Profit pressure and due diligence failings: Why the PRA fined Co-op bosses £261k

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Former Co-op bank chief executive Barry Tootell put staff under pressure to “smooth” numbers to meet forecasts, the PRA says.

Tootell was hit with a £173,802 fine and lifetime ban by the regulator earlier today for posing an “unacceptable threat to the safety and soundness of Co-op Bank”.

In the final notice documents attached to today’s ruling, the PRA says its investigation into the Co-op found Tootell encouraged a culture of prioritising the short-term financial position of the bank.

It uncovered multiple examples of Tootell pressuring staff to amend monthly financial data to improve short-term profits and capital positions.

Toottell’s May 2013 departure from the bank came shortly before it revealed a £1.5bn shortfall in capital, and pulled out of a deal to acquire more than 600 branches of Lloyds bank.

In one example, the PRA says Tootell instructed staff to reverse a £20m collective impairment provision designed to improve ratings with auditors.

The impairment was to be funded by reducing the bank’s bonus pot for pay outs, but after the bank’s finance team worked through a weekend to amend financial statements, Tootell decided not to include the provision.

Similarly, the regulator found Tootell’s determination to meet forecast profit figures in September 2012 led him to email colleagues “stating that delivering against the half-year forecast was critical and that the September 2012 profit figures must be higher than forecast in order to maintain credibility with Co-op Group and Co-op Bank boards”.

Tootell’s email noted that “disclosing new risks or crystallised risks would not be a helpful outcome”.

As a result, proposed impairments were reduced by approximately £10m, with a plan for the figures to be recognised later in the year.

Tootell also instructed that final quarter forecast impairment figures be reduced to match the forecast impairment figures which had been recorded in the July quarterly forecast, despite evidence the further impairment provisions would be required before the end of 2012.

This saw the bank reaffirm to Co-op Group that it would achieve the profits forecast in July.

Keith Alderson, the former managing director of the corporate and business banking division, was also fined £88,890 for his role in the failure of the Co-op.

For his part, Alderson is blamed for the Co-op’s failure to perform adequate due diligence ahead of its 2009 merger with Britannia Building Society, and in particular the valuation of Britannia’s corporate loan book.

The PRA says ahead of the deal a Co-op Bank team conducted a “limited” review of commercial lending files which identified risks such as weak interest cover, high loan-to-value ratio and very-long dated lands. This led Co-op’s advisers to recommend further due diligence, although this was never undertaken.

The regulator says: “Accordingly, when the merger completed in August 2009, and Mr Alderson became responsible for CABB, Co-op Bank’s understanding of the risks posed by the Britannia Corporate Loan Book was limited at best.

“Although Mr Alderson was aware that external advisers had produced a due diligence report and the in house team had reviewed a sample of Britannia loans, he did not request the due diligence report or a briefing from the in house team on what they had found and was unaware of the risks identified by this work.”