Co-op Bank Review Sparks Pay Clawback Demand

The Main Findings Of The Co-op Bank Review

Updated: 10:38am UK, Wednesday 30 April 2014

The review by Sir Christopher Kelly into what went wrong at the Co-operative Bank is summarised below:

:: THE REVIEW

The independent review was commissioned in July 2013. It is based on more than 130 interviews of current and former employees, board members and others, as well as examinations of internal papers and external reports.

Its conclusions are scathing. In its own words it is a "sorry story of failings in management and governance".

The review states that contributory factors to the "debacle" include the economic environment and increasing capital requirements by regulators but Sir Christopher Kelly identifies two key areas of failing:

:: BRITANNIA MERGER

It says the Britannia merger of August 2009 "lies at the heart" of the problems at the bank. At the time of the merger, Britannia was the second largest building society in the UK with assets of £35bn, 2.8m customers and 254 branches, compared with Co-Op Bank's assets of £15bn, 500k customers and 90 branches.

Britannia had more exposure to sub-prime lending (loans to people who may struggle to repay them) than any other building society. The review found out Britannia would sometimes complete transactions that no other lender would take on.

It was put on a "watch list" by the city regulator, then-called the FSA, but it makes clear neither Britannia, nor the Co-op Bank were aware of this.

It calls the due diligence process preceding the merger "cursory" and "startling". Accountancy firm, KPMG was not given access to Britannia premises so could only perform high level checks on the information provided. But adviser JP Morgan Cazenove advised the Co-op that KPMG's due diligence "exceeded that normally undertaken for listed companies".

The Bank's board was not alerted to the deteriorating business case of Britannia as property prices plummeted. Something the review calls "a major error of judgement".

:: MANAGEMENT AND CULTURE

It says the executive team of the bank "failed to exercise sufficiently prudent and effective management of capital and risk" and that the board "failed" in its oversight of the executive. Combined it says "they badly let down the Group's members".

The bank's culture accepted mediocrity and "did too little to discourage wrong behaviours". It failed to address poor performance and tolerated under-performers – "something which might take a week in most banks would take months in the Co-operative Bank".

It advises that considering the Group still owns 30% of the bank, the Group board should take on an experienced banker. It notes that both Sainsbury's and Tesco, which are trading companies with banking subsidiaries smaller and less complex than the Co-op Bank, have experienced bankers on their main boards.

Other areas of note:

:: Payment Protection Insurance

In relation to PPI mis-selling it notes that in spite of the fact the Bank had an avowedly ethical policy, it "manifestly failed to treat its customers fairly". Total provisions for PPI compensation up to the end of 2013 were £347m.

:: PROJECT VERDE (LLOYDS BRANCHES)

Paul Flowers, the disgraced former chair of the Bank, is called in the report a "wholly unsuitable person to chair the Co-operative Bank board".

Flowers has asserted the Treasury pressured the Bank into buying branches of Lloyds, in the deal known as Project Verde.

He declined to be interviewed by the review but the report has found "no compelling evidence of pressure from government ministers or anyone else".

:: CONCLUSION

The report concludes the circumstances that led to the lessons laid out by the report "must pain all who care about the co-operative movement".

:: CONTEXT

In the past few weeks both the Co-operative Group and the bank have announced major losses.

The group's losses were £2.5bn for 2013 - the worst results in the group's 150-year history, with £2.1bn of that coming from the Co-op Bank.

The Bank's figure contained a trading loss of £1.44bn for the year to December, when the group lost control of Co-op Bank to US hedge funds.

The interim chief executive of the group, Richard Pennycook, on April 17 called the past year a "disastrous year for the group" - the worst in its history.

:: AGM

On May 17 there will be an AGM for Co-operative members. It is expected the mutual's board will seek backing for Lord Myners' proposals to reform corporate governance.

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WPP Boss Nets £29m After Share Payout

By Mark Kleinman, City Editor

Sir Martin Sorrell's status as one of Britain's best-paid businessmen will be cemented on Wednesday when the company he founded discloses that he earned close to £30m last year.

Sky News can reveal that Sir Martin, chief executive of WPP Group, the world's biggest marketing services supplier, saw his total remuneration reach a record high in 2013.

His package was boosted by a £22.7m payout disclosed last month from a scheme linked to total shareholder returns during a five-year period in which WPP was the seventh-best performer in the FTSE-100.

Sir Martin's pay will be outlined in WPP's annual report, days after the company reported a strong set of results for the first quarter of 2014, with like-for-like revenues growing by 7%.

The document is expected to show that Sir Martin's overall pay for 2013 was in the region of £29m, 90% of which was performance-related, insiders said on Tuesday.

The £22.7m share payout was made under a scheme called LEAP, which was discontinued last year after feedback from institutional shareholders.

The remainder of Sir Martin's 2013 package is understood to consist of roughly £4m awarded under a short-term incentive plan, half of which is in shares deferred for two years.

He also received £1.15m in base salary last year, a lower figure than the previous year's £1.3m, and a reduced pension contribution.

WPP's status as the world's biggest supplier of marketing services, through advertising and media buying networks such as J Walter Thompson and MEC, has been under threat from the proposed merger of Omnicom of the US and France's Publicis.

However, that transatlantic alliance now looks to be in jeopardy, with tax authorities in the UK and the Netherlands resisting overtures to host a new holding company for the combined group.

Disagreements about the management line-up at the new Franco-US company are also said to be undermining the proposed merger.

Sir Martin said last week that the uncertainties about his rivals' deal was fuelling a surge in new business success at WPP, with recent major client wins including Marks & Spencer and Vodafone.

The WPP boss has been a staunch defender of his pay, frequently pointing to the risks he took to fund its growth during several precarious phases of the company's existence.

One ally of Sir Martin's pointed out that during the five-year period covered by the £22.7m share payout, there was a £12.35bn uplift in returns to all WPP's shareholders.

Reforms to WPP pay policies saw investor support for the company's remuneration report rebound to 80% last year from a meagre 40% in 2012.

Vince Cable, the Business Secretary, has forced an overhaul of the way companies report executive pay, and handed shareholders a binding vote on future compensation policies.

Votes on the previous year's pay deals, which saw bloody noses given to boards at Barclays and Pearson last week, remain non-binding.

A WPP spokesman said: "The vast majority of Sir Martin Sorrell's pay relates to the five-year LEAP scheme already disclosed and designed to link long-term shareholder value creation with executive rewards as prescribed in Vince Cable's recent communication with companies."

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More Disruption As Tube Strike Draws To End

Commuters in London face more disruption during their journey home on Wednesday as the final hours of a Tube strike takes place.

The 48-hour strike, called by members of the Rail, Maritime and Transport (RMT) union, ends at 9pm, but Underground services are not expected to return to normal until Thursday morning.

Passengers could also face being shut out of stations after Transport for London (TfL) said they could close "without warning" during the afternoon for shift changeovers.

Special services were operating on routes beneath the capital and queues for buses and trains were expected again during rush hour on Wednesday evening.

London Underground (LU) and the RMT clashed over the level of support for the strike action, with the union claiming platforms and stations were "dangerously overcrowded" and the public were being "misled".

Extra buses have been put on in London but passengers face long queues

Acting general secretary Mick Cash said: "It helps no one for LU to deliberately mislead the public as to what services are available as it simply piles dangerous levels of pressure on to ghost trains and skeleton operations, leaving passengers and staff at risk."

LU managing director Mike Brown said 15% more staff were at work during this strike and appealed for fresh talks.

He said: "Under our plans to modernise the Tube, we are committed to a safe railway with visible staff personally serving our passengers."

London Mayor Boris Johnson attacked RMT claims the strike had been "solidly supported".

He said: "This action is the result of a minority of just one union, the RMT, who are refusing to see the logic of what we are trying to achieve."

Passengers were unable to get on some London Overground trains in north-west London during the morning because they were so full the doors could not shut.

Commuters were forced to wait 20 minutes to try and get on the next service.

Another three-day strike is planned for next week.

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Tablets Boost 'Silver Surfer' Web Use

By Tom Cheshire, Technology Correspondent

The number of older people going online has soared, driven by the uptake of tablet devices and smartphones, according to Ofcom.

Among those over 65, internet use rose by 25% in just a year, mainly because of the popularity of tablet devices among that age group.

The Ofcom report provides a comprehensive overview of the UK population's media use.

It says young people are spending more than 24 hours a week online.

But 16-24 year olds are also better informed about privacy and security than typical UK adults, who spend an average of nearly 17 hours online per week.

Although laptop and desktop computers remain the most popular way of accessing the internet, two-thirds of adults now use other devices like smartphones and tablets.

The age of people who play games on a smartphone is also getting older

Twice as many people now use tablets as they did in 2012.

Smartphones are also getting greyer. Six in 10 adults now use one, mainly driven by increased ownership among 45-54 year olds.

As a result, gamers are getting older: Playing games on a smartphone has more than doubled among 45 to 54-year-olds and 55 to 64-year-olds.

On tablets, the number of gamers in those age groups has tripled since last year. Those older than 45 now spend more than four hours per week playing games.

But on smartphones, more than half the apps installed are never used.

Ofcom found that most people only use 10 apps regularly, out of an average of 23 installed.

Facebook was the most popular social network, followed by Twitter, YouTube and WhatsApp.

The average person has 228 friends online - a number that is unchanged since 2012.

Women are slightly more likely to have a Facebook profile than men, but men are significantly more likely to use Twitter, YouTube and MySpace.

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Xbox One To Hit China After Console Ban Lifted

Microsoft has announced it will launch the Xbox One in China after a 14-year-old ban on consoles was lifted.

It becomes the first foreign country to announce the sale of a console since the ban was rescinded in January.

Gaming consoles were banned in 2000 amid fears the mental health of young people in the country could be damaged by the devices.

It meant major gaming firms such as Microsoft, Nintendo and Sony have been locked out of one of the world's booming markets.

A message on Microsoft's website called the news "monumental" for the company.

"The culture of games and entertainment is rapidly growing in China, with nearly half a billion people playing games - roughly a third of the country's population and more than the entire population of North America."

Sales of the Xbox One have lagged behind Sony's Playstation 4

Microsoft has teamed up with BesTV, a subsidiary of Shanghai Media Group, to distribute the consoles from September.

Sales of the Xbox One have lagged behind those of Playstation 4, partly due to Sony launching its console in more countries than Microsoft.

The move into China may help the Xbox One pick up some momentum in the console sales battle.

Without console gaming, China's games scene is currently dominated by PC, mobile and online games.

In 2013, the gaming industry in China was worth £8bn, a rise of around 40% on the previous year.

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Fat Face Rides IPO Wave With London Listing

By Mark Kleinman, City Editor

The high street fashion chain Fat Face will on Thursday become the latest big name from the retail sector to declare its desire to seek a listing on the London Stock Exchange.

Sky News has learnt the private equity-backed chain has lined up a trio of new board members to steer it through its flotation.

The new recruits include Darren Shapland, the former Carpetright chief executive and one-time J Sainsbury finance director, who recently joined Poundland as a non-executive director ahead of its initial public offering (IPO).

Sources said the other new directors would be named as Deborah Baker, the director for people at BSkyB, the parent company of Sky News, and Maria Kyriacou, the managing director of global entertainment at ITV.

Fat Face's push to go public means it will join a flurry of other high street retailers which have taken advantage of the improving UK economy and investor appetite by selling shares.

So far this year, Appliances Online, Card Factory, Pets At Home and Poundland are among the companies to announce listings, with the sofa retailer DFS poised to do so in the coming months.

Fat Face is chaired by Sir Stuart Rose, the former Marks & Spencer (M&S) boss, who also chairs the online grocer Ocado.

The fashion group's chief executive Anthony Thompson, another ex-M&S executive, told The Times last week that he was keen to accelerate the expansion of the business.

Fat Face has more than 200 stores in the UK and Ireland, and plans to open shops in Boston in the US during the next 18 months.

People close to the situation said Fat Face's announcement of its intention to float would say it was seeking gross proceeds from investors of tens of millions of pounds to fund its growth.

The chain was established in 1988 selling T-shirts in the Alps.

Its controlling shareholder, Bridgepoint Capital, has been an investor since 2007, and has not had an entirely trouble-free period of ownership, having to inject additional capital during difficult trading conditions.

However, the company has been performing strongly in recent times, with sales understood to have approached £180m in 2013, and robust like-for-like revenue growth.

Profits during the year are understood to have topped £31m,

Further details of Fat Face's financial performance are expected to be disclosed on Thursday.

Bridgepoint, which is expected to reduce its controlling stake by selling shares in the IPO, and Fat Face both declined to comment.

Citi and Jefferies, the investment banks, are handling the flotation.

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Twitter Stock Down 12% As It Posts $132m Loss

Twitter shares fell 12% on opening in New York on Wednesday after the social network's latest results disappointed investors.

Shareholders were looking for stronger user growth than the company reported in its first quarter statement following the market close on Tuesday.

Twitter, which went public on the New York Stock Exchange last November, said it had 255 million monthly users at the end of March, up 25% on a year ago, though the figure was two million lower than Wall Street's consensus. 

The social network posted a deeper net loss of $132.4m (£79m) - which compares to $27m in the same period last year - blaming  stock compensation costs.

A sharp increase in advertising revenue helped numb the pain.

Total revenue more than doubled to $250m from $114m while Twitter's advertising revenue was $226m, about 80% of which came from mobile advertising.

But it was not enough to appease investors, with shares hitting $38.53 in after-hours trading - still above their flotation price of $26 but down significantly on the heights seen in December of $74.73.

Analysts said user numbers was a key metric for Twitter.

The company has said it is focusing on expanding its audience and encouraging people using short messaging service to use it more often.

By comparison, Facebook has 1.28 billion users and professional networking service LinkedIn had 277 million users at the end of 2013.

WhatsApp, the messaging app Facebook has agreed to buy for $19bn, recently passed the 500 million user milestone.

"We had a very strong first quarter. Revenue growth accelerated on a year over year basis fuelled by increased engagement and user growth," Twitter's chief executive Dick Costolo said in a statement.

Twitter gave a conservative revenue forecast for the current quarter and for all of 2014 - expecting revenue of up to $280m for the April-June period.

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1.4 Million Workers On Zero-Hours Contracts

A report estimates there are 1.4 million UK workers on contracts that do not guarantee minimum hours, as a union claims many on controversial 'zero-hours' contracts are paid less than the living wage.

The Office for National Statistics (ONS) said most of the contracts it identified were zero-hours, under which people are not guaranteed work from one week to the next.

Its research found that 13% of firms used non-guaranteed hours contracts, rising to almost half in the tourism, catering and food sectors.

Other findings included women making up a bigger proportion of people on zero-hours at 55% while 64% on zero-hours said they worked "part time".

Another 18% of people questioned were on zero-hours contracts while in full-time education.

The findings were released as a study by the TUC found that nearly three out of five people on a zero-hours contract outside London earned below the living wage of £7.65 an hour.

This rose to three out of four in the capital, where the rate is set at £8.80.

Labour has promised to stop abuses of the system if it is elected.

Unions want zero-hours contracts banned.

The TUC said it was concerned that many workers on the contracts were poorly paid, had no regular income and risked being exploited.

The average hourly wage for someone on a zero-hours contract is £8.83, a third less than for workers on permanent contracts, its research found.

The union believes increasing numbers of workers are "trapped" on zero-hours contracts, even as the economy improves.

General secretary Frances O'Grady said: "Employers like to argue that zero-hours contracts offer flexibility but for many workers they mean poverty pay and no way of knowing how often they'll be working from one week to the next."

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UAE Ambassador To Head Trade Promotion Body

By Mark Kleinman, City Editor

The Foreign Office mandarin who led the UK's response to the devastating Asian tsunami in 2005 is to be named as the head of the Government's trade promotion agency.

Sky News has learnt that Dominic Jermey, the current British ambassador to the United Arab Emirates, has seen off rival candidates to become the new chief executive of UK Trade and Investment (UKTI).

A statement confirming Mr Jermey's appointment is expected to be made on Thursday, according to Whitehall sources.

Mr Jermey will take over the role from Nick Baird, who resigned late last year to join Centrica, the owner of British Gas.

Dominic Jermey is expected to be appointed on Thursday

In addition to his ambassador role in the Middle East, Mr Jermey previously served as UKTI's acting chief executive in 2009; as the head of peacekeeping at the Foreign Office; and as deputy ambassador in Madrid.

He has also worked in the City, including at Schroders during the early 1990s, which may help to counter a widespread perception that too few of those involved in the UK's trade promotion efforts possess broader business experience.

His arrival will come at a crucial time for UKTI, with ministers determined to bolster Britain's export efforts amid sporadic criticism of the agency's performance.

In last month's Budget, George Osborne, the Chancellor, announced additional funding for UK Export Finance, which provides credit to British exporters.

However, economists expect the Government to miss its target of doubling the UK's annual exports to £1trn by 2020, with the Office of Budget Responsibility forecasting that export growth will average just under 5% until the end of the decade.

Mr Jermey's arrival at UKTI will come just months after that of Lord Livingston, the former BT Group chief executive, as the minister for trade and investment.

Lord Livingston replaced Lord Green, the former chairman of HSBC, who stepped down after three years in the role.

During a trip to Brazil earlier this month, Mr Osborne announced that UKTI would invest £4m annually to triple the number of medium-sized business advisers in order to support the export ambitions of 3,000 companies.

A UKTI spokesman declined to comment on Wednesday.

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IMF: Ukraine Crisis Sparks Russia 'Recession'

The International Monetary Fund (IMF) has warned Russia is already in recession as a result of the effects of the crisis in Ukraine.

An economist working for the organisation, Antonio Spilimbergo, made the comment while confirming a huge downgrade in the IMF's growth forecast for 2014 from 1.3% to just 0.2%.

It had predicted the higher growth figure for Russia just three weeks ago.

The move was a response to heightened concerns over the effects of a flight in capital from Russia - expected by the IMF to top $100bn in 2014 alone.

A tightening of sanctions against Russian individuals and firms close to Russian president Vladimir Putin, imposed by the West in response to his annexation of Crimea from Ukraine, was also cited as a core reason for the downgrade.

The tensions surrounding the crisis in Ukraine have pushed relations between Russia and the West to their lowest since the end of the Cold War, sparking a wider flight from risk on world markets.

As the IMF amended its forecasts, Ukraine's acting leader warned his country's forces were on full combat alert in case of a Russia invasion.

Mr Spilimbergo was quoted by the Interfax news agency as saying: "If we define recession as negative growth in two quarters in a row, then Russia from that point of view is experiencing recession.

"This all has a very negative effect on the investment climate. We expect that the fall in investments that already took place in 2013 will increase further this year."

Russia's economy contracted by about 0.5% in the first three months of the year compared with the previous quarter.

Standard and Poor's ratings agency on Friday downgraded Russia's ability to repay debt to BBB-, one notch above junk status, and retained its negative outlook.

Mr Spilimbergo, who acts as the IMF's mission chief to Moscow, agreed there were "considerable downside risks" and said the decision by Russia's central bank to raise interest rates last week would reduce inflation but would not be enough.

He argued the depreciation in the rouble over the past few months would put pressure on inflation and forecast consumer prices would rise more than 6% during the course of 2014.

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