Co-op Bank to face independent inquiry, says PM David Cameron

Chancellor George Osborne is to order an independent inquiry into how Paul Flowers was deemed a suitable chairman of the Co-op Bank.

The inquiry is also expected to examine whether the bank's recent leadership crisis has had any financial impact on its customers.

Its exact terms of reference and the name of its chair are likely to be formally announced in coming days.

Mr Flowers, 63, apologised after he was filmed allegedly buying drugs.

The Methodist Church said Mr Flowers had been "suspended indefinitely" from his post as a minister.

He had stepped down as chairman of Co-op Bank and as deputy chairman of Co-op Group in June.

It has also emerged that he was found to have had "inappropriate" adult images on his computer in 2011 while he was a Labour councillor in Bradford and before he was appointed chair of governors at a primary school in Bradford.

A council spokeswoman noted that the material was not illegal, but Glen Miller, leader of the Conservative group at Bradford Council, said: "Apparently no-one thought it sensible to inform the local school of the material that was found on his computer."

The inquiry into the Co-op is to be ordered by the chancellor and arranged by the Prudential Regulation Authority, under powers Mr Osborne obtained in the 2012 Financial Services Act, the BBC's Robert Peston has reported.

"This would be a long and detailed investigation by an independent expert into events at the Co-op Bank," he said.

But this cannot begin until the police have concluded their investigation into the allegations that Mr Flowers bought and used illegal drugs, including cocaine, our correspondent added.

West Yorkshire Police officers searched Mr Flowers' Bradford home on Tuesday.

Treasury Select Committee chairman Andrew Tyrie said regulators had been considering an investigation into Mr Flowers' role at the bank for "some weeks".

"It must be independent and independent of the regulators, who themselves may have questions to answer. I'm not saying they do but they could do," he said.

The Financial Conduct Authority is also thinking about launching another, separate investigation, into whether the bank broke City rules, our correspondent said - which also would need to be completed before the independent investigation could start.

"If you put all this together, it means that this bank, which is in the throes of trying to save itself, will be under a cloud of investigation for months - it could be years," he concluded.

The former Bradford councillor and adviser to Mr Miliband, who has been suspended from both his church and the Labour Party, said he had been "wrong" and "stupid".

Earlier in the Commons, Prime Minister David Cameron said Labour knew about his "past" before the drugs and porn claims emerged.

Mr Cameron had been asked by Tory MP Steve Brine at Prime Minister's Questions about the "nightmare unfolding" at the bank and the "sense of disbelief" that Mr Flowers was appointed to his role in the first place.

Mr Cameron said the government's first priority was to safeguard the Co-op Bank and ensure its customers and bondholders were protected, but the prime minister went on to question Mr Flowers' suitability for the role and his links with Labour.

"Why was Reverend Flowers judged suitable to be chairman of a bank? Why weren't alarm bells rung earlier, particularly by those who knew?" he said.

But opposition leader Ed Miliband questioned the Conservatives' own ethics, claiming they took money from tax exiles.

Mr Miliband hit back with a series of jibes about the people Mr Cameron "associated with".

He accused the Conservatives of taking £5m from a City firm whose traders subsequently rigged interest rates. He said the Tories had "taken millions" from tax exiles and had not returned donations made in the 1990s by Asil Nadir, convicted in 2012 of fraud.

Mr Miliband quoted an ally of Mr Cameron, Planning Minister Nick Boles, who recently argued that potential Conservative voters "don't trust our motives" and said: "The single biggest problem facing the Conservative Party is being seen as the party of the rich."

Mr Boles was "really saying [that] this prime minister is a loser", the Labour leader concluded.

Earlier the PM in the Commons had indicated only that the chancellor would be "discussing with the regulator what is the appropriate form of inquiry" without making definitively clear whether one would be held.

The Co-op Group, a major donor to Labour, is investigating the leadership of its bank subsidiary before its near-collapse earlier this year.

A spokesman for the Methodist Church said: "Paul is being offered pastoral care, and we ask for prayers for all involved in this matter."