Labour dragged into Co-op scandal as questions grow over Flowers’ appointment


  By G.A.Ponsonby
The Labour party is facing questions over the growing scandal surrounding the former Co-op Bank Chairman Paul Flowers.
Days after Flowers resigned after being captured on film allegedly paying for drugs, there is mounting pressure on Labour leader Ed Miliband to explain his relationship with the former Labour councillor.

Flowers resigned from his position at the Co-op bank after an undercover operation caught him allegedly counting out twenty pound notes in order to pay for cocaine.

It has since emerged that the church minister who was also a former Labour councillor had no formal qualifications or banking experience.  Pressure is now building on Mr Miliband to explain why he appointed Flowers to a key role in Labour’s finance advisory group.

It has also emerged that, at the time he was recruited by Miliband, Flowers had resigned from Bradford Council after pornographic material was found on his computer.  One newspaper has claimed that the Labour party were aware of the reason for the resignation. 

Weeks after Miliband appointing Flowers to his group, the Co-operative bank handed the Labour party a £1.2m loan.

Miliband has admitted to having at least one private meeting with Flowers.  The Labour leader has also confirmed he attended informal dinners and had other meetings with the former councillor, one in Downing Street which Mr Miliband hosted with colleague Ed Balls.

Last July, Miliband hailed the Co-op Bank as his preferred model for banking reform, saying that the bank had “always understood that ethics of responsibility, cooperation and stewardship must be at the heart of what you do.”

Flowers has also admitted sanctioning a fifty thousand pound payment to Labour Shadow Chancellor Ed Balls, cash he claimed was handed to the MP for a “researcher to assist the shadow chancellor in the work that he needed to do,”.

The Labour party are now under pressure to hand the cash back to the bank whose investors are facing losses resulting from a capital shortfall of £1.5bn.  Co-operative Group chairman Len Wardle has already quit amid the deepening scandal, which came after the ailing bank had to be bailed out by hedge funds after getting into financial difficulties.

The Co-operative Bank’s problems began in 2009 when it acquired the Britannia, then Britain’s second-biggest building society.  Co-op inherited £11bn of toxic loans from Britannia which contributed to a £662m loss last year.

A re-capitalisation plan agreed with the UK Treasury will result in the bank no longer being owned by the mutual Co-operative Group.  Co-op investors, including pensioners, are expected to lose out when their investments are replaced by income-paying bonds as part of the rescue package.

Another facing questions is former Labour Chancellor Alistair Darling, who was in charge of the Treasury when the Co-operative bank merged with the Britannia and later when Flowers was appointed to his role at the Bank.  There has been criticism of an apparent failure on the part of the then Financial Services Authority to vet Flowers prior to his appointment with the bank.

Writing in his own book – Back from the Brink – which chronicled the financial disaster, Mr Darling explained how he was responsible for the regulatory framework:

He wrote: “The responsibility for the architecture was largely mine.  When we were in opposition in the early 1990s, Gordon had asked me to take responsibility for the City.  I realised quickly that getting the right supervision and regulatory regime was essential and set about planning for the change in regulatory control which we implemented once we were in power”

There has also been concern raised at the extent of the links between the bank and the Labour party.

Labour Links

An arm of the Co-operative Bank, the Unity Bank, is closely associated with the Labour party and the trade union movement.  The bank is the Labour party’s major creditor, having loaned millions to the cash-strapped party.

In 2006, the Daily Telegraph reported that the Co-op Bank had extended Labour’s loan overdraft to £11m, and criticised the bank’s reluctance to discuss the nature of its relationship with Labour.  The bank also reportedly made a loan of £3.5m to Labour, secured on the party’s headquarters.

In May of this year the Times newspaper reported that the Labour party is dependent upon an overdraft of £3.9m with the Co-operative Bank, which is held on terms very favourable to the party.  The restructuring of the bank could lead it to revise the terms of Labour’s overdraft, causing the party severe financial difficulties.

The Co-operative Group is also the sponsor of a number of Labour MPs and former MPs, including George Foulkes (now Lord Foulkes of Cumnock) who sat in the House of Commons as a Co-operative party MP.

The Co-operative party was established in 1917 as the political arm of the Co-operative Group. Although it is a separately registered party, all Co-operative party election candidates are jointly nominated as Co-operative/Labour following an agreement made in 1926.

Since party funding records began, the bank’s donations to the Co-operative Party have been increasing, from £228,893.25 in 2001 to £809,000 in 2011.  The Group have donated directly to Labour as well, giving as much as £89,356 in 2004 and £50,000 in the first quarter of 2012.

However, the Co-operative Party also donate to Labour, giving an average of over £100,000 a year between 2001 and 2011.

Labour is also one of the organisations, and only political party, to benefit from indirect donations from the Co-operative Bank credit card schemes, which has so far raised over £2m for the party.