The playing out of the mudslinging around the former chairman of the Co-op Bank tells us much about the government’s political tactics, but little about why the bank fell and what might be learned from its collapse.
The Tory strategy this week has been clear: make the Rev Paul Flowers Ed Miliband’s running mate. For every new revelation about sex, drugs and rock’n’roll ask the Labour leader who knew what when. In fact, make Labour responsible for him becoming bank chair in the first place, even though the party played no part in this decision.
However eagerly some have bought this line in recent days, it is nonsense. You don’t have to think long about the image of Miliband knowing about Flowers’ background and habits and saying “yes he’d be really good on an advisory board” to realise this is absurd or to conclude that he was as surprised as anyone else by what has been revealed. Flowers’ position as Co-op Bank chair owed nothing to Labour.
The Co-op Bank fell because it made bad decisions. It also made at least one very bad appointment. Flowers should never have been chair of a bank, not because of his private life, but because by his own admission and confirmed by his testimony to the Treasury select committee, he knew little or nothing about banking. Despite the traditional Co-op structures of elected boards from all walks of life, if you have no idea what your bank’s balance sheet is you should not chair the board. How he was approved by the regulator to hold this post is a legitimate and important question.
The broader tragedy of the Co-op Bank is that it marketed itself as something different, yet made very similar mistakes to other banks. Bad commercial property loans. Self-certified mortgages. Mis-selling of PPI policies to customers. Expensive failed IT projects. Takeovers it couldn’t afford. They are all there and all add up to a £1.6bn black hole which sees the Co-op Group relinquish control to hedge funds.
In other words, the Co-op Bank was not that different after all. Laudibly, it eschewed certain lines of business, but it still pursued a programme of expansion that resulted in it ceasing to be owned by a mutual.
How this came about, what role was played by the bank itself, by its external advisers, by the regulator and by the government should be the focus of the inquiries announced this week.
On the politics, the relationship between the Labour party and the Co-op Bank is no secret. Labour has banked with the Co-op for many years and the Co-operative movement sponsors a number of MPs. But support for mutualism has gone beyond Labour. The coalition agreement said: “We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.” Government ministers are said to have encouraged the Lloyds Verde transaction. The chancellor is reported to have leaned on the EU to ease capital rules for the bank. The attempt to politicise the bank’s failure through inquiries will shine a light on coalition ministers’ interaction with the Co-op and its attempted expansion.
Co-operatives are by design a different model from a plc. They are owned by their members. Profits are distributed in a different way. They are supposed to take decisions for the long term, free of the need to satisfy short-term shareholder hunger. After the Co-op Bank’s demise, what future is there for this kind of model in UK financial services?
The Co-op is the best known mutual in the country, but not the only one. Mutual building societies survive. Credit unions across the country offer banking services often to those on very low incomes, often shunned by high street banks. Sometimes these credit unions are all that stands between families and payday lenders or loan sharks. What can they learn from the demise of the Co-op Bank? There is no doubt that reform is needed in the Co-op’s structures. Other mutuals too should look at what changes if any they need to make in their governance structures so that the good principles of mutualism can meet the sometimes hard realities of business.
The real mistake would be to allow the political dogfight launched by the prime minister to take attention away from the role mutuals can play in our financial services. However colourful Flowers’ life, that is the bigger issue.
This article first appeared on the Guardian online on 21/11/13.