The Financial Conduct Authority (FCA) has issued a public censure against The Co-operative Bank plc (Co-op Bank) for breaching its Listing Rules. The Listing Rules require issuers to ensure that information published is not misleading so that investors can make fully informed decisions.
In a joint investigation with the Prudential Regulation Authority (PRA), the FCA also found that Co-op Bank fell short of its responsibility to be open with its regulators, which is one of the principles that regulated firms must abide by.
In addition to the joint investigation, the PRA has also separately published the result of its enforcement action against Co-op Bank. The PRA found that Co-op Bank failed to comply with Principle Three of the Principles for Businesses for the period 22 July 2009 to 31 December 2013. Principle Three requires a firm to manage its affairs responsibly, with adequate risk management. In particular, Co-op Bank had a three lines of defence risk management model that was flawed in design and operation.
Co-op Bank’s failings would normally merit a substantial fine. However, in the circumstances, the FCA has decided not to impose a financial penalty. The PRA has also, given the exceptional circumstances, issued Co-op Bank with a public censure.
As with all enforcement investigations, serious consideration is given to the impact of a financial penalty. In this case the FCA and the PRA considered the fact that Co-op Bank is engaged in a plan to ensure that it meets its Individual Capital Guidance on a sustainable basis and has adequate capital to withstand a severe stress.
Georgina Philippou, acting director of enforcement and market oversight, said:
"Firms have a very basic but extremely important responsibility to be transparent with their investors and with us, as their regulator, and Co-op Bank fell short of this. As a result, investors were left unaware of Co-op Bank’s true capital position and we were left in the dark about intended changes to senior personnel at the bank.
"This is a serious matter, but exceptional circumstances mean a public censure is the appropriate and proportionate response. It is vitally important that Co-op Bank’s capital resources are directed towards improving its resilience."
For the period 21 March 2013 to 17 June 2013 Co-op Bank breached the FCA’s Listing Rule 1.3.3R (misleading information not to be published).
In its financial statements for the year ending 31 December 2012, published on 21 March 2013, Co-op Bank stated that “Adequate capitalisation can be maintained at all times even under the most severe stress scenarios, including the revised FSA [Financial Services Authority] “anchor” stress scenario”. And: “A capital buffer above Individual Capital Guidance (ICG)1 is being maintained, to provide the ability to absorb capital shocks and ensure sufficient surplus capital is available at all times to cover the Bank’s regulatory minimum requirements.”
In fact, since 15 January 2013, when the FSA had issued Co-op Bank with revised capital requirements, Co-op Bank did not have sufficient capital to meet its revised Capital Planning Buffer (“CPB”). This was the capital buffer set by the FSA “to provide the ability to absorb capital shocks and ensure sufficient surplus capital is available at all times to cover the Bank’s regulatory minimum requirements.” In addition, when the financial statements were published, there was no reasonable basis for stating that Co-op Bank had adequate capital in the most severe stress scenarios.
Statements about capital are crucial to readers of banks’ financial statements. They are a key guide to the health and future stability of a firm. Co-op Bank’s statements about capital in the 2012 financial statements were misleading.
The UK listing regime relies on disclosure and transparency to allow investors to make fully informed decisions. It is of fundamental importance to achieving the FCA’s objective of making the relevant markets work well that market disclosures by listed companies are not only timely but also accurate. This ensures that they can be relied on by investors in making investment decisions to hold, buy or sell an investment. By making statements about its capital position that were false and misleading in its annual report, Co-op Bank fell significantly below the standards expected of listed companies in the UK.
Co-op Bank also breached Principle 11, which requires firms to be open and co-operative with regulators, and disclose information of which the regulators might reasonably expect to be aware. Co-op Bank failed to notify the FCA or PRA of intended changes to two senior positions and the reasons behind those changes in the period April 2012 to May 2013.
The regulators would expect to be notified of any intended changes to senior individuals without delay to enable us to properly consider and assess the management of the firm. This is particularly important when, as was the case with Co-op Bank, there were significant issues to be dealt with by the firm.
Investigations into senior individuals at Co-op Bank during the relevant period are on-going.
Notes to editors
- FCA Final notice: The Co-operative Bank plc
- PRA Press release
- Listing Rule 1.3.3R requires that ‘an issuer must take reasonable care to ensure that any information it notifies to a RIS or makes available through the FCA is not misleading, false or deceptive and does not omit anything likely to affect the import of the information.’
- Principle 11 of the Principles for Business requires that ‘a firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.’
- Principle 3 of the Principles for Business requires that ‘a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.’
- The PRA also found that Co-op Bank did not have adequate risk management, corporate lending or capital management policies and management information.
- On 22 November 2013 the Treasury announced it would use the powers brought in under the Financial Services Act 2012 to order an independent investigation into events at Co-op Bank and the circumstances surrounding them. The Treasury has previously indicated that the independent review announced by the Chancellor will not start until it is clear that it will not prejudice any actions that the regulators may take.
- On 1 April 2013, the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA). On 1 April 2014, the FCA took over responsibility for consumer credit regulation.
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.
1 Individual Capital Guidance is the guidance given to a firm about the amount and quality of capital resources that the Authority/PRA thinks the firm should hold at all times under the overall financial adequacy rule as it applies on an individual company or consolidated level.