FINAL NOTICE

To:
The Co-operative Bank plc



1.
ACTION

1.1.
For the reasons given in this notice, the Authority hereby, pursuant to sections 91

and 205 of the Financial Services and Markets Act 2000 (the “Act”), publishes a

statement to the effect that the Co-operative Bank plc (“Co-op Bank”) has

contravened regulatory requirements.

1.2.
The serious failings in this case merit a substantial financial penalty. However, in

the circumstances of this case, the Authority has decided not to impose a financial

penalty. The Authority has given serious consideration to the impact of a

substantial financial penalty. This includes, in particular, that Co-op Bank is

currently engaged in a turnaround plan with the aim of ensuring that it meets its

Individual Capital Guidance on a sustainable basis and has adequate capital to

withstand a severe stress.

1.3.
The Authority considers that it is of great importance that this plan is successful

and that Co-op Bank’s capital resources are directed towards improving its

2

resilience. In the exceptional circumstances of Co-op Bank, a public censure is

considered appropriate and proportionate.

1.4.
The public censure will be issued on 11 August 2015 and will take the form of this

Final Notice, which will be published on the Authority’s website.

2.
SUMMARY OF REASONS

2.1.
For the period 21 March 2013 to 17 June 2013 Co-op Bank breached the

Authority’s Listing Rule 1.3.3R (misleading information not to be published). This

was as a result of the statements made on its capital position in its financial

statements for the year ending 31 December 2012. In addition, from 25 April

2012 to 9 May 2013 Co-op Bank also breached Principle 11 by failing to notify the

Authority of intended changes to two senior positions (and the reason for those

changes).

2.2.
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

Authority’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 misleading in its annual report, Co-op Bank fell significantly below the

standards expected of listed companies in the UK.

2.3.
On 21 March 2013, Co-op Bank published its 2012 Financial Statements for the

year ended 31 December 2012. The 2012 Financial Statements showed a loss of

£673.7m. This was a significant change to that expected by Co-op Bank only a

few months previously. A major contributory factor to this was impairment losses

of £474.1m. These resulted in large part from work required after the year end

to comply with the standards for provisioning set out in a letter to the industry

from the Authority dated 20 December 2012. In addition, there was a further

provision for Payment Protection Insurance claims of £149.7m and a partial write

off of the value of a new bank IT system in the amount of £150m.

2.4.
The 2012 Financial Statements contained the following statements in relation to

Co-op Bank’s capital position:

3

(1)
“Adequate capitalisation can be maintained at all times even under the

most severe stress scenarios, including the revised FSA “anchor” stress

scenario; and

(2)
“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.”

2.5.
Statements made about capital are crucial to readers of banks’ financial

statements. They are a key guide to the health and future stability of a firm.

These statements about capital in the 2012 Financial Statements were false and

misleading.

2.6.
In fact, since 15 January 2013, when the Authority 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 down

by the Authority “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.” From this time there were frequent discussions

between Co-op Bank and the Authority (and from 1 April 2013 the PRA) on steps

necessary to improve its capital position. Whilst it did hold capital above its ICG,

it should, have been apparent to Co-op Bank that this was a misleading

statement.

2.7.
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.

2.8.
Co-op Bank withdrew from the potential purchase of branches from Lloyds

Banking Group (known as Project Verde) on 24 April 2013. On 9 May 2013 the

credit agency, Moody’s, downgraded Co-op Bank’s debt ratings 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.

2.9.
Co-op Bank announced it was holding insufficient capital on 17 June 2013 and

required an additional £1.5bn of Common Equity Tier 1 (“CET1”) capital. The PRA

confirmed in an announcement on 20 June 2013 that it was also of the view that

the Co-op Bank had a £1.5bn capital shortfall.

2.10. 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. The value of holdings was significantly reduced when the

Liability Management Exercise completed on 20 December 2013.

2.11. Co-op Bank’s breach of Principle 11 by failing to notify the Authority of intended

changes to two senior positions (and the reasons behind those changes) was also

a serious failing. The regulator would expect to be notified of any intended

changes to senior individuals without delay to enable it to properly consider and

assess the management of the firm. This is particularly important when, as was

the case with Co-op Bank in the Relevant Period, there were significant issues to

be dealt with by the firm.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

“2012 Financial Statements” means the Co-op Bank financial statements for year-

ended 31 December 2012.

“the Act” means the Financial Services and Markets Act 2000.

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

Authority.

“CET1” means Common Equity Tier 1 capital. This consists of the sum of:

common shares that meet the criteria for classification as common shares for

regulatory purposes and which meet the criteria for inclusion in CET1 capital,

stock
surplus
(share
premium),
retained
earnings,
accumulated
other

comprehensive income and other disclosed reserves and regulatory adjustments

applied in the calculation of CET1. This is the definition used under the Basel III

global regulatory framework for capital. This applied in the EU under the Capital

Requirements Directive (CRD) IV which came into force on 1 January 2014.

5

Under the previous framework (the Basel II framework) the equivalent term was

“Co-op Bank” means Co-operative Bank plc.

“CPB” means Capital Planning Buffer. This is the amount and quality of capital

resources that a firm should hold at a given time in accordance with the

Authority’s general stress and scenario testing rule, so that the firm is able to

continue to meet the overall financial adequacy rule throughout the relevant

capital planning period in the face of adverse circumstances, after allowing for

realistic management actions. It is in addition to the Individual Capital Guidance

amount.

“DEPP” means the Authority’s Decisions Procedures and Penalties Guide

“EG” means the Authority’s Enforcement Guide

“ICG” means Individual Capital Guidance. This 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.

“LME” means the Liability Management Exercise conducted by Co-op Bank in

2013.

“PRA” means the Prudential Regulation Authority.

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).

“Relevant Period” is between 25 April 2012 and 21 June 2013.

“RIS” means a Regulatory Information Service.

“SREP” means Supervisory Review and Evaluation Process. As part of the SREP,

the Authority / PRA reviews the firm’s Internal Capital Adequacy Assessment

Process (”ICAAP”).

6

4.
FACTS AND MATTERS

4.1.
Co-op Bank is a retail and commercial bank which offers a range of financial

products, including current accounts, savings accounts, credit cards and loans.

Co-op Bank has been authorised to perform regulated activities by the Authority

since 1 December 2001.

4.2.
On 1 August 2009 Britannia Building Society merged with Co-op Bank, with the

combined business continuing to trade under both the Britannia and Co-op brands

after the merger. Co-op Bank was a wholly owned subsidiary of the Co-operative

Group (through the Co-operative Banking Group Limited) until 20 December

2013, when the Co-operative Group reduced its stake in Co-op Bank to 30 per

cent, as part of its plan to raise more capital (named the Liability Management

Exercise). The Co-operative Group’s stake in Co-op Bank has since been reduced

further to approximately 20 per cent.

4.3.
During the Relevant Period, Co-op Bank had bonds and preference shares that

were available for trade on a Regulatory Information Exchange. As such, Co-op

Bank was subject to the UK Listing Rules.

Capital requirements and their importance

4.4.
A firm’s capital requirement is the amount of capital that a firm must hold and it

is set by its financial regulator. These requirements are put into place to ensure

that firms are managed prudently and do not take on excess leverage (i.e. debt

compared to capital base). It is crucial that firms are able to withstand adverse

trading or economic conditions. These requirements aim to protect firms,

customers, the Financial Services Compensation Scheme (which compensates

certain customers in the event of a bank failure) and the markets. The financial

regulator establishes rules to make sure that institutions hold enough capital to

ensure continuation of a safe and efficient market and are able to withstand any

foreseeable problems.

4.5.
The framework for capital requirements was established with the Basel Accords,

published by the Basel Committee on Banking Supervision. The Basel II

framework and the Capital Requirements Directive III were in force as at 21

March 2013. These set out guidance and rules on how banks and depository

institutions must calculate their capital.

7

4.6.
It is very important that firms publish accurate information concerning their

capital position in their financial statements as it provides users of the financial

statements with details of the prudential strength of the firm and its ability to

withstand adverse scenarios.

Events leading to identification of the CPB deficit

4.7.
On 14 November 2012 the Authority communicated to Co-op Bank the initial

findings of the Authority’s SREP and Capital Planning Stress Testing module that it

had recently carried out on Co-op Bank. The Authority explained that it was

evident that Co-op Bank’s capital requirements and CPB would be increasing

significantly. The Authority confirmed these findings, which included increases in

Co-op Bank’s ICG and CPB, in writing on 15 January 2013.

4.8.
On 20 December 2012 the Authority sent a letter to banks and building societies

on loan loss provisioning. This sought to ensure that firms took an appropriate

approach to loan loss provisioning by setting out the circumstances in which a

provision should be made. This caused Co-op Bank to change its practice

significantly and led to a large increase in impairment provisions both for year-

end 31 December 2012 and onward into 2013.

Identification of the CPB deficit

4.9.
On 15 January 2013 the Authority wrote to Co-op Bank setting out its revised

capital requirement including the ICG and CPB. This resulted from work done by

Co-op Bank and the Authority in 2012.

4.10. Co-op Bank did not have enough capital to meet its revised CPB, and significant

management action was required to improve its capital position. From this time

there were frequent discussions between Co-op Bank and the Authority (and from

1 April 2013 the PRA) on steps necessary to do so.

4.11. On 21 March 2013 Co-op Bank published its financial statements for the year

ending 31 December 2012. This was published through a Regulatory Information

Service announcement at 7.00am. The accounts reported a loss before taxation

of £673.7 million. This included impairment losses of £474.1 million and a £150

million provision relating to Co-op Bank’s intended replacement IT system,

Finacle.

4.12. The statements relating to Co-op Bank’s capital position in its 2012 Financial

Statements are set out in full in Appendix 1. In the section entitled ‘Capital

management – capital resources (audited) at page 80 these contained the

(1)
“Adequate capitalisation can be maintained at all times even under the

most severe stress scenarios, including the revised FSA “anchor” stress

scenario”; and

(2)
“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.”

The true position in respect of Co-op Bank’s capital position

4.13. From 15 January 2013 Co-op Bank knew that it did not have sufficient capital to

meet its CPB. This was the capital buffer set down by the Authority “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, 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 been already removed from

another section of the accounts after concerns were expressed about its accuracy.

4.14. Co-op Bank withdrew from the potential purchase of branches from Lloyds

Banking Group (known as Project Verde) on 24 April 2013. On 9 May 2013 the

credit agency, Moody’s, downgraded Co-op Bank’s debt ratings 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 preference shares and listed debt.

4.15. Co-op Bank’s inadequate capital position was publicised on 17 June 2013, with

the Co-op Bank announcing that it required an additional £1.5bn of CET1 capital.

The PRA confirmed in an announcement on 20 June 2013 that it was also of the

view that the Co-op Bank had a £1.5bn capital shortfall.

4.16. 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. The value of holdings was significantly reduced when the

Liability Management Exercise completed on 20 December 2013.

Failure to notify the Authority of proposed changes to senior positions

4.17. 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 position of two

key individuals. As a result, it was intended that the holders of these positions

would change. The Authority 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

Authority asked questions in relation to one of the position holders and was

provided with an incorrect assurance.

4.18. The regulator would expect to be notified without delay of any intended changes

to senior position holders (and the reason for the changes) to enable the

Authority to properly consider and assess the management at Co-op Bank. This

is particularly important when, as was the case with Co-op Bank in the Relevant

Period, there were a number of significant issues being dealt with by the firm.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Final Notice are referred to in Annex A.

5.2.
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.”

5.3.
For the reasons set out in paragraphs 4.9 to 4.16, Co-op Bank breached Listing

Rule 1.3.3R by publishing the 2012 Financial Statements.

5.4.
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.”

5.5.
For the reasons set out in paragraphs 4.17 to 4.18, Co-op Bank breached

Principle 11 by failing to notify the Authority of intended changes in two senior

positions and the reasons behind those changes.

6.
SANCTION

Public censure

6.1.
The principal purpose of issuing a public censure is to promote high standards of

regulatory conduct by deterring persons who have committed breaches from

committing further breaches and helping to deter other persons from committing

similar breaches, as well as demonstrating generally the benefits of compliant

behaviour.

6.2.
DEPP 6.4.2G sets out the factors that may be of particular relevance in

determining whether it is appropriate to issue a public censure rather than impose

a financial penalty. The criteria are not exhaustive and DEPP 6.4.1G(1) provides

that the Authority will consider all the relevant circumstances of the case when

deciding whether to impose a penalty or issue a public censure. The Authority

considered that the factors below were particularly relevant in this case.

Deterrence (DEPP 6.4.2G(1))

6.3.
In determining whether to publish a statement of Co-op Bank’s misconduct the

Authority had regard to the need to ensure that firms take their obligations to

publish accurate information to the market seriously. The Authority considered

that a public censure should be imposed to demonstrate to Co-op Bank and

others the seriousness with which the Authority regards its failings.

The seriousness of the breaches (DEPP 6.4.2G (3))

6.4.
In deciding whether to impose a public censure or a financial penalty the

Authority will have regard to the seriousness of the breaches. The Authority has,

in particular, considered the following factors from DEPP 6.5AG:

(1)
the breaches were committed negligently rather than deliberately or

recklessly;

(2)
no profits were made or losses avoided by Co-op Bank as a result of the

breaches, either directly or indirectly;

(3)
there was a significant risk of loss to individual investors or other market

users in relation to the Listing Rules breach.

The previous disciplinary history of Co-op Bank (DEPP 6.4.2G (6))

6.5.
The Authority has also considered the previous disciplinary history of Co-op Bank.

Co-op Bank was fined £113,300 by the Authority for breaches of Principle 6

(Customers’ interests) of the Authority’s Principles for Businesses on 4 January

2013. In the Relevant Period (21 January 2011 to 9 May 2011) there were

serious failings in Co-op Bank’s handling of complaints arising from the sales of

Payment Protection Insurance (PPI).

The impact of a financial penalty (DEPP 6.4.2G (8))

6.6.
The Authority has had particular regard to the impact of a financial penalty on Co-

op Bank. This includes, in particular, that Co-op Bank is currently engaged in a

turnaround plan with the aim of ensuring that it meets its Individual Capital

Guidance on a sustainable basis and has adequate capital to withstand a severe

stress.

Conclusion

6.7.
The serious failings in this case merit a substantial financial penalty. However, in

the circumstances of this case, the Authority has decided not to impose a financial

penalty. The Authority has given serious consideration to the impact of a

substantial financial penalty (as set out in paragraph 6.6 above). The Authority

considers that it is of great importance that Co-op Bank’s turnaround plan is

successful and that its capital resources are directed towards improving its

resilience. In the exceptional circumstances of Co-op Bank, a public censure is

considered appropriate and proportionate.

7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

7.3.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

7.4.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.5.
For more information concerning this matter generally, contact Andrew Wigston

(direct
line:
020
7066
6286/email
andrew.wigston@fca.org.uk)
of
the

Enforcement and Market Oversight Division of the Authority.

Guy Wilkes
Acting Head of Department
Financial Conduct Authority, Enforcement and Market Oversight Division

The 2012 Financial Statements included the following statements relevant to Co-op
Bank’s capital position (emphasis added in bold):

(1)
Overview’ section, page 3: “… our balance sheet remains robust with good

capital ratios, which we will take measures to continue to strengthen, and

high levels of liquidity.”

(2)
The banking environment’ section, page 4: “Our core business remains

profitable, while our balance sheet is robust. However, we are not

complacent about our financial strength and our strategic focus for the

medium term is directed at implementing measures to enhance the

strength of our capital ratios. In addition to a risk mitigation transaction

executed since the year end, these include strengthening the management

team and engaging a major investment bank to support on a range of

balance sheet deleverage options. Further to the signing of the sale and

purchase agreement for the sale of the Co-operative Banking Group’s life

insurance business which, subject to regulatory approval, is expected to

generate a significant release of capital, the strategic review will

encompass a review of the scale and composition of the financial services

group.”

(3)
Performance’ section, page 4: “These results are disappointing, but are

framed by the outcome of a recent strategic review designed to build on

the strength of the Bank’s core retail and business operations and at the

same time increase our focus on de-risking the non-core assets in order to

further strengthen the balance sheet. This review, supported by a

strengthened management team and premier league advisory partners,

will deliver capital benefits from a range of initiatives including a review of

the composition of our wider Banking Group and the deleveraging of our

balance sheet. The completion in 2013 of the sale of the Life and Savings

business owned by the Co-operative Banking Group should, subject to

regulatory approval, further strengthen the capital position.”

(4)
‘Business and financial review - Overview’ section, page 6: “As a result of

the financial performance noted above, the Core Tier 1 ratio has reduced

to 8.8% (2011: 9.6%). Since the year end, the Bank has completed a

securitisation transaction to reduce risk on the balance sheet, which has

improved the Core Tier 1 ratio by 0.4%, and which would increase the

year end ratio to 9.2% on a pro forma basis. This transaction is one of a

range of actions targeted, as part of a strategic review, at improving our

capital strength.”

(5)
‘Business and financial review – Balance sheet’ section, page 7: “The

capital position has been impacted by the statutory loss for the year, with

a Core Tier 1 ratio of 8.8% (2011: 9.6%). The total capital ratio was

14.4% (2011: 14.7%), with a Tier 1 ratio of 9.4% (2011: 10.1%). Further

detail on the capital position of the Bank can be found in the capital

management section on page 80. As noted above, since the year end, the

Bank has completed a securitisation transaction to reduce risk on the

balance sheet, which would improve the year end Core Tier 1 ratio to 9.2%

on a pro forma basis.”

(6)
‘Business and financial review - Outlook’ section, page 9: “We are working

to strengthen our profitable core business, enhance our retail offer and

simplify our high street presence under one Co-operative brand. In the

short term, while market conditions remain difficult, we will re-double our

focus on cost management, improving our capital strength, deleveraging

the balance sheet and controlling impairment risk by actively managing

our non-core business for value.”

(7)
‘Corporate Governance – Audit Committee focus during 2012’ section,

page 18: “The committee met 11 times during the financial year. During

2012 the committee focused on … the appropriateness of the accounting

judgements in the 2012 annual report and the 2012 interim report. The

key judgements for the bank were… going concern. The Audit Committee

took particular care to review the going concern status of the organisation

in depth. Profit, capital and liquidity forecasting were debated along with

the proposed actions to improve the position...”

(8)
‘Statutory disclosures information - Going concern’ section, page 29: “…

The new governor of the Bank of England has indicated that rates are

likely to be low for longer with inflation being allowed to rise to improve

growth. In response, a broad-ranging strategic review of the business is

underway with the objective of improving the capitalisation and

profitability of the Group.”

(9)
‘Statutory disclosures information - Capital’ section, page 30: “The Group’s

policy is to conserve a robust capital base so as to maintain investor,

creditor and market confidence and to sustain future development of the

business. However, the Group still recognises the need to maintain a

balance between the potential higher returns that might be achieved with

greater gearing, and the advantages and security afforded by a sound

capital position.

Total capital resources are £2,578.2m (31 December 2011: £2,975.9m),

with Core Tier 1 capital after regulatory deductions of £1,576.8m (31

December 2011: £1,947.4m).

The Group’s capital position remains acceptable with a period end Core

Tier 1 position of 8.8% (31 December 2011: 9.6%). Throughout 2012, the

Bank and its individually regulated operations have complied with all

externally imposed capital requirements. However, the Board recognises

the need to build the capitalisation of the Group to provide increased

resilience and capacity for future growth. Actions taken early in 2013 have

already improved this position to 9.2%.

Current forecasts show that the Group’s capital will remain above

minimum regulatory requirements over the period of the Plan. However, in

response to the impact of new Basel III regulations and the expectation of

a prolonged economic downturn, we are reviewing our business with the

intent of improving our profitability and capital position. Without

management action, explained in the Opportunities section below,

compliance with regulatory capital requirements would come under

pressure.”

(10)
‘Statutory disclosures information - Risks’ section, page 30: “The

idiosyncratic risks that could affect the future performance of the Group

are: … Failure to complete management actions to strengthen the Group’s

capital position.”

(11)
‘Statutory disclosures information - Opportunities’ section, page 30: “The

Board sponsored strategic review seeks to build on this platform. This

wide-ranging strategic review of our Banking Group businesses, considers

the management actions at the Board’s disposal which will be undertaken

in order to improve profitability and capitalisation of the Group in line with

market expectations and Basel III capital requirements … The signing of

the Sale and Purchase Agreement and subsequent completion of the sale

of our Life and Savings business, followed by the planned downstreaming

of capital into the Group will also have positive implications for our capital

position, subject to regulatory approval.”

(12)
‘Statutory disclosures information - Conclusion’ section, page 30: “The

directors are satisfied that the Group is a going concern, has sufficient

profit, capital and liquidity in place and forecast, and has plans in place to

strengthen that position going forward.”

(13)
‘Capital management – capital resources (audited)’ section, page 80: “The

Bank’s policy is to maintain a strong capital base so as to maintain

investor,
creditor
and
market
confidence
and
to
sustain
future

development of the business. However, the Bank still recognises the need

to maintain a balance between the potential higher returns that might be

achieved with greater gearing, and the advantages and security afforded

by a sound capital position.

Our submissions to the FSA in the period have shown that the Bank and its

individually regulated operations have complied with all externally imposed

capital requirements.

The Bank’s Core Tier 1 capital position at the year end was 8.8% (2011:

9.6%). However, the Board recognises the need to build the capitalisation

of the Bank to provide increased resilience and capacity for future growth.

To this end, a strategic review is underway targeting growth in the Core

Tier 1 ratio. Part of this was concluded in January 2013 when a risk

mitigation transaction completed which would increase the year end ratio

to 9.2% on a proforma basis.

Adequate capitalisation can be maintained at all times even under

the most severe stress scenarios, including the revised FSA

‘anchor’ stress scenario.

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…”

(14)
‘Capital management – Capital allocation’ section, page 82: “… Since the

year end, the Bank has completed a securitisation transaction to reduce

risk in the balance sheet which has improved the Core Tier 1 ratio by

0.4%. The signing of the Sale and Purchase Agreement relating to the Life

and Savings business owned by The Co-operative Banking Group in 2013

is expected to further strengthen the capital position.”

ANNEX A

1.
JOINT INVESTIGATION

1.1.
On 1 April 2013, a new “twin peaks” regulatory structure came into being under

which the Financial Services Authority was replaced by the Authority and the

Prudential Regulatory Authority (“PRA). The effective date of that change, 1 April

2013, is known as Legal Cutover (“LCO”). Following LCO both the Authority and

the PRA have an enforcement remit and are able to exercise a range of

enforcement powers and impose sanctions under the Act.

1.2.
Although the conduct to which this matter relates occurred prior to LCO, Part 5 of

the
Financial
Services
and
Markets
Act
2012
(Transitional
Provisions)

(Enforcement) Order 2013 (“Order”) permits the PRA and/or the Authority to take

action to address contraventions occurring pre LCO but for which the PRA and/or

the Authority would have been an appropriate regulator had the contravention

occurred on or after LCO. Both the PRA and the Authority therefore have the

ability to take action in this matter.

1.3.
In January 2014, the Authority and PRA agreed to undertake a joint investigation

into the potential Principle 11 breaches. The Authority and the PRA are both

permitted to take action pursuant to the Order.

1.4.
The Authority and PRA considered a joint investigation necessary because the

failings encompassed both conduct and prudential issues and therefore had

implications for the statutory objectives of both regulators. In particular, the

matter is relevant to:

(1)
The Authority’s overarching strategic objective of ensuring that the

relevant markets function well and the advancement of the Authority’s

operational objectives of (i) securing an appropriate degree of protection

for consumers and (ii) protecting and enhancing the integrity of the UK

financial system; and

(2)
The PRA’s general objective of promoting the safety and soundness of PRA

authorised persons by “seeking to ensure that the business of PRA-

authorised persons is carried on in a way which avoids any adverse effect

on the stability of the UK financial system” under section 2B(3)(a) of the

Act; specifically where adverse effects may result from the lack of

adequate senior management.

2.
RELEVANT STATUTORY PROVISIONS

2.1.
In discharging its general functions, the Authority must, so far as reasonably

possible, act in a way which is compatible with its strategic objective and

advances one or more of its operational objectives (section 1B(1) of the Act).

The Authority’s strategic objective is ensuring that the relevant markets function

well (section 1B(2) of the Act). The Authority has three operational objectives

(section 1B(3) of the Act).

2.2.
The Authority’s operational objectives are the consumer protection objective

(section 1C of the Act), the integrity objective (section 1D of the Act) and the

competition objective (section 1E of the Act).

2.3.
Section 91 of the Act states:

“(1) If the [Authority] considers that:

(a) an issuer of listed securities, or

(b) an applicant for listing,

has contravened any provision of listing rules, it may impose on him a penalty of such

amount as it considers appropriate…….

(3) If the Authority is entitled to impose a penalty on a person under this section in

respect of a particular matter it may, instead of imposing a penalty on him in respect

of that matter, publish a statement censuring him”.

2.4.
Section 205 of the Act states:

“If the [Authority] considers that an authorised person has contravened a relevant

requirement imposed on the person, it may publish a statement to that effect”.

3.
RELEVANT REGULATORY PROVISIONS

3.1.
In exercising its power to issue a penalty, the Authority must have regard to the

relevant provisions in the Handbook of rules and guidance (“Handbook”). The

Handbook provisions relevant in this matter are the Principles, the DEPP, and EG.

3.2.
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system. They derive their authority from the Act’s rule-

making powers and reflect the Authority’s regulatory objectives. The relevant

Principle in this matter is Principle 11:

“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”

3.3.
The Authority’s policy for imposing penalties is set out in Chapter 6 of DEPP.

3.4.
EG sets out the Authority’s approach to taking disciplinary action (Chapter 2) and

issuing financial penalties (Chapter 7).

3.5.
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”.