The Co-operative Bank plc (Co-op Bank) was publicly censured by the FCA for breaching the Listing Rules, pursuant to sections 91 and 205 of the Financial Services and Markets Act 2000.
During the relevant period Co-op Bank was subject to the UK Listing Rules and breached Listing Rule 1.3.3R (misleading information not to be published) as a result of the statements made in relation to its capital position in its financial statements for the year ended 31 December 2012. In addition, Co-op Bank breached Listing Principle 11 by failing to notify the FCA in a timely manner of intended changes to two senior positions at the bank and the reasons for those changes.
The relevant Listing Rule and Listing Principle
Listing Rule 1.3.3R states:
“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.”
Listing Principle 11 states:
“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.”
Financial Statements and Co-op Bank’s capital position
On 21 March 2013, Co-op Bank published its financial statements for the year ended 31 December 2012. The 2012 Financial Statements showed a loss of £673.7 million. This was a significant change to that expected by Co-op Bank only a few months previously. A major contributory factor was impairment losses of £474.1 million. In addition, there was a further provision for payment protection insurance claims of £149.7 million and a partial write off of the value of a new IT system of £150 million.
The 2012 Financial Statements included the following statements in relation to Co-op Bank’s capital position in the section entitled ‘Capital management – capital resources (audited)’:
“Adequate capitalisation can be maintained at all times even under the most severe stress scenarios, including the revised FSA “anchor” stress scenario”; and
“A capital buffer above Individual Capital Guidance (ICG) 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 2012, when the FCA issued Co-op Bank with revised capital requirements, Co-op Bank did not have sufficient capital to meet its revised Capital Planning Buffer. This was the capital buffer set by the FCA “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”.
Significant management action was required to improve Co-op Bank’s capital position and there were frequent discussions between Co-op Bank and the FCA (and from 1 April 2013, the PRA) on the steps necessary to do so.
In addition, there was no reasonable basis for stating that Co-op Bank had adequate capital in the most severe stress scenarios. This was particularly the case given the significant changes in what was known about Co-op Bank’s financial position in the previous months. This same sentence had already been removed from another section of the financial statements after concerns were expressed about its accuracy.
Co-op Bank withdrew from the potential purchase of branches from Lloyds Banking Group on 24 April 2013. On 9 May 2013 the credit agency, Moody’s, downgraded Co-op Bank’s debt rating from A3/ Prime 2 to Ba3/Not Prime (a downgrade of 6 levels). This resulted in a significant drop in the value of Co-op Bank’s listed securities.
On 17 June 2013, Co-op Bank announced it was holding insufficient capital and required an additional £1.5bn of Common Equity Tier 1 capital. The PRA confirmed in an announcement on 20 June 2013 that it was also of the view that Co-op Bank had a £1.5bn capital shortfall.
During 2013, Co-op Bank carried out a Liability Management Exercise, with the aim of increasing the level of capital that it held by £1.5 billion. This exercise involved issuing new shares and new debt in exchange for cash and existing debt and preference shares.
Changes to senior positions
In the period from April 2012 to May 2013, two separate discussions took place amongst certain senior individuals at Co-op Bank about the future positions of two key individuals. As a result, it was intended that the holders of these positions would change. The FCA was not informed of either of these intended changes in a timely manner (and in one case, not until after the position holder had left). Moreover, during one particular conversation with the firm, the FCA asked questions in relation to one of the position holders and was provided with an incorrect assurance.
Co-op Bank breached:
- Listing Rule 1.3.3R by publishing the 2012 Financial Statements; and
- Listing Principle 11 by failing to notify the FCA of intended changes to two senior positions and the reasons behind those changes.
In deciding whether to impose a public censure or a financial penalty the FCA had regard to the seriousness of the breaches. The FCA, in particular, considered the following factors:
- the breaches were committed negligently rather than deliberately or recklessly;
- no profits were made or losses avoided by Co-op Bank as a result of the breaches, either directly or indirectly; and
- there was a significant risk of loss to individual investors or other market users in relation to the Listing Rules breach.
The FCA also considered the fact that Co-op Bank was fined £113,300 by the FCA in 2013 for breaching Listing Principle 6 (Customers’ Interests).
Although the failings were serious and merited a substantial financial penalty, the FCA decided not to impose a financial penalty. The FCA had given consideration to the impact of a substantial financial penalty and decided that it was of great importance that Co-op Bank’s turnaround plan, in which it was then engaged and the aim of which was to ensure that it met its capital requirements, was successful and that its capital resources were directed towards improving its resilience. In the exceptional circumstances of Co-op Bank, a public censure to demonstrate to Co-op Bank and others the seriousness with which the FCA regarded Co-op Bank’s failings was considered appropriate and proportionate.