Co-op Bank auditor KPMG defends role in financial crisis

Co-op Bank
Image caption The Co-operative Bank has been forced into a rescue deal

Auditors to the troubled Co-operative Bank have defended their role, saying they saw nothing that raised alarm bells ahead of its financial crisis.

Partners at KPMG, the bank's auditor for 30 years, were speaking to MPs about the Co-op's £1.5bn black hole.

Crucially, KPMG did not see due diligence data for the Co-op Bank's takeover of Britannia building society.

KPMG partner Andrew Walker said the firm was not asked to review Britannia's commercial loans.

Many of these commercial loans turned sour, forcing Co-op Bank into a rescue deal with outside investors. Due diligence on the loan book was done by the board itself.

Giving evidence to the Treasury Committee, Mr Walker also said that he was confident in the bank board's qualities and experience.

Questions have been raised over the board's abilities, especially in the light of allegations against the bank's former chairman, Rev Paul Flowers. He has been released on bail after being arrested in Merseyside in connection with a "drugs supply investigation".

KPMG partner Jonathan Hurst added that there was "nothing that made me particularly concerned" about the board's behaviour or decision making.

He said there was nothing in Rev Flowers' behaviour that suggested the subsequent allegations against the former chairman.

The Treasury Committee also heard evidence from US investment bank JP Morgan, which received a £7m fee for work on the Co-op's Britannia deal.

'Not reckless'

Tim Wise, a UK managing director in JP Morgan's investment arm, agreed that the fee was a "significant" sum of money. "But that is the way that the industry works," he said.

"In terms of the integrity of our advice, that is fundamental to the way we work and a lot of professions work that way. Like all advisers, you have an economic interest on the deal," he said.

He said that although JP Morgan's role was to advise on the scope of due diligence and financial terms of the Britannia acquisition, it was not the investment bank's job to say if the deal should go ahead.

On Britannia's commercial loan book, whose poor quality harmed Co-op, Mr Wise agreed with KPMG that it was the Co-op's board and management team that had the "real expertise in this area".

He said that, with hindsight, the Britannia deal turned out to be a wrong move for the Co-op. But Mr Wise said he would "take issue" with allegations that the Co-op's decisions at the time were "reckless".

He added: "The strategic logic [of the deal] still holds water, for what it's worth. In terms of economically, clearly that has not stood the test of time."

JP Morgan was paid £2m when the Britannia deal was announced and a further £5m on completion.

Andrew Tyrie, the Treasury Committee's chairman, asked if JP Morgan's advice would have been different if the fee structure had been scheduled over a longer period and linked more closely to performance.

Mr Wise said no. "The advice would not change."

He also said that he did not believe JP Morgan had suffered any "reputational damage" over the Britannia deal.

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