The Co-operative Bank censured

Posted on 30 September 2015

Co-operative Bank censured

10 August 2015

Following a joint investigation by the FCA and the PRA, The Co-operative Bank plc has been publicly censured by both regulators for publishing misleading statements over its capital adequacy, failings in risk management systems and lack of disclosure to the regulators.

In its financial statements for the year ending December 2012 (published March 2013), the Co-op claimed to be able to maintain adequate capitalization even in high stress scenarios and to have a capital buffer sufficient to absorb shocks and cover its regulatory minimum requirements. On 17 June 2013, the Co-op announced that it was holding insufficient capital and that in fact it had a £1.5bn capital shortfall.

The FCA determined that the financial statements were false and misleading, commenting that capital statements are crucial to allow an understanding of the health and future stability of the Co-op.  The FCA found there to be no reasonable basis for the claim regarding adequacy of capital, indeed, similar claims had been removed from other parts of the statements after concerns had been expressed. The FCA also found that, in relation to the capital buffer, whilst the Co-op did have enough to meet its requirements up to January 2013, it did not have enough to meet its revised capital buffer and had known since November 2012 that the requirement was set to increase.

As a result:

  • The FCA found a breach of Listing Rule 1.3.3.R (requirement to take reasonable care to ensure information is not misleading, false or deceptive).  Investors were given an inaccurate picture of the bank's capital position and deprived of their ability to make informed decisions.
  • The FCA also found, in breach of Principle 11 of the FCA's Principles for Businesses, that the Co-op had not dealt with it in an "open and cooperative manner" as it failed to inform the FCA of changes to its senior management.

The PRA concluded that the bank had also breached Principle 3 of its Principles for Businesses, considering it to have "serious and wide-ranging failings" in its risk management and control systems, with information not being communicated properly to the Board and a culture which prioritised the short-term financial position over long-term sustainability.

Despite the serious nature of the breaches, both the FCA and PRA made a decision not to impose a financial penalty. Given the vulnerable position of the bank and the effect such a fine would have had on it, both regulators considered it a more appropriate response to allow the Co-op to continue with its turnaround plan to build capital and thereby ensure stability and deal with any extreme stress in the future.  However, the PRA stated that had it not been for the precarious position of the Bank, it would have imposed a penalty of £121.86m, reduced to £85.3m for early settlement.  The FCA did not provide any comment on the level of fine that it would otherwise have sought to impose.

You can read the Final Notices here: FCA, PRA.


From an enforcement perspective the most interesting aspects of this already well publicised case are the following:

  • There is provision for the FCA and the PRA in appropriate circumstances to conduct a joint investigation. The Co-op is a rare instance of such an investigation. Given the relative maturity of the FCA's enforcement arm as compared to the PRA's, it would be interesting to know quite how the investigation worked in practice.
  • In relation to sanction, the Co-op's failings were clearly extremely significant, warranting a substantial fine (although only the PRA stated what level would have been appropriate).  However, it was decided in the circumstances not to impose a fine.  One consideration that is expressed in the rules to be relevant in determining whether to issue a public censure rather than impose a financial penalty is the impact on the person concerned. In that context, it is stated that only in an "exceptional case" would the regulator be prepared to agree to issue a public censure rather than to impose a financial penalty, if a financial penalty would otherwise be the appropriate sanction.  In the case of the Co-op, the precarious capital position constituted "exceptional circumstances", and therefore the regulators decided not to impose a fine in order not to jeopardise the Co-op's turnaround plan. The logic of that position is very clear.  Given that the rules are not prescriptive on what may constitute "exceptional circumstances", this is an area where examples are helpful in order to clarify the regulators' thinking.
  • The FCA has stated that it is still investigating certain individuals in relation to the Co-op's failings.  At a time when individual accountability is very much to the fore, we shall have to wait and see what emerges from those investigations.


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