HOUSE OF COMMONS
Oral evidence, 7 January 2014.
Witness
Clive Adamson, Director of Supervision, Financial Conduct Authority, and former Director, Major Retail Groups Division, Financial Services Authority (2008-2011), gave evidence.
Chair
Thank you very much for coming to give evidence to us this morning. If we include the Treasury Select Committee, there are now no less than six inquiries running into the Co-op, as I understand it; three triggered or being run by the Co-op: one by Sir Christopher Kelly, one an internal inquiry into inappropriate behaviour and one an independent review commissioned by the Treasury for which we still do not have terms of reference or even, as far as I am aware, an individual to run it, plus now the enforcement investigation that is taking place through the FCA. There has been quite a lot to investigate, hasn’t there?
Clive Adamson
Indeed there is, yes.
Chair
One part of it is that the appointment of Mr Flowers now looks an extraordinary decision. Do you regret having approved Mr Flowers?
Clive Adamson
I stand by the decision that I made at the time, Chairman. I am as surprised as all of us as to the events that unfolded around Mr Flowers’ apparent misdemeanours, but perhaps for context I can take you through, if it would be helpful for the Committee, as to—
Chair
We will do that in a moment. I just want to clarify whether you regret it and whether you think it was a mistake. From what you have just said, it sounds as if you do not regret it and you do not think, given the way you were going about things at the time, that it was a mistake.
Clive Adamson
I do not think it was a mistake in terms of the decision that I made at the time with the information I had. No, I do not.
Chair
We will come back to that in a moment perhaps as well. I asked Paul Flowers some very basic questions about the bank that he was chairman of. This had nothing to do with the subsequent revelations, but his answers to those questions were enough to make it clear that this man was unlikely to be suitable to run a bank. Did you try asking any straightforward questions?
Clive Adamson
During the meeting I had with him in May 2010, which was just before his appointment, I did indeed explore his experience together with why he was being put forward by the Co-op to be the chairman. Just to put it in context if I may, the reason that he was proposed to be put forward was that, at that time, the board of the Co-op Bank was 22 individuals. It was a somewhat unruly board and it was important that somebody was put in place to better chair that board. My view at the time was that Mr Flowers did have the competence to perform the role of non-executive chairman. Just to be clear, our view is the non-executive chairman does not run the bank. The role of the non-executive chairman is to run the board.
Chair
It is helpful to have someone in charge as chairman who has a rough idea about the organisation he is running; by which I mean a rough idea of the order of magnitude of its size, for example, which after several years in the job, he did not.
Clive Adamson
In front of this Committee, I am as surprised as you were by the answers he gave. I can tell you at the time I saw him in 2010—
Chair
He did know?
Clive Adamson
He was certainly much more cogent. The individual that you had in front of you is not the individual that I saw in 2010. He was much more articulate. He was more cogent. He did appear to grasp the issues around the firm at that point.
Chair
Can we go back to the first appointment in 2009? This was in the summer of 2009.
Clive Adamson
Correct.
Chair
This is only nine months before he was subsequently appointed chairman. Was there any intimation that he might be a successor for the chairmanship at that time?
Clive Adamson
No, there was not.
Chair
You were identifying him just as a possible non-executive and no more?
Clive Adamson
Correct.
Chair
Who within the FSA conducted those interviews and what was their level of seniority?
Clive Adamson
That was conducted by two individuals, one individual from the supervisory team at the time. The second was an individual from our authorisation division.
Chair
The names are?
Clive Adamson
I would have to come back to you with the names. I can tell you the levels, if I may. The levels were what we call associate levels.
Chair
Relatively junior?
Clive Adamson
That is indeed relatively junior.
Chair
What sort of questions were these people asking? Do you know what they were?
Clive Adamson
Yes. There is a note of that meeting, which I have reviewed.
Chair
I think the Committee had better see that note.
Clive Adamson
Indeed, yes.
Chair
You reviewed that, did you?
Clive Adamson
I looked at that and it was one of the reasons I decided that I wanted to personally see Mr Flowers at the time of his chairman’s appointment. That was beyond what was required by our process at the time, but I felt it was important, as director of the division at the time, to see an individual who was in the process of being appointed chairman.
Chair
Do you think that the process that you put in place nine months later was more rigorous?
Clive Adamson
Certainly I felt the meeting I had with him with two colleagues was more rigorous. The purpose of that meeting was to explore essentially how he would run the board, what his relationship with the CEO would be like and what the major issues facing the firm were at that time. I felt we did cover the ground. We also covered his lack of banking experience and that was the point he agreed he would appoint two deputy chairmen.
Chair
Yes. Was that vetting process unanimous? How many of you were there?
Clive Adamson
In the 2010 meeting?
Chair
Yes.
Clive Adamson
There were three of us at that meeting.
Chair
Were you unanimous in your conclusions or was there dissent?
Clive Adamson
We were, yes.
Chair
Have you read the recommendations of the Banking Commission in this area?
Clive Adamson
I have, yes.
Chair
Do you agree with them?
Clive Adamson
Completely.
Chair
You would acknowledge now in retrospect that the approved person’s regime is a busted flush and not worth—
Clive Adamson
Yes. I think, notwithstanding—
Chair
A “box-ticking exercise” we described it as.
Clive Adamson
I would describe certainly at least part of it as a box-ticking exercise. I think we were learning the mistakes of that process during the course of 2009-10. We did make improvements to the process, but we completely acknowledge that further improvements should be made and, therefore, accept the recommendations of the Commission.
Chair
At the time the Commission started looking at this, you had had this under review in the FSA for three years and nothing had borne fruit from those internal reviews, had it?
Clive Adamson
Some things have borne fruit. In 2010 we did make enhancements to the process so that more senior individuals from the organisation were required to attend interviews of senior individuals being appointed. That is one of the reasons that I did the interview at the meeting in 2010.
Chair
Before I go too deep perhaps into the Banking Commission recommendations to which I might return in a minute—I know other colleagues will want to come in on this process of appointment—I just want to ask one further question. What checks do you think should be for the firm to make and to what extent are you relying on them having done this? When we see this paperwork, are we going to see evidence that those checks were done and that you had made sure that they had been done?
Clive Adamson
There are lessons to be learned from what happened. To specifically answer the question, we would expect firms to conduct their own due diligence in order for them to recommend to us the candidate. In this case, as I said earlier, I am disappointed at some of the events that have surrounded Mr Flowers. At no time did anybody, whether within the firm or whether in public life, who knew the individual or indeed his other associations ever alert us to some of his misdemeanours.
Chair
I was not discussing the misdemeanours. I am just discussing his general suitability. After all, it did not take us very long as a Committee to discover that he was unsuitable to run a bank. I am asking you whether you saw evidence that those sorts of checks had been conducted by the Co-op.
Clive Adamson
As far as I am aware, we did not see evidence.
Chair
You did not?
Clive Adamson
We did not see evidence. The types of checks that we did at the time, and indeed do now, are around criminal records, past regulatory history—
Chair
This is all box-ticking stuff, isn’t it? This is, “Is there something really serious?” Yes, you have to go through those hoops, but what we want to know is a qualitative judgment, isn’t it? “Does this guy cut the mustard? Does he have much of a clue about how a financial organisation works?”
Clive Adamson
Yes, indeed, and that was the judgment that I stand by that I made in May—
Chair
A qualitative judgment, even though it was completely wrong?
Clive Adamson
It was a qualitative judgment from the information I had, yes.
Chair
But you do agree it was completely wrong?
Clive Adamson
I do not agree it was wrong with the information I had at the time. I think with some of the things that have subsequently emerged that were certainly unknown to us—
Chair
Okay, but the information you were getting was this box-ticking stuff, wasn’t it? It was a sort of “rubbish in, rubbish out” operation to produce the qualitative judgment?
Clive Adamson
The content of the meeting I had with him was not box-ticking. That was substantive.
Chair
You do not think that you had a misjudgment when you were cross-examining him in that meeting?
Clive Adamson
No, I did not. As I said, the individual that you had in front of you during your investigations is not the individual I saw in 2010.
Chair
He had managed to forget a good deal about the bank over the three years that he was chairman. It is an extraordinary state of affairs that you are asking us to believe, but I will leave it there for a moment.
Mr Ruffley
What strikes me is that the trouble with the Co-op emerged not in 2008-09 when the crash occurred. If 2008-09 told us one thing, it was that the people in charge of major financial institutions quite often did not understand risk at all and did not understand some of the products they were selling. Given that, Mr Adamson, when you were approving the appointment of chairman of the Reverend Flowers, could you just give us a list of the technical questions that you were asking that satisfied you that he knew what he was doing? Just give us a list of the questions that you asked in the interview.
Clive Adamson
I asked a number of questions. They were partly, as I said earlier, around his view of the board and how he would run the board, his relationship with the chief executive, the—
Mr Ruffley
No, sorry, I will make myself clear: technical questions about banking and financial services. What questions about his technical expertise; not his governance capabilities, but what he knew about the subject.
Clive Adamson
We discussed the key issues facing the Co-op Bank at that time.
Mr Ruffley
Which were?
Clive Adamson
They were around capital, integration risk and transformation risk. He appeared to be on top of the concept. He agreed that he was not on top of the technical detail.
Mr Ruffley
When he was not on top of the technical detail, did that not make bells ring in the regulator’s head?
Clive Adamson
No, it did not.
Mr Ruffley
Why not?
Clive Adamson
The reason is that the main purpose that I felt he was the right person at that time was in terms of his ability to run a somewhat large and unruly board. The fact that he was deficient in technical banking experience and financial services experience was completely recognised by me and by him. That was the reason we asked and he agreed for two deputy chairmen to be—
Mr Ruffley
Yes. On that point, obviously you would have seen quite a lot of appointments of chairmen and deputy chairmen of a non-executive kind across a range of financial institutions. How many of the appointments you saw in other financial institutions, other than the Co-op, were as technically deficient as the Reverend Flowers, in your experience? Was anyone quite as ignorant of technical matters as him?
Clive Adamson
No.
Mr Ruffley
No. So he was the worst of the bunch?
Clive Adamson
Yes.
Mr Ruffley
You knew that at the time, presumably?
Clive Adamson
Yes.
Mr Ruffley
Just so I am clear about this, how many times did you interview the Reverend Flowers for the chairman’s job?
Clive Adamson
Once.
Mr Ruffley
Just once. Did anyone else interview him before that one occasion that you were present?
Clive Adamson
No.
Mr Ruffley
How long did the interview last?
Clive Adamson
It was, from my memory, about an hour, hour and a half.
Mr Ruffley
So three of you were interviewing him for an hour and a half?
Clive Adamson
Correct.
Mr Ruffley
That was it? There was no written information or written questionnaires that he answered at all?
Clive Adamson
No. That was completely in accordance—and bearing in mind that the fact of having the meeting itself was well beyond our requirements at the time.
Mr Ruffley
There is a full transcript of that interview, is there?
Clive Adamson
There is.
Mr Ruffley
Good. We will be getting that. On the question of approving the appointment of someone like the Reverend Flowers, as a regulator didn’t it occur to you to check up on how he was doing and, if so, how did you do that after the original approval?
Clive Adamson
At the time we did not formally supervise individuals and clearly that is one of the recommendations of the Banking Commission that we fully support. There were a series of meetings with him in the normal course of supervision of that firm.
Mr Ruffley
Which you were present at or other colleagues and other parties of the FSA?
Clive Adamson
Mainly colleagues. I was present at a small number of them.
Mr Ruffley
You said you would do no formal checks, but you would informally check that the guy you waved through in April 2010 was not completely hopeless or incompetent?
Clive Adamson
Correct.
Mr Ruffley
You formed a view on an ongoing basis that this guy was probably okay. There was nothing that he did after you had approved him that suggested he was incompetent, so far as your colleagues informed you of their dealings with him?
Clive Adamson
Correct. Indeed, at one of the meetings I attended in February—
Mr Ruffley
The impression I am getting is that the FSA regulation—and hindsight is a wonderful thing—was not very rigorous. Could you tell me on how many occasions you vetoed/rejected a nomination put forward by a financial institution for a non-executive chairman, non-executive deputy chairman or non-executive director? How many occasions did you veto? What percentage of the cases in front of you would have been vetoed by your panel?
Clive Adamson
From 2008 to 2011—
Mr Ruffley
Your time there, yes.
Clive Adamson
—approximately one in 10 applicants for those SIF positions withdrew. To be clear, they were withdrawals during the process. From the three-year period thereafter, that became one in five.
Mr Ruffley
After you left and changes were made?
Clive Adamson
I did not leave, to be clear.
Mr Ruffley
Sorry, moved posts.
Clive Adamson
I changed my role to be Head of Conduct Supervision.
Mr Ruffley
Moved role, yes.
Clive Adamson
What we are talking about is application to the FSA during that six-year period. So in the first three years is one in 10 was withdrawn. What happens, if I can just amplify what I mean by that, is that the application process starts with a formal application. On some occasions candidates are subject to an interview. If, as a result of either their formal application or the first interview, we are not content we then proceed to a second interview at which there could be a formal declination. In virtually all, if not all, cases if we are minded to refuse, candidates withdraw from the process rather than subject themselves to being declined. That is why I refer to the one in 10 withdrawing for the first three years. Then, as the process did get tougher—notwithstanding the Committee’s views here, I would submit that the process did get tougher—that is why one in five withdrew for the subsequent three years.
Mr Ruffley
Thank you.
Mark Garnier
Good morning, Mr Adamson.
Clive Adamson
Good morning.
Mark Garnier
Just to put this in context, can you remind us how much the haircut is for the savings bondholders of Co-operative Bank as a result of the—
Clive Adamson
As a result of the restructuring?
Mark Garnier
Of the restructuring, yes.
Clive Adamson
Yes. As I am sure you are aware, it is quite a complex restructuring.
Mark Garnier
Yes, but if you are an innocent customer of Co-operative Bank and you have bought some of these savings bonds, how much will you have lost?
Clive Adamson
Depending on which particular bond you hold, in most cases the retail bondholders, to distinguish them from the institutional bondholders—
Mark Garnier
Sure, I take that point.
Clive Adamson
The retail bondholders, in my view, received as best a deal as we could get for them.
Mark Garnier
How much did they lose?
Clive Adamson
Again, depending which one they are in, most of them retained their income for 10 years and then suffer a haircut thereafter.
Mark Garnier
So they are pretty unhappy? They will be looking at you as responsible for their losses? They will have made losses, yes.
Clive Adamson
Yes, and—
Mark Garnier
No, that is fine. I just wanted to get the context of this, to remind people that there are individuals out there who have lost money as a result of it all.
Clive Adamson
There are indeed, but they have also retained a high level of income for the next 10-year period.
Mark Garnier
Getting back to your role in this, it is very interesting hearing your earlier evidence about the process that you have gone through in order to appoint the Reverend Flowers first as a non-executive director and then as the chairman of the bank. As a member of the Banking Commission, I have come across various people in anecdotal conversations who talk about how tough the regulator is in terms of appointing directors and that it is a pretty gruesome process going through your approvals process in order to become a non-executive director of a bank, yet it seems extraordinary that the Reverend Flowers, just to be a non-executive director, had two relatively junior individuals interview him. Is that normal?
Clive Adamson
At that point, in 2008-09, that was normal.
Mark Garnier
2009 I think it was.
Clive Adamson
That is why we improved the process from 2010.
Mark Garnier
Fully two years after the banking crisis erupted, you were still having an inappropriate process of interviewing?
Clive Adamson
Yes, I think I would agree that it was not as strong as it should have been.
Mark Garnier
Two years after we were seeing HBOS collapse, RBS collapse, you still felt it was appropriate to have juniors interviewing non-executive directors?
Clive Adamson
Yes.
Mark Garnier
Okay, that is fine. Even despite all the arguments about corporate governance of banks, all of that, still two years after that?
Clive Adamson
Yes, I agree with that. I would also say that our primary focus was improving firm supervision rather than supervision of individuals during that first period.
Mark Garnier
Yes, but a lot of us would have regarded corporate governance as part of firm supervision. Holding the whole edifice together is important through corporate governance. Anyway, you then went on with your specific interview with two colleagues. I want to be clear about this: you talked about the Reverend Flowers was happy to have these two non-executive vice-chairmen sitting beside him, sort of buffering between him and the knowledge he needs.
Clive Adamson
Yes.
Mark Garnier
What was the form of that conversation? Did you say to him, “You have to have this” or was it a suggestion, that you said, “We think you should have this”?
Clive Adamson
No, it came out of the discussion that we had about his lack of experience and it was an agreement by both of us that he would appoint the two as deputy chairs.
Mark Garnier
He would appoint two deputy chairs?
Clive Adamson
Yes. He did not resist it.
Mark Garnier
But it was his choice who they were?
Clive Adamson
I cannot recall precisely the form of words, but it was an agreement between the both of us that it would be appropriate.
Mark Garnier
But who decided who they were? This is quite important because you have chosen a couple of people, one who has banking experience and the other who has insurance experience. Was he given the job of finding them? Was the board given the job? Did you guys pick a couple from—
Clive Adamson
No, he suggested them.
Mark Garnier
He suggested two individuals. What also perplexes me about this is that this is a man who clearly has no idea how the bank works. He obviously was a teller at some point in his youth. Clearly he does not know anything about financial services institutions and particularly banks, but you liked him because he had a good way of controlling an unruly board. What you are suggesting is you are putting a powerful individual with a strong character in charge of quite a large board, which by the fact that it is large and unruly is likely to be slightly uncoordinated in its approach to things. What you are doing is you are saying you need somebody of strength of character to take over and run a board. Would you agree that if you have somebody with a strong character, that person can shepherd an unruly board into a corral and get them to follow a line of thought? You would agree with that? You are nodding.
Clive Adamson
They could do, yes.
Mark Garnier
You would agree with that. How on earth is it sensible to have an individual that clearly knows nothing about banks and yet has a strong character and personality, without the knowledge of knowing how a bank works or what a bank even does given some of the evidence he was giving to us, he was then in a position to be able to drive that board forward in a direction that he felt was worth taking and where the board would not necessarily be able to gather itself together to resist his will? You would agree that was a problem?
Clive Adamson
It could have been. It could have been a problem. If I can also—
Mark Garnier
But I want to know why you thought it was a good idea to put the board of this organisation into that situation, where somebody of strong character but no knowledge was allowed to drive that organisation’s direction.
Clive Adamson
At that point, the problem with the board was its somewhat large and unruly nature and I think that is what we were looking to Mr Flowers to correct.
Mark Garnier
But would it not have been better to raise the point that he did not know what he was talking about? The further evidence we have had suggests that, when we are talking about the purchase of the 632 Project Verde Lloyds’ branches, Baker-Bates and Davies were against that. The two individuals who you approved presumably as the vice-chairmen, in order to support an ignorant chairman—I am sure he is clever in other respects, but on this particular subject he does not know what he is talking about—voted against something that clearly was not, in their opinion, a good idea and yet you were quite happy that these two individuals were overruled.
Clive Adamson
You are referring to events now in 2012, I think—
Mark Garnier
Yes.
Clive Adamson
—where it is indeed the case that those two individuals did vote against the Verde transaction.
Mark Garnier
But doesn’t it illustrate the point I am trying to make, which is that, where you do have expertise, it is ridden over by somebody who has the strength of character in order to be able to drive his own agenda forward, as opposed to the collective agenda of the board?
Clive Adamson
I think just because two voted against does not necessarily mean that the board should not—
Mark Garnier
The two good ones voted against it. The two ones who knew what they were talking about voted against it.
Clive Adamson
The two with the most experience, yes.
Mark Garnier
It is a pretty sorry state of affairs. Just one final quick line of questioning, if I might. Of the directors of the most recent board, which is obviously now only 10 people and they are much rulier, seven of them have been started since May last year, so they are all pretty much brand new, and only three of the old ones. Of the five senior management team—five of them again started last year—interestingly, three have contracts for services as opposed to employment contracts. What do you make of that structure of new and also the slightly unusual employment terms for three of the five senior management?
Clive Adamson
I am not aware of their employment terms. That is new information for me.
Mark Garnier
But what would it say to you as a regulator if three of the five senior management team are on contracts for services as opposed to more traditional contracts of employment? What would that say to you about the view that the senior management team or people going to work for this bank have of that organisation?
Clive Adamson
I am not sure I would draw particular conclusions from that. I think perhaps it is worthwhile—
Mark Garnier
Isn’t it your job to draw conclusions from clues that are out there in terms of how an organisation is run?
Clive Adamson
Our job is to draw conclusions about the effectiveness of the board and the senior management team, and indeed about the capital position of the firm as the prudential regulator.
Mark Garnier
Part of that though has to be the longevity of the people who are working there. Surely what you do not want to see is a high turnover of senior managers within these organisations, because you get lack of continuity.
Clive Adamson
Correct.
Mark Garnier
If three of the five senior management team are on contracts for services as opposed to employment contracts, which could have a year-long notice period if they wanted to leave, whereas a contract for services may have a far shorter one, does that not suggest to you that some of these senior managers are quite nervous about working for this organisation and want to make sure that they have a quick parachute?
Clive Adamson
It may suggest that. Equally, it may not suggest that.
Mark Garnier
Has nobody looked into that?
Clive Adamson
As far as the FCA is concerned, we have not. You would have to ask the PRA whether they have.
Mark Garnier
I think probably we ought to. Thank you very much.
Chair
From where did you glean the information that the board was unruly?
Clive Adamson
It was a result of the fact that it grew to 22 at the time of the merger with Britannia. There were a series of new members being put on the board from Britannia’s side as well as the Co-op’s.
Chair
It is not just numbers, is it? Other big banks have very large boards. I can think of one or two that are up in the 20s.
Clive Adamson
There were very few certainly of the size of the Co-op Bank at that time, which was still a medium-sized bank. It was certainly not a large bank.
Chair
So by “unruly” you should have said “over-large”?
Clive Adamson
It was over-large, correct.
Chair
Not unruly?
Clive Adamson
I think it was difficult to manage because of the two sides being put on there and bearing in mind that some of those did not have financial services experience.
Chair
Your solution to this unruly or excessively large board was to put a financial illiterate in charge of it, wasn’t it?
Clive Adamson
There were three solutions, if I may suggest. First was the judgment that Mr Flowers was the right person at that time, with the information I had; the second was the appointment of the two deputy chairs; and the third was an agreement that the board was too large at the time of the merger and would over time be reduced in size. That did indeed—
Chair
Yes, but the first of those fits the description I have just given, doesn’t it? Flowers was the right man for the job. One of your solutions was to tame this unruly board by putting in a financial illiterate as its chair, a man you knew to be financially illiterate at the time.
Clive Adamson
As I said earlier, Chairman, it was agreed with him that he did not have sufficient financial services experience. So that is the case, yes.
Chair
At the time, it did not ring alarm bells with you, three years into the financial crisis?
Clive Adamson
As a non-executive chairman, given what we were looking for at the time, that was the decision and judgment I made.
Chair
We know that. Can I go back to the question that I asked at the beginning? I asked you at the beginning whether you now think that that was regrettable and you said “no”.
Clive Adamson
I certainly think as of today he would not be approved because we would look for more experience.
Chair
That is not what I asked at all. I hope that if I took this decision I would regret it. It looks pretty catastrophic, but you do not seem to be regretting it.
Clive Adamson
To be clear and to answer the question, I do stand by the judgment I made. I think it was the right judgment at the time. Do I regret what subsequently happened? Yes, I do.
Chair
The information you had at the time was that this guy was pretty hopeless on the financial literacy front and that you had what you have described as an unruly board to handle. You are telling us that one of your solutions, which you are still standing by on the facts you had at the time, was to put this man in charge.
Clive Adamson
Yes, I am. Just to be clear of the reasons for that, his role was non-executive chairman. He was not running the bank. That was the role of executive management. I did think he had sufficient governance experience to be able to run the board with the help of the deputy chairmen.
Chair
Was the issue of systemic risk high in your mind? Were you thinking, “Is the Co-op Mutual structure an appropriate one for institutions that carry systemic risk”?
Clive Adamson
Not explicitly at the time of that appointment, no.
Chair
Don’t you think it should have been, nearly three years into the financial crisis, seeing what had happened after Northern Rock, Lehman Brothers, RBS and HBOS?
Clive Adamson
We were certainly concerned about the risks posed by the merged group. Yes, we were.
Chair
It does seem an extraordinary state of affairs, even in normal times, to put a man who does not have the knowledge to understand the subject matter as your solution to a problem of running a medium-sized bank with an unruly board. In these extraordinary times, frankly it seems like a negligent decision, a very poor decision indeed, that you took.
Clive Adamson
As I said—and I am happy to be responsible for the decisions I made at the time with the information I had—I felt that was the right decision. We can go on, if it would be helpful to the Committee, to take you through the risks we saw at the time with the group.
Chair
We might do later on, but I must bring in other colleagues.
Mr McFadden
I want to go back to this issue of the two deputy chairmen or vice-chairmen. You said in response to Mr Garnier’s question that this idea came out of the discussion. I would like to explore that a little bit more. Did the FSA, as it was then, insist on the appointment of deputy chairmen with greater banking and financial experience as a condition of approving the appointment?
Clive Adamson
It was not as explicit as that. Just to remind the Committee, the context of that meeting was not a formal approval meeting, because at that time that was not required. At the time, I went beyond what was required to request to have a meeting with Mr Flowers. It was an agreement between us that he would do so, as opposed to part of a formal process.
Mr McFadden
But whose idea was it? Was it the regulator’s idea or did the bank offer this up as a way of kind of sweetening the pill of their suggestion of someone who did not have banking experience? Whose idea was it?
Clive Adamson
As I said earlier, it was a mutual agreement that came out of the discussion.
Mr McFadden
But it must have been someone’s idea to have these two guys. Was it your idea or was it the Co-op Bank’s idea?
Clive Adamson
It was not the Co-op Bank’s idea. In recollection, it came from Mr Flowers’ idea, because he recognised that he did not have sufficient technical experience. I think, as he has disclosed to the Committee, he put that agreement into practice afterwards. He viewed it as an agreement that would be necessary.
Mr McFadden
Does that not ring alarm bells? Surely if you need two people with banking and financial services experience to justify this course of action, shouldn’t that have rung alarm bells with the director that you need this insurance policy, rather than appointing somebody who would not need such an insurance policy and in whom you could have confidence, as the regulator?
Clive Adamson
Again, I do not think so. Again, the context at the time of why he was put forward by the Co-op Group out of five candidates to be the chairman, there was no hiding the fact that he did not have sufficient technical experience. There was no hiding of that. The discussion was around how that could be mitigated.
Mr McFadden
Following the appointment, what contact or discussion did you have with these two deputy chairs? Did you meet them?
Clive Adamson
Personally I did not, no.
Mr McFadden
Between the two of you, the Co-op Bank and the regulator, you have decided that the appointment of Rodney Baker-Bates and David Davies as deputy chairs will help to compensate for the chairman’s lack of banking experience, but then you never met them?
Clive Adamson
No.
Mr McFadden
Did you have any other contact in written terms about their view of how the bank was going or any discussion?
Clive Adamson
No. I do not think that would be unusual. We would expect all the individuals on the board, including deputy chairmen if they were appointed, if they do have concerns to raise them directly with us. That did not occur until Mr Baker-Bates came to see me in 2012.
Mr McFadden
I am going to come on to this. We have already heard that these two voted against the Verde deal. When did you become aware that the two people who were on the board specifically because of their banking experience voted against the Verde deal?
Clive Adamson
In July 2012.
Mr McFadden
In July 2012. Rodney Baker-Bates left the group around that time, is that correct?
Clive Adamson
Correct.
Mr McFadden
Did you conduct an exit interview with him?
Clive Adamson
I did not, but I believe there was an exit interview conducted for him.
Mr McFadden
Who conducted the exit interview with him?
Clive Adamson
Members of the supervisory team.
Mr McFadden
Were you given a report on that discussion?
Clive Adamson
I believe I was, yes.
Mr McFadden
Did he make clear in that discussion or in any other subsequent discussion with you that he thought the Verde deal was a huge mistake?
Clive Adamson
In my personal meeting with him in July 2012, he did think that the Verde deal was a step too far, yes.
Mr McFadden
How did he put it; “a step too far” or something worse?
Clive Adamson
I am trying to recollect the words he used. He certainly viewed that it was too far for the group. Given everything else going on at the group at that time, it was a mistake.
Mr McFadden
There are two conversations. There is an exit interview with members of your team and there is also a meeting between you and Rodney Baker-Bates. The meeting between you and Rodney Baker-Bates, at whose instigation did that—
Clive Adamson
That was his instigation.
Mr McFadden
It was his instigation. Not only did he go through the normal exit interview, he asked to come and see you specifically to express his concerns about the Verde deal?
Clive Adamson
Correct.
Mr McFadden
The Verde deal was then allowed to run on for a further nine months or so after that discussion.
Clive Adamson
Correct.
Mr McFadden
Why was that allowed to happen? What action did you take in response to him going out of his way as he is leaving to come and express his concerns?
Clive Adamson
To be clear, we felt at that time—and the context is that, at that point, the Prudential Business Unit had taken over the lead for the Verde transaction—neither the PB or the PRA or us in the FCA ever saw a business plan or formal proposal to us for us to formally consider for the Verde transaction.
Mr McFadden
I think people listening to this would find it unusual at the least, if not more than that, that a director, who is on the board specifically because of his banking experience, leaves the board, comes to the regulator at his own instigation and says, “I am very worried about this deal” or something along those lines and your response is not to do anything about that.
Clive Adamson
Not quite. The issues he was raising were exactly the issues that Mr Bailey, who was leading at that point in the Prudential Business Unit, had communicated clearly to the firm would need resolution before either we or the PRA can formally consider it. The five issues that Mr Bailey raised, quite correctly, were around the capital position, the liquidity position, management stretch, integration and governance. Mr Baker-Bates raised nothing other than issues that were already being expressed by Mr Bailey to the firm.
Mr McFadden
I just want to explore this. What did you do after the meeting when he told you this? Did you have a discussion with Mr Bailey? What happened after he flagged up these concerns to you?
Clive Adamson
I think Mr Baker-Bates also had the same conversation with Mr Bailey. As far as I am aware, it is exactly the same conversation.[1]
Mr McFadden
He is blowing the whistle as loudly as he possibly can. He has come to see you and he has come to see Mr Bailey to express his concerns about this deal and yet it was still allowed to run on until the Co-op put itself into a very difficult position nine months later.
Clive Adamson
The issues he raised were no different from the concerns that Mr Bailey was expressing to the firm that had to be satisfied before either or both the two regulators would consider the transaction.
Mr McFadden
David Davies left later in 2013. Did you have any discussions with him on his departure?
Clive Adamson
No.
Mr McFadden
Did he have an exit interview with members of your team in the way that Rodney Baker-Bates did?
Clive Adamson
I cannot recall. I would have to confirm that to the Committee.
Mr McFadden
Just to go back to this issue of the whole appointment of Mr Flowers and these two point men, wing men—whatever you want to call them—as deputy chairs. Is this a feature of mutuals where you have elected boards, you have member ownership and other specific features of the model, or is this something that you would consider in a “mainstream” high street bank, which we should, of course, acknowledge have also had spectacular failures with very different models of corporate ownership? Would you have appointed a chairman of Lloyds, HSBC or any of these banks who didn’t have banking experience with these two similar vice chairmen? Was that something you would have considered then?
Clive Adamson
I don’t think it is a particular feature of mutuals, I think what is somewhat unusual of the Co-op governance structure was partly the member representatives and partly the dual board structure of the group board and the bank board. We have cross-membership between them, so that was somewhat unusual.
Mr McFadden
Has such a model of approval by you been done elsewhere?
Clive Adamson
Specifically what?
Mr McFadden
I mean, in banking terms, a non-experienced chairman compensated for by a deputy chairman with experience.
Clive Adamson
I can’t recall any other direct examples.
Mr McFadden
Thank you.
Chair
Nuclear power stations have a good deal of risk about them, don’t they? Would you put a chairman in charge of an unruly board that was trying to run a nuclear power station who didn’t know anything about nuclear power?
Clive Adamson
I think it would depend upon the circumstances.
Chair
You might?
Clive Adamson
We might, yes.
Chair
We will draw our conclusions from that.
Mr Newmark
If we can go on to the Britannia merger issues and focus a little bit on that. When did the FSA first become aware of the intention of Britannia and Co-op Bank to merge?
Clive Adamson
In August 2008.
Mr Newmark
David Anderson, the former chief executive, told this Committee that he made the first approach to Britannia about a possible merger. Did he discuss this with the FSA first before making his approach?
Clive Adamson
I am not aware that he did. I was informed in August 2008 by the Britannia chief executive.
Mr Newmark
Before approaching a bank that was potentially having huge problems, you are saying the Co-op itself did not seek to just have that discussion with you first? It is just a point of clarification, that is all. That is what you are saying?
Clive Adamson
I don’t think they approached me first. As I said, the Britannia CEO informed me first very shortly after—
Mr Newmark
When did the Co-op have a discussion with you then?
Clive Adamson
I think it was very shortly afterwards that both chief executives came to see me.
Mr Newmark
But the first point of contact was effectively Britannia?
Clive Adamson
Correct.
Mr Newmark
What did the FSA understand to be the rationale behind the merger when the two chief executives came to speak to you?
Clive Adamson
The rationale for the merger was both boards thought it would be a good strategic fit and what that meant was in terms of branches, the customer base and the range of products. It was also felt that to have a somewhat larger mutually-owned bank would be beneficial for the market.
Mr Newmark
Barry Tootell told us that one director of the Co-op had said at the time of the merger, “Perhaps Britannia needed this a little more than we do”. Were you at all aware of this view?
Clive Adamson
I wasn’t aware of that view has expressed by that individual. Certainly our view—
Mr Newmark
Effectively, instead of two negatives equalling a positive, your view was two positives equalling a double-plus positive?
Clive Adamson
Not quite. Our view was that the merger did make strategic sense. We did think that Britannia was running a higher risk business model and we did think it would be safer as part of a larger group.
Mr Newmark
But there were some suggestions in the media when the merger between the Co-op and Britannia was announced in 2008-09 that it was a rescue operation of Britannia. You are saying that was not the case from your view.
Clive Adamson
It certainly was not in our view a rescue. If it had been a rescue it would have been treated differently. In our view, it was a merger proposed by two boards of directors. It was the case—
Mr Newmark
Yes, but there were problems with Britannia.
Clive Adamson
It was running a high risk model.
Mr Newmark
It was running more than a high risk model. There were problems with the balance sheet and so on, or not in your view?
Clive Adamson
Perhaps I can explain some of the background as to what we thought of the merger and how we assessed it, if that would be helpful, Chairman?
Mr Newmark
Yes, and just put it in the context of this is the height of the financial crisis and why it was a good time to do this merger. If you can give your answer wrapped up in that.
Clive Adamson
We thought at the time that it was a good strategic fit. We did think that Britannia would be safer in a larger group but it was—
Mr Newmark
Could it have survived alone at that time or not?
Clive Adamson
It is hard to speculate whether it could or could not, but at the time of the merger we thought it was an ongoing going concern firm, absolutely correct.
Mr Newmark
Who came to that conclusion internally? Did you or did a group of you within your group decide that?
Clive Adamson
It was under my watch and I take responsibility for that. It was concerned by our ExCo three times. It was considered by the tripartite in late 2008/early 2009. As I said, even if it was in our view a good strategic fit, it was completely dependent upon whether it would be financially robust. We subjected the merged entity to the same capital framework that we used in October 2008 where we looked at the recapitalisation of the major banks. I can amplify it if it would be helpful. That capital framework was called the H64 framework whereby a firm had to maintain a tier 1 capital position of 8%, a stress tier 1 capital position of 6% and stressed core tier 1 capital position of 4%.
Mr Newmark
Effectively, you had your own model for stress testing what would happen post-merger. Is that right?
Clive Adamson
Correct.
Mr Newmark
Do you think that model, with the benefit of hindsight, was a good model?
Clive Adamson
If I can give you the numbers that might be helpful, because I think that does indicate what we did. At the time when we subjected the firm to our stress test approach and our capital framework approach, it did suggest that under stress—and it is not a forecast it was under stress—the core tier 1 capital position could fall to 4.3% and the stress tier 1 capital position could be between 6% and 7%. It was tight but it did meet our framework at the time. Now, if you look at the—
Mr Newmark
Again, sorry, I just want to understand this quickly. The thinking of the stress testing; we are in a financial crisis at this time so we are not quite sure where the bottom ends. You say that your stress testing model was fit for purpose at that time?
Clive Adamson
We believed it was and, just to indicate, the outcome for the Co-op by June 2013, the latest set of results, shows that its core tier 1 capital position fell to 4.5%. In other words the stresses did materialise. Now, that was not a forecast by us at the time but it did meet our capital framework at the time. For the benefit of this Committee, what is unusual about the Co-op Bank is indeed the stresses did materialise. Not only did the impairments materialise, but they also had PPI provisions that were more than forecast. The difficulty for the Co-op is that while, at the time in 2009, our capital framework, which was agreed with the tripartite, was if a firm could meet that 4% core tier 1 stress, which was considerably above the legal minimum at the time, then it would be okay to do a merger. What has transpired with the Co-op is that, as a mutual, it is much more difficult to raise additional core tier 1 capital to restore its position to the capital framework that now applies quite correctly on the PRA.
Chair
Sorry, just to clarify, when you say “transpired” everybody knew that a mutual would always have that problem. It is not some problem that subsequently transpired. It was just a mis-judgment, was it not?
Clive Adamson
No, it wasn’t. If I can correct that; the judgment we made at the time with the capital framework that we used for mutuals and banks was if they could meet our capital stress framework that was acceptable. In effect it meant that firms could go down to a minimum core tier 1 capital position of 4% and survive. What has happened is that over time capital standards have been raised.
Mr Newmark
That is answering a different question. He is saying you should have been aware all along that the Co-op, given its mutual status, could not access the markets in the same way as ordinary banks. I think that is point the Chairman is making. You have not answered his question. Anyway, I have a different question. You talk about the tripartite discussions and so on and I am curious as to what discussions the FSA held with the Treasury and the Bank of England about the Britannia merger.
Clive Adamson
Those discussions were at the tripartite meetings. I wasn’t in attendance at those, but they were discussed and the tripartite did give its agreement to the merger in January 2009.
Mr Newmark
Were you aware of any differences between the Bank of England and the Treasury in their encouragement of the Britannia merger itself?