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Drugs scandal rocks Britain's troubled 'ethical' bank

19 november 2013, 11:14
©Reuters/Andrew Winning
©Reuters/Andrew Winning
Britain's Co-operative Bank, which prides itself on ethical investments, has been plunged deeper into crisis after its former chairman was filmed allegedly seeking to buy drugs, AFP reports.

Former Co-op bank chairman Paul Flowers -- a church minister -- apologised after allegations were published in the in The Mail on Sunday newspaper involving crystal meth, crack cocaine and ketamine.

The paper alleged that the 63-year-old Methodist minister was caught on camera discussing the purchase of illegal substances.

The paper said the event allegedly occurred just days after Flowers had bungled an appearance before lawmakers on parliament's Treasury Select Committee to explain the lender's dire finances.

At his appearance on November 6, Flowers said that the Co-op's balance sheet had £3.0 billion of assets when in fact the figure was £47 billion. He also appeared confused about the bank's loans and investments.

Analysts said Monday the scandal further damaged the bank's reputation, two weeks after it was forced to hand control to US hedge funds to plug a £1.5-billion ($2.4-billion, 1.8-billion-euro) black hole.

Following the newspaper revelations, Flowers apologised in a statement issued through the Methodist Church in Britain, blaming pressures in his personal life.

"This year has been incredibly difficult, with a death in the family and the pressures of my role with the Co-operative Bank," he said.

"At the lowest point in this terrible period, I did things that were stupid and wrong. I am sorry for this and I am seeking professional help, and apologise to all I have hurt or failed by my actions."

The Co-operative Group said it had launched an investigation into "any inappropriate behaviour" and a "root-and-branch review" of the organisation.

Flower, who chaired the lender from 2010 until June this year, when he resigned over the capital shortfall, has been suspended from the Methodist Church for three weeks pending investigations.

The former local councillor in Bradford, northern England, has also been suspended from the main opposition Labour Party.

"This is another big blow to the Co-op bank's ethical image," said Andre Spicer, professor of organisational behaviour at Cass Business School in London.

"It is hard to image a bank retaining ethical credentials when it is run by hedge funds and was chaired by a minister who was allegedly caught shopping for cocaine," Spicer told AFP.

Flowers, who was paid an annual salary of £132,000 at the Co-op, has been a Methodist minister for around 40 years and was formerly chair of drugs abuse charity Lifeline.

Economist Neil MacKinnon at financial services group VTB Capital said it was "yet another example of how the banking sector has failed the interests of its depositors and shareholders as well as the interests of the broader economy".

"The UK taxpayer must ask the question why they have to be on the hook for bailing out banks when they read of stories like the Co-op," he added.

Bad deals caused problems

Earlier this month, parent company the Co-op Group announced plans to close 50 of its 324 bank branches and axe a "significant" number of jobs in a rescue plan that handed bond investors majority control.

The dire financial situation at the bank was caused by its 2009 purchase of British mortgage lender Britannia -- which was saddled with bad loans -- and the recent collapse of a deal to buy 632 branches run by Britain's state-rescued Lloyds Banking Group.

"The Co-op Bank failed basic due diligence in its merger with Britannia given the problems with its loan book. The regulators are also to blame in not providing greater scrutiny of the merger," added MacKinnon.

Under the rescue deal, recently unveiled by Co-op Group chief executive Euan Sutherland, investors who purchased bonds in its loss-making banking division -- including US hedge funds -- will be given a 70-percent stake in the lender. That leaves Co-op Group with a minority shareholding of 30 percent.

"The revelation itself concerning... Flowers is highly disappointing but (further) damage to the 'ethical' brand should be fairly limited," said analyst Markus Huber at trading firm Peregrine & Black Capital.

"After all, Flowers has no say anymore. Instead, Co-op customers will be much more concerned with the changes ahead likely to be imposed by the new owners."

Huber added: "No doubt the 'ethical' brand image has been already severely damaged by the news US hedge funds taking a large stake in the bank."

The Mail on Sunday also published text messages from an acquaintance of Flowers who was said to be "disgusted" with his hypocrisy.

One message from Flowers allegedly read: "I was 'grilled' by the Treasury Select Committee yesterday and afterwards came to Manchester to get wasted with friends."

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