AN independent review has been launched into the near downfall of the Co-operative Bank as its former chairman was released on bail after his arrest in connection with alleged drugs offences.
Chancellor George Osborne announced plans for the review yesterday after Bank of England governor Mark Carney and top City regulators held talks over the troubled lender.
Mr Flowers, 63, a Methodist minister, spent most of the day in police custody after being arrested on Merseyside in connection with a "drugs supply" inquiry before being freed on bail. On Sunday, film emerged allegedly showing him handing over £300 for cocaine and discussing buying other illegal drugs.
The Treasury-led probe will add to an enforcement investigation being considered by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), looking at whether there were adequate systems and controls in place and if there was any wrongdoing by individuals, which could lead to fines and censures.
The eight-strong PRA board had discussed the Co-op at its regular meeting earlier.
The review uses new powers under the Financial Services Act and follows calls from Prime Minister David Cameron for an inquiry into the bank's finances and the decision to appoint former chairman Paul Flowers.
It will have a wider scope than the enforcement investigation, looking at mistakes made in the run up to the Co-op Bank's woes and the £1.5 billion black hole in its finances, dating back to 2008.
This will cover its takeover of Britannia Building Society at the height of the banking crisis, as well as appointment procedures in light of the scandal surrounding Mr Flowers.
As with the recent review into Royal Bank of Scotland, it will be independently chaired - seen as vital by the Treasury Select Committee, given that the role of the regulators will also come under scrutiny.
The Treasury confirmed it will look at the actions of the regulators and government in relation to the issues at the bank.
The FCA said it "fully agrees" the investigation should be led by an independent person. It will make its full resources available to support the investigation, it added.
But the inquiry will not start until the outcome of criminal and enforcement investigations into Mr Flowers and the bank have concluded or it is clear proceedings will not be prejudiced.
The FCA and PRA are set to announce soon if a formal enforcement probe is to be launched.
The Co-op is the centre of a barrage of investigations, with the group already being grilled by MPs on the Treasury Select Committee into the bank's failed "Project Verde" bid for 632 Lloyds Banking Group branches, which raised questions over the mutual's finances and led to a credit ratings cut to junk status in May as well as a host of senior departures.
There is also a further internal investigation being conducted by ex-Treasury mandarin Sir Christopher Kelly, who was appointed by the Co-op in July to look at the bank's balance sheet problems and governance procedures.
The results are due at the mutual's annual meeting next May.
Mr Flowers was later bailed until the New Year. A police spokesman said: "West Yorkshire Police investigating allegations of Drug Supply offences have released a man on unconditional bail.
"The 63-year-old arrested last night in the Liverpool area will answer bail in the New Year at a West Yorkshire Police station."
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