Co-op Bank: Inquiry into bank under Paul Flowers

Paul Flowers was chairman of the Co-op Bank until June this year

An independent inquiry is to look into "events at the Co-op Bank" dating back to 2008, the chancellor has said.

The bank's ex-chairman, Paul Flowers, has been released on bail after being arrested in Merseyside in connection with a "drugs supply investigation".

Mr Flowers, a Methodist minister in Bradford, has been suspended from the church and the Labour Party.

The chairman of the Co-op Party, which is paired with Labour, said the damage "was not good" for the Co-op movement.

Mr Flowers quit as a Labour councillor in Bradford in 2011 after "inappropriate but not illegal" material was found on his computer, although at the time he claimed he was leaving due to pressures of work.

Bradford Council is investigating Mr Flowers' departure.

Labour MP Gareth Thomas, who has chaired the Co-operative Party since 2000, said he had been unaware of these events.

"I wasn't aware of what happened in Bradford or some of the other disclosures that have come out," Labour MP Gareth Thomas told BBC Radio 4's Today programme.

He insisted the wider Co-op movement was doing well despite the fallout from the Co-op Bank's near downfall and a series of scandals surrounding the bank's former chairman.

The Mail on Sunday published a video on 17 November allegedly showing Mr Flowers, 63, handing over £300 for cocaine and discussing buying other illegal drugs.

Mr Flowers resigned from his position as deputy chairman of the Co-op Group in June amid concerns about his expenses.

Separately, he was forced out of the Co-op's banking arm in June because of doubts about his competence for the job.

Conduct of directors

The Treasury has not yet said who will lead the inquiry announced by Mr Osborne.

"The investigation has been jointly agreed with the two regulators - the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) - who agree there is a public interest in a statutory investigation," a Treasury spokesman said.

"It will be led by an independent person appointed by the regulators, with the approval of the Treasury."

The chancellor used the Financial Services Act 2012 to order an independent investigation into "events at the Co-op Bank and the circumstances surrounding them".

This will date from 2008 and include the conduct and appointment of directors.

Separately, the FCA and PRA are considering whether they should launch formal enforcement investigations.

Internal review

The Co-op Bank is seeking to recover money paid to its former chairman, telling him to hand back £31,000.

It is also looking at emails and other evidence as part of an "internal fact-finding review".

The Co-op Group has launched a "root and branch" review of how it governs itself in the wake of the revelations about Mr Flowers, which its new chairman called "shocking".

Labour has sought to distance itself from Mr Flowers, as a political row developed over why he was allowed to reach a such high position in the bank.

Mr Thomas said that it was "right" that Mr Flowers had been suspended by both the Labour Party and the Co-op Party.

"I believe that the right thing's been done both by Ed Miliband and by the decision that we've taken ourselves," he said.

The Methodist Church said it had offered "pastoral care" to Mr Flowers, who is indefinitely suspended as a minister.

It has emerged that he resigned from running drugs charity Lifeline in 2004 after allegedly lodging false expenses claims.

The Charity Commission said it received a complaint at the time but had no evidence that Mr Flowers "acted in bad faith or fraudulently".