at the height of the banking crisis, as well as appointment procedures in light of the scandal surrounding Flowers.
As with the recent review into Royal Bank of Scotland, it will be independently chaired. This is seen as vital by the Treasury Select Committee as the role of regulators will also come under scrutiny.
Senior Conservative MP David Davis yesterday said his party colleague Mr Osborne and the Treasury had “serious questions to answer” about the oversight of the Co-op Bank. Issues over the bank’s operations were raised by a rival at the time of a subsequently-aborted takeover bid of Lloyds Bank branches.
“These problems were apparent to a rival and would have been – with a bit of work – to anyone else,” said Haltemprice and Howden MP Mr Davis, who fought David Cameron for the Conservative leadership in 2005.
Asked to respond to Mr Davis’s comments, the Prime Minister’s official spokesman told a Westminster media briefing: “I think what Co-op bondholders and clients want to know is why the Co-op got into the financial difficulties it is in, including the questions about its leadership.
“That’s why the Chancellor is in discussion with the regulators around the appropriate form of inquiry.”
Labour, which accuses Mr Cameron of seeking to “smear” the party over its relationship with the Co-operative, seized on Mr Davis’s comments in a bid to move the spotlight onto the Conservatives.
Shadow Chief Secretary to the Treasury Chris Leslie said: “David Davis is right to say that there are serious questions for George Osborne, the Treasury and regulators to answer about how the Co-operative Bank has got into trouble over the last three years.
“What due diligence was done by the Chancellor and the Treasury into the state of the Co-op Bank and its leadership when ministers were encouraging the bank’s failed bid for 632 Lloyds branches?”