January 6, 2014 / 3:45 PM / 4 years ago

UPDATE 1-UK regulator to investigate problems at Co-op Bank

* Investigation carried out jointly by PRA, FCA

* Regulatory probe will examine role of senior managers

* Independent inquiry to begin after regulatory probe

By Matt Scuffham

LONDON, Jan 6 (Reuters) - Britain’s financial regulators have launched an investigation into problems at the Co-operative Bank, including the role played by former senior managers, they said on Monday.

The probe could lead to fines for the bank and its former directors.

Co-op Bank fell under the control of investors including U.S. hedge funds after a 1.5 billion pound ($2.5 billion) capital shortfall was exposed.

Its problems were exacerbated when former chairman Paul Flowers was arrested as part of an investigation into the supply of illegal drugs.

Britain is introducing new rules which mean bankers who are reckless with customers’ or taxpayers’ money could face criminal charges and have bonuses and pensions clawed back.

The so-called enforcement investigation will be run jointly by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

In a statement, the FCA said the investigation will look at the decisions and events at the bank up until June 2013, when the full extent of the bank’s financial problems emerged.

Co-op Bank was not immediately available for comment.

British Finance Minister George Osborne ordered a separate, independent, inquiry into Co-op Bank in November which he said would not begin until it was clear that it would not prejudice any action being taken by the regulators.

The regulators said on Monday that they would work with the Treasury to ensure the separate investigations are timed appropriately.

Co-op Bank hit trouble after racking up big losses on commercial property. Many of the bad loans were acquired through its takeover of the Britannia Building Society in 2009 and its management has subsequently been overhauled.

A 1.5 billion pound recapitalisation of the bank was approved by creditors and a British court in December. The rescue saw Co-op Group, Britain’s biggest customer-owned business, hand a 70 percent stake in the bank to bondholders, leaving it with a 30 percent shareholding.

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