Political 'interference' in Co-op bid for Lloyds branches under fire

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The Government is facing fresh allegations of political interference in the failed deal to sell 631 Lloyds Bank branches to the Co-op.

The Telegraph can reveal that Lord Levene, the chairman of the failed NBNK bid for the bank branches known as “Verde”, has written to the Chancellor and alleges that he has been told that political pressure did play a part in the process of the deal.

Lord Forsyth, the former Scottish Secretary and a member of the NBNK board, has also spoken publicly for the first time saying that trying to do the deal with the Co-op was inexplicable as the NBNK offer would have meant more money up front for the taxpayer.

The senior Conservative said that he had been “certainly told” there was political pressure applied during the process of the deal.

The Treasury has denied any pressure was brought to bear and said that the deal was a purely commercial decision between the Co-op and Lloyds. It said it was kept informed but played no part in the negotiations.

It is understood that in the letter Lord Levene links government enthusiasm for “mutual” banks like the Co-op to play a bigger role in the financial services industry and the decision to make Co-op the preferred bidder.

The Coalition agreement signed at the last general election specifically stated that mutual societies should be encouraged. Lord Levene, the former chairman of Lloyds of London, has also written to UK Financial Investments, the body set up to ensure the taxpayer’s interests are looked after. The state owns a 39pc stake in Lloyds Banking Group (LSE: LLOY.L - news) after it was bailed out with public money during the financial crisis.

UKFI has also denied it should have done more to stop the deal.

“It is inexplicable to me how this bid could be approved either by Lloyds Banking Group or UKFI who are responsible for protecting the taxpayer’s interests,” Lord Forsyth said.

“Certainly we have been told there was political interference. The Chancellor has given the assurance that this wasn’t the case but how on earth did we get to the situation that everyone can now see is inexplicable?

“What were the Treasury and business department doing? The interests of the taxpayer have not been met, to put it mildly.”

Despite political support, the Lloyds Co-op deal collapsed in April when the Co-op admitted that the poorly performing economy and lack of board enthusiasm meant the agreement would not go ahead.

Critics said that the Co-op Group, structured to look after its retail and funeral interests, was not capable of integrating 4.6m new customers onto its own smaller bank platform.

It is believed that the purchase of Britannia by the Co-op in 2009 has yet to be fully integrated and as part of the original deal Co-op had to agree to take Lloyds’ management team and technical platform.

Fears were also raised by the Financial Services Authority that the capital position of the Co-op needed strengthening.

Peter Marks, the chief executive of the Co-op who pushed for the deal, left last month, and Euan Sutherland, the new CEO, is undertaking a strategic review of the operation .

There is an outside chance the banking division could be sold. Lloyds is now planning for an initial public offering for the branches, possibly as early as the autumn. A trade sale is still a possibility.

The Treasury select committee is about to launch an inquiry into the failed deal and has called Sir Win Bischoff, the Lloyds chairman, and Antonio Horta-Osorio, the chief executive, to give evidence.

Lord Levene has written to Andrew Tyrie, the TSC chairman, asking to appear before the committee.