Labour Shadow Chancellor comes under pressure as Co-op scandal engulfs party

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  By Martin Kelly

Labour’s Shadow Chancellor Ed Balls is coming under pressure to explain the extent of his involvement in pushing through the deal that led to the near collapse of the Co-operative Bank.

According to the Times newspaper, the Labour MP boasted in election material of how he had used his ministerial influence to help clear the way for the Co-operative Bank to merge with the Britannia Building Society.

The 2009 merger landed the Co-op with toxic debt that led to a capital shortfall of £1.5bn and its near collapse.  The bank recently announced the loss of thousands of jobs after it was forced into a restructure which saw almost three quarters fall into the hands of hedge fund investors.

On the Labour MP’s website, referring to his time as a Treasury minister, it said: “In that role I was able to give the Treasury’s support for a new Private Member’s Bill that led to the creation of the first ever super-mutual bringing Britannia Building Society and the Co-op Bank together in the interests of customers rather than consumers,”

A spokesman for the Shadow Chancellor said: “It is matter of public knowledge that as a Treasury Minister Ed supported a Conservative MP’s Private Member’s Bill in 2007 which received cross-party backing and enabled co-operatives and building societies to merge without demutualising.

“But the decision by the Co-op Bank in 2009 to merge with the Britannia Building Society was a commercial one for the bank which Ed had absolutely no involvement in. It was also a decision made two years after Ed had left the Treasury and a year before Paul Flowers became chairman of the bank.”

The bank has been caught up in a growing scandal after its Chairman, Paul Flowers, was forced to resign after being filmed allegedly trying to but cocaine from a drug dealer.

Flowers was a former Labour councillor who had been appointed to the role despite having no banking experience.

Despite having resigned his council role after pornography was found on his computer, he was recruited by Ed Miliband into the party’s finance advisory group.

Shortly after, the Co-op gave the Labour party a £1.2m loan.

Mr Balls is also coming under pressure to return a £50,000 donation he received from the Co-op.  The disgraced former bank chairman sat on a board of the Co-op Group that authorised political donations, including the funding for Mr Balls’ office.

Responding to growing calls for explanations, Mr Balls tried to distance himself from the scandal and said: “I have never had a meeting with Paul Flowers, a telephone conversation exchanged, an e-mail, never.  Nor have I ever received any donation from him or the Co-op Bank.  I have been to a dinner which he was also invited to, I think I have spoken at a reception at a party conference and he was also on the platform, but other than that I have had no contact with him at all.”

The scandal took a new twist today with lurid sexual allegations now being leveled against Mr Flowers.  It has also emerged that Flowers has now been arrested following allegations he bought class-A drugs.

The appointment of the former Labour Councillor, who had no experience of banking, to a senior position within a bank has led to criticism of the former financial regulator, the FSA.

Also implicated in the decision to appoint Flowers to a role for which he had no qualifications is former Labour MP Alistair Darling who was the head of the Treasury at the time of Flowers’ appointment.

Writing in his own book – Back from the Brink – which chronicled the financial disaster, Mr Darling, who now leads the anti-independence campaign Better Together, 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 [Brown] 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”

The scandal, which is threatening to engulf the UK Labour party, has received widespread coverage south of the border.  However in Scotland it is being downplayed by the media which has instead been concentrating its fire on the SNP’s plan for independence.