Blackfriar: Rise and fall of a local hero as Co-op’s bungling exposed

During the course of a 46-year career, Bradford-born Mr Marks had risen from “general factotum” on the shopfloor at his local Co-op to become the chief executive of the Co-operative Group, a vast organisation that had been credited with helping to revive Britain’s mutual sector.

To cap it all, he had just been awarded a CBE in recognition of his work in retailing.

Alas, like so many retailers, he must be cursing the day he became embroiled in the world of banking.

His performance this week in front of the Treasury Select Committee made for uncomfortable viewing. He faced probing questions about decisions made by senior figures at the troubled Co-operative Bank.

The Co-op is finalising a rescue plan for its banking arm which will avoid a taxpayer bailout but cede control to investors, including US hedge funds Aurelius Capital Management and Silver Point Capital. The move risks alienating the bank’s 4.7m customers, many of whom were drawn to it because of its ethical focus. Mr Marks said the changes left the principles and traditions of the 150-year-old Co-op movement under threat.

“Hedge funds are there to maximize profit; that is what their sole purpose in life is. I think to be truly ethical, you can’t do that,” Mr Marks told the committee on Tuesday.

These words have an unfortunate echo of sentiments expressed by Mr Marks earlier this year, when he spoke to Blackfriar.

“The problem is that a lot of PLCs are controlled by hedge funds who buy and sell shares in a nano second,’’ Mr Marks said. “That generates behaviour that aims to make as much profit as quickly as possible. That behaviour led to the financial crisis of 2008.”

So how did the Co-operative Bank get into such a mess?

Earlier this year, the Co-operative was all set to buy 632 Lloyds branches.

In April, the Co-op announced it was pulling out of the Lloyds deal, blaming toughening regulations and the worsening outlook for UK economic growth.

The Co-op Bank has been pulled down by its 2009 rescue of Britannia Building Society. It inherited toxic commercial property and home loans that dragged it to losses of £662m in 2012.

During his evidence to MPs, Mr Marks distanced himself from the decision to acquire Britannia. Mr Marks, who at the time was chief executive of the Co-op Group and a director of the Co-op Bank, told the Committee that the merger had, in hindsight, been a mistake. He added that he was not qualified to make decisions about the bank’s strategy and the architects of the deal had been the former chief executives of the Co-op Bank and Britannia – David Anderson and Neville Richardson.

In a letter to the committee, Mr Richardson admitted that the loans acquired with the Britannia were a “key factor” behind the bank’s troubles. Under questioning by MPs, Mr Marks said the Co-op relied on its accountants KPMG for due diligence. As a result, the spotlight has shifted to KPMG. One of the MPS asked Mr Marks if KPMG had “screwed-up” when evaluating the Britannia deal.

A KPMG spokesman told Blackfriar: “KPMG’s audits of Co-op Bank and Co-op Group have been robust and followed all relevant professional standards. KPMG conducted some due diligence ahead of the Britannia deal. We did not, however, undertake any due diligence on the corporate loan book. Our due diligence work did not include a recommendation on the merits of the Britannia deal.”

Responding to claims that KPMG also failed to flag up problems with the failed Lloyds deal, the spokesman said: “KPMG was engaged to provide assurance on the programme leading up to the proposed Lloyds deal.

“Through this work, we raised any concerns we found.”

The spokesman highlighted a section of the Co-op Bank’s 2013 interim results, which included the following warning: “These conditions indicate the existence of a material uncertainty which may cast significant doubt on the bank’s ability to continue as a going concern.”

Blackfriar believes that the seeds of the Co-op Bank’s destruction were sown during the Co-operative Group’s period of rapid and ill-judged expansion.

The real losers will be customers who still seek a major lender built around the co-operative movement’s ideals.