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DERMOT MURNAGHAN: Well now, in the wake of the Co-op Bank scandal surrounding its former Chairman Paul Flowers, politicians and the public of course have been asking how a man with no real banking experience came to be head of the bank. But now a more important question is being asked, how do we stop it happening again? Well I’m joined now by the Labour peer and former City Minister, Lord Myners and by the Conservative MP and member of the Treasury Select Committee, Jesse Norman. A very good morning to you, gentlemen. I want to start with you Lord Myners because did you see this coming because your report into mutuals in 2004 said amongst other things that boards could become self-perpetuating oligarchies unaccountable to the members. Does that sound like the Co-op Bank?

LORD MYNERS: It does. I produced the report for the Treasury citing the flaws in the governance of mutuals. Mutuals have millions of members, single members, single vote. It’s just not possible for the owners or members to hold the board to account. Public companies have large shareholders, they have financial resource, Dermot, they can get behind things, they can press for change. So mutuals have a flaw in their DNA through this spread of ownership. Secondly, they have a flaw, they don’t have anybody they can fall back to, to get further capital if required. So my report said to the regulator, you must watch the governance and the capitalisation of mutuals very carefully.

DM: So we’ve got that inbuilt flaw that you’ve identified and then we add into this, Jesse Norman, a man appointed at the top as chairman who has no real banking experience, well he has no banking experience, he’d worked as a teller when he was a teenager so he has no banking experience whatsoever. This was a disaster waiting to happen wasn’t it?

JESSE NORMAN: Well it was in a way, that’s right. Not only did he have no banking experience and almost no business experience but he didn’t seem to have much interest in what it was to be chairman of a bank. When we asked him what the assets of the bank were he said they were £3 billion and it turned out to be £47 billion so he didn’t seem to be engaged, must less competent. So I think Lord Myners is absolutely right about the problems with the mutual structure and there’s a further problem which is that the mutuals find it increasingly and intrinsically difficult to raise capital, they can’t go out and raise money in the way that other corporate institutions can. The effect of that is that you have to have even stricter care of what capital you do have in order to preserve it and therefore there is a special duty on the directors of the Co-op or other mutuals to make sure that that capital is properly preserved.

DM: Lord Myners, do we have to change our opinion of mutuals because many, particularly in your party, still cleave to the idea that mutuals good, shareholders bad. As you described, with those flaws there, it is mutuals pretty dangerous.

LORD MYNERS: Mutuals are good and indeed the coalition agreement said it was going to take action to support and encourage mutualisation. I think we have to recognise that there are weaknesses here but …

DM: What are the safeguards that have to be built in then?

LORD MYNERS: Well that can be addressed by an oversight governance process, a supervisor board, the use of a panel to vet the quality of people who become directors of mutually owned financial institutions. But actually we have the same problem here with public companies. Public banks are the work of the Treasury Select Committee of which Jesse is a great member, exhibited the weaknesses HBOS and Royal Bank of Scotland. Their boards didn’t function well either and there I think the real thing is that the shareholders who have paid … an institution owning banks like Barclays have shown no interest who sits on boards and we have to rectify that as well.

DM: But that’s the point isn’t it? The public are going to ask exactly that question, are bank boards firing on all cylinders now or are there more out there like Paul Flowers? Do they know that, do we know that?

JESSE NORMAN: Well if you are my constituents sitting thinking about the Sunday lunch, the last thing you’re thinking about is the management of these great institutions but of course …

DM: Well, I don't know.

JESSE NORMAN: The fact of the matter is … you are worrying about it but you don’t have the detailed knowledge so you have to have proactive institutional shareholders to go in there and really start kicking the tyres on the quality of the people who are after all their delegates, their appointed directors guiding and shaping that bank and preserving their capital.

DM: Right, there are two other big questions about the Co-op. First of all the merger with Britannia, I mean it looks like a terrible idea. It happened of course when circumstances were different but Britannia as we have now found out, its loan book wasn’t exactly in the best possible shape and that is really what has dragged the Co-op down. Why did that merger take place?

LORD MYNERS: I think that is one of the things that needs to be looked at through this inquiry which the Chancellor is setting up. I hope this inquiry starts work soon, I hope it’s not delayed and I hope, in fact it is essential, that it’s led by a person of stature and independence. I think the Treasury Select Committee or the Treasury Select Committee chairman should be consulted and approve who conducts that inquiry. We need to know what went wrong at the Co-op but as you say, the Britannia deal was clearly a deal which holed the ship well below the line. And I think there is one point worth making here, talking about the constituents of Jesse and others over their lunch. Depositors are protected here up to £85,000, people should not become alarmed about the Co-op Bank, should not be withdrawing funds from the Co-op Bank as long as those deposits are less than £85,000. I know it has rarely been said in this whole debate and it is worth reiterating.

DM: But there we have from Lord Myners, the boat holed below the water, okay with the best will in the world let’s say people didn’t know that. It’s sailing along, it then does hit the rocks as well as being holed, continuing with this analogy, but you press ahead with trying to give it all those or buy all those Lloyds Banks. It was pretty clear then that things were going pretty badly wrong.

JESSE NORMAN: On the Treasury Committee of course we are independent of government and we have been looking at this whole thing of how these institutions think and the fascinating thing is that the Co-op problems were not just confined to the Britannia. Of the £1.5 billion of black hole they have got, about £600 million is attributable to the Britannia loan book but there were a lot of other things that were going wrong and the Co-op management was vastly overstretched. The fascinating thing is the bank Chief Executive goes to the Chair and the Board at that time and says actually, in fact he goes to the Chief Executive of the whole Co-op and says we are overstretched by two management systems and all these other programmes and the result is he ends up having to quit because they are not prepared to engage with the problems and the reason why they then get so excited about Lloyds is because they think that Lloyds could be part of a solution by bringing capital and new management and in fact that was just a vain hope.

LORD MYNERS: Dermot, we have to ask here what George Osborne and

Mark Hoban were doing. Did they go too far in trying to force through the Project Verde transaction which would have seen four million customers of Lloyds Bank transferred to the Co-op Bank without a single right of comment or vote on that decision. Mark Hoban we are told had over 30 meetings with the Co-op Bank, that from my experience as a Minister is an extraordinarily high number of meetings. That needs to be investigated, there is a big political question here.

JESSE NORMAN: It is a fascinating question. We have asked all the people who have come up in front of us from the Co-op so far whether or not they felt under any political pressure either from the present government or from the previous government and the uniform testimony has been that there was no pressure.

DM: Do you believe them?

JESSE NORMAN: Well that’s an interesting question, we’ll file our report and see what our collective view is but what’s interesting about it is that even the Reverend Flowers, when we cross examined him the other day and it’s all online, even he said that there was encouragement and support from both sides of the political arc but no pressure and that is quite interesting because it is going to put the question much more squarely.

DM: Okay point taken. Does, flowing from our discussion and of course what has happened with Reverend Flowers, the whole question about who appoints bank directors. Shouldn’t there have been some kind of committee, shouldn’t they appear before hearings to show us that they are fit and able and have the knowledge to run a bank?

JESSE NORMAN: The FSA which is the old regulatory body and now the FCA and the Prudential, they should all have – particularly on the conduct side which is the FCA – they have rules who should become a fit and proper person in a bank and the staggering thing is these weren’t being applied when the Reverend Flowers was appointed and they only really got picked up by the Banking Commission which has insisted on new tougher standards and those seem to be coming to play but frankly they could come faster.

DM: But that’s the point, Lord Myners. People say we have had five years, starting under Labour, five years of banking reform, reform to regulation, it doesn’t seem to have worked here. Is it any good?

LORD MYNERS: Well two things. One, good regulation costs money and it is going to cost us more to get the right sort of people in the regulatory bodies because clearly the vetting of the directors of Co-op Bank and in my experience the vetting of directors in other banks, does not measure up to public expectation. It is not as invasive, not as curious as it should be. Secondly, as far as public companies are concerned, we can no longer accept institutional investors simply ticking boxes when it comes to electing directors. Institutional directors must be forced to join the nomination committees of banks, to choose the directors who are put forward to shareholders for approval and thereby be accountable for any bad appointments that they have made.

DM: Okay, some very interesting suggestions. Thank you very much for sharing your expertise with us, Lord Myners, Jesse Norman, very good to see you.