Co-op Bank boss Paul Flowers was right choice at the time, says watchdog

The watchdog who waved through the appointment of the "financial illiterate" Paul Flowers as chairman of the beleaguered Co-operative Bank told MPs yesterday that he stood by the decision and insisted it was "not a mistake".

Clive Adamson, now director of supervision at the Financial Conduct Authority, led a three-man panel that approved the appointment after a 90-minute interview. He told MPs on the Treasury Select Committee, who looked on aghast: "I stand by the decision I made at the time."

Mr Flowers, a Methodist minister who had no senior banking experience, was filmed allegedly buying drugs after his resignation, and was found to have stored "inappropriate but not illegal" material on a laptop while a Bradford councillor. Other lurid allegations followed.

Mr Adamson, a senior regulator at the Financial Services Authority when Mr Flowers was hired, said: "I'm as surprised as all of us at … Mr Flowers' apparent misdemeanours. Do I regret what subsequently happened? Yes I do.

"At no time did anyone in the firm, or in public life [who may have known about Mr Flowers' behaviour], ever alert us to these matters."

The three-man panel also included Graham Hardie, who subsequently joined Co-op Bank as a non-executive director. They were aware of Mr Flowers' spent conviction, dating back to 1981, for gross indecency but did not view that as relevant to the appointment.

However, Andrew Tyrie, the committee chairman, said that following Mr Flowers' bumbling appearance before MPs, when he was unable to answer basic questions about the bank, it "didn't take us long" to realise he was unsuitable. He described Mr Adamson's "judgement call" as "completely wrong".

But Mr Adamson said: "I was surprised at the answers he gave. At the time [we met him] he was much more cogent. It was not the same individual I saw in 2010. He did appear to grasp the issues."

Challenged on Mr Flowers' lack of banking experience, Mr Adamson said the chairman's job was to "run the board, not run the bank".

"I did explore his experience, together with why he was being put forward. At that time, the reason that he was proposed and put forward was the board of the Co-op Bank was made up of 22 individuals. It was a somewhat unruly board and it was important someone was put in place to better chair it.

"My view was that at the time Paul Flowers did have the competence to be non-executive chairman."

Mr Tyrie put it to him that the "approved persons regime" operated by the FSA was a "box-ticking exercise" and a "busted flush".

Mr Adamson replied: "I would describe part of it as a box-ticking exercise … We did make improvements but we acknowledge that more needed to be made."

It also emerged during the hearing that the two deputy chairmen appointed along with Mr Flowers, because they had banking experience, had voted against the attempt to take on Verde – the business of more than 600 branches being sold by Lloyds Banking Group. Rodney Baker-Bates visited Mr Adamson himself in 2012 to warn that the proposed deal was a "step too far". He and his fellow deputy chairman, David Davies, are no longer with the bank.

The inquiry is one of six either announced or under way into the bank's near failure.

Questions were also raised about the disastrous merger with Britannia Building Society. Its corporate loan book is largely blamed for the £2bn black hole in the Co-op bank's accounts.

Mr Adamson said there was political support for the deal, but denied that there had been any interference.