(Refiles with full name of bank's new auditor)
* Ill-fated 2009 deal lay at root of problems -Kelly
* Report identifies failings in management, governance
* Kelly report was commissioned by bank last year
* Mistakes must never be repeated -Coop chair
* Bank chief apologises for failings
By Matt Scuffham
LONDON, April 30 The root of the problems which
led to the near collapse of Britain's Co-operative Bank lay in
its 2009 takeover of the Britannia Building Society and poor
management controls, an independent review commissioned by the
Co-op Bank came close to collapse last year after a 1.5
billion pound ($2.5 billion) capital shortfall was exposed,
before a recapitalisation saw it fall under the control of
bondholders including U.S. hedge funds.
The bank's new management asked Christopher Kelly,
previously a senior official within Britain's finance ministry,
to examine the events that led to the funding gap in July last
"The roots of the shortfall lie in a merger between the bank
and the Britannia Building Society which should probably never
have happened. Both organisations had problems. Bringing them
together exacerbated those problems," Kelly said on Wednesday.
The bank, which has 4.7 million customers, hit trouble after
racking up big losses on commercial property, many of which were
acquired through the Britannia takeover, which was supposed to
create a "super-mutual" able to compete with Britain's biggest
high street banks.
Kelly said his report, based on 130 interviews with current
and former employees and written evidence from a number of
individuals and organisations, told "a sorry story of failings
in management and governance on many levels".
The report said Co-op Bank's board had failed in its
oversight of management and failed to properly manage capital
Co-op Bank said on Wednesday it broadly accepted the
"On behalf of the bank I would like to apologise for these
past failings," said Co-op Bank Chief Executive Niall Booker.
"The board will consider the implications of today's report
and, bearing in mind the various external investigations into
the same past events which are still ongoing, consider what
action it should take, after taking appropriate professional
advice," he added.
Co-op Group said the report laid bare the failings of
management and governance that caused the bank's problems.
"It is a sobering assessment which shows clearly that the
Co-operative Group's loss of control of its bank could have been
avoided. The management that instigated this disaster for the
group are no longer in place; the flawed governance structure
that failed to apply the right checks and balances, however,
remains," said Interim Chief Executive Richard Pennycook.
The Co-operative Group, which now owns just 30 percent of
the bank, made a loss of 2.5 billion pounds in 2013, capping the
worst 12 months in the mutual's 150-year-old history and the
group's new management is battling to convince members of the
need for radical reform.
Efforts to reform the Co-op had been led by former chief
executive Euan Sutherland and senior independent director Paul
Myners; but both quit in the face of resistance to their drive
to modernise the customer-owned group and bring a commercial
focus to its decision making.
Members are due to vote on proposed reforms at the bank's
annual meeting next month. A number of other inquiries into the
Co-op's problems are ongoing, including a governance review by
Myners which is due to be published shortly and a review by
Britain's financial regulator.
"Christopher Kelly's conclusions must strengthen our
collective resolve, underlining as they do the urgency of the
need for far-reaching fundamental change. We must ensure the
mistakes of the past are never again repeated," said Co-op
Group's Chairwoman Ursula Lidbetter.
Co-op Bank also said on Wednesday that it had appointed
Ernst & Young LLP as its new auditors, replacing KPMG, which had
been the bank's auditor for the past 40 years.
In his report, Kelly said the bank had a tendency "to seek
ways of favouring short term financial performance and capital
where the bank believed the letter of accounting rules allowed
it to do so, even if that was not fully within their spirit".
Co-op Bank said earlier this year it had put its external
audit services contract out to tender and that KPMG had not
entered the process.
$1 = 0.5936 British Pounds)
(Editing by Paul Sandle and Ralph Boulton)