Appendix: Government Response
Overview
In October 2014, the Treasury Committee published
the report of its inquiry, launched in June 2013, into the divestment
of 632 branches of Lloyds Banking Group under 'Project Verde',
and the collapse of the Co-operative Bank's bid for them.
As the Committee notes (Paragraph 1), in November
2013 HM Treasury announced that it would direct the Regulators
to conduct an investigation into events at the Co-operative Bank
and the circumstances surrounding them, using its powers under
the Financial Services Act 2012; this investigation will be led
by an independent person appointed by the Financial Conduct Authority
(FCA) and the Prudential Regulation Authority (PRA) with the approval
of HM Treasury.
The Government welcomes the thorough inquiry conducted
by the Committee, and detailed summary of its findings from the
evidence presented to it over these 16 months. The Government
has no doubt that this will provide a profoundly helpful contribution
to the independent investigation and ongoing inquiries by other
bodies.
The Committee's conclusions and recommendations
for other authorities
The Committee's report (pages 104 ff) sets out
a range of detailed conclusions, and a number of recommendations
for other bodies, including the Financial Reporting Council and
the financial services regulators (FCA and PRA). These independent
bodies are expected to respond separately to the Committee's recommendations.
Responses to recommendations directed at the Government are set
out below.
The Government notes in particular the conclusions
of the Committee's inquiry that:
· notwithstanding
any shortcomings in the respective oversight roles played by the
auditor and the regulator that may be uncovered by the other inquiries,
banks—in this case the Co-op Bank—bear primary responsibility
for their own prudent management (Paragraph 129); and
· the
Committee has seen no evidence that the goodwill expressed by
the Government towards Co-op Bank's bid amounted to pressure on
any party, and that that witnesses have presented the Committee
with overwhelming evidence to the contrary (Paragraph 276).
Recommendations for the Government
The Government and the regulators should at the
earliest opportunity make proposals to extend the coverage of
the Senior Managers and Certification Regimes to, and remove the
application of the Approved Persons Regime from, other parts of
the financial services industry. (Paragraph 207)
The Government notes the Committee's recommendation.
The Fair and Effective Markets Review is considering whether to
extend the Senior Managers and Certification Regimes to non-bank
firms active in fixed income, foreign exchange and commodities
markets. The Review will report in June 2015. Further primary
legislation would be needed to extend the Senior Managers and
Certification Regimes beyond banks, building societies, credit
unions and PRA-regulated investment firms.
The independent inquiry into events at Co-op Bank
and the circumstances surrounding them should consider:
e) Whether the FSA could or should have developed
superior stress-testing tools sooner than it did;
f) Whether superior stress-testing tools would
have led to Co-op Bank's loan impairments being discovered sooner;
g) Whether Co-op Bank's impairment profile—which
appeared to differ from that of other banks throughout the financial
crisis—should have led the regulator to inspect it more
closely prior to 2012;
h) Why the FSA's analysis on the Britannia
merger failed properly to account for the prudential risks attached
to the Britannia assets that have since been uncovered by the
PRA;
i) Whether the work provided by KPMG and JPMC
on the Britannia merger met a reasonable standard, in substance
as well as form;
j) Whether the FSA was made aware of the change
made by Co-op Bank to the accounting treatment for its IT platform
replacement programme in 2010, and whether the FSA should have
foreseen and acted on its consequences—that is, delaying
the effect of the IT programme on the bank's regulatory capital;
k) Whether—given the conclusions of
the independent inquiry on the forgoing points and the FRC's investigation
on the late emergence of Co-op Bank's capital shortfall—Co-op
Bank's Verde bid could or should have been halted sooner;
l) What, if anything, further can be learnt
from the record of the Government's contacts with Co-op Bank and
Group, Lloyds Banking Group, the regulator, UKFI and NBNK during
the Verde bidding process. (Paragraph 303)
The Government welcomes the Committee's work in this
area and will consider its recommendations when determining the
scope of the investigation under the Financial Services Act 2012,
in consultation with the independent person appointed to lead
it and in the light of any issues that may arise from the enforcement
investigations which the FCA and PRA have confirmed that they
are undertaking.
The Government has committed to ensuring that this
investigation will cover the actions of relevant authorities (regulators
and government) and the institution itself, including prudential
issues, governance (including the appointment of senior staff)
and acquisitions. The direction and the investigation's report
will be laid before Parliament.
The period that the investigation will review will
start from at least 2008 and run to at least the time when the
investigation was announced. The Government can confirm the review
will cover the period of the merger between the Cooperative
Bank and the Britannia Building Society in 2009.
In respect of the Government's contacts with Co-op
Bank and Group, Lloyds Banking Group, the regulator, UKFI and
NBNK during the Verde bidding process, HM Treasury has undertaken
to ensure that the independent investigator will have access to
all of the relevant information from the Treasury's records. A
summary of the Treasury's contacts with the various parties, and
the underlying purpose of those contacts, was included in the
Chancellor of the Exchequer's letter to the Committee of 1 August 2014,
published by the Committee as Written Evidence PV 44 for
this inquiry.
The independent investigation will not start until
it is clear it will not prejudice the FCA and PRA enforcement
investigations.
| 
