Disgraced Co-op bank chief arrested in drugs probe

Police on Friday said they had arrested the ex-chairman of Britain's Co-operative Bank in a probe over "drug supply", as the ethical lender finds itself dragged into a political row.

The Treasury meanwhile said it was ordering an independent inquiry into events at Co-op Bank in the wake of damaging allegations surrounding former chairman Paul Flowers, a 63-year-old church minister, coming also amid a dire financial situation at the lender.

Flowers was filmed talking about buying crystal meth, crack cocaine and ketamine by the Mail on Sunday tabloid newspaper in allegations published last weekend.

Flowers, also a former local councillor for the opposition Labour party, has since apologised -- leading to his subsequent suspension from the church and Labour.

A police statement released Friday said officers had on Thursday "arrested a 63-year-old man... in connection with an ongoing drug supply investigation". British media widely reported the person to be Flowers.

Later on Friday, the Treasury said that finance minister George Osborne will "order an independent investigation into events at the Co-op Bank and the circumstances surrounding them."

"It will be led by an independent person appointed by the regulators, with the approval of the Treasury," the statement said.

It confirms a statement on Thursday by Conservative Prime Minister David Cameron, who said he would order a inquiry into the finances of the bank, which faces a big recapitalisation to cover bad loans and the costs of a failed expansion plan.

Britain's financial regulators on Friday added that they were considering their own separate probes in the Co-op.

Reverend Flowers was chairman of the Co-operative Bank -- which prides itself on ethical investments -- from 2010 until June earlier this year.

Flowers has meanwhile been engulfed in a highly damaging series of allegations over illegal drug use, sex with rent boys, drink-driving and questions over his expense claims while working for a drugs charity.

The allegations and the arrest of Flowers further damages the reputation of the Co-op just weeks after it unveiled a drastic restructuring that will hand control to US hedge funds in order to plug a £1.5-billion ($2.4-billion, 1.8-billion-euro) hole.

The revelations have also sparked the resignation of Len Wardle, who has stepped down as chairman of parent firm the Co-operative Group.

The BBC on Friday reported that Flowers -- who was paid £132,000 a year -- resigned from the Co-op in June after being confronted by "lavish" expense claims, and growing doubts over his competence.

The Co-op Bank has meanwhile said that it is seeking to recover contractual payments made to Flowers, and he has been told to hand back £31,000.

Expansion cost bank dragged into political row

The lender's disastrous financial situation was caused by its 2009 purchase of British mortgage lender Britannia -- which was saddled with bad loans -- and the collapse earlier this year of a deal to buy 632 branches run by Britain's state-rescued Lloyds Banking Group.

Cameron on Thursday asked questions about the crisis at the Co-op.

"Why was Rev Flowers judged suitable to be chairman of a bank? Why weren't alarm bells ringing earlier, particularly by those who knew?" the prime minister said in a statement to parliament.

The premier also blasted Labour leader Ed Miliband over his centre-left party's close connections with the bank.

Miliband countered however that Labour had acted with "utmost integrity" and he accused Cameron of smear tactics.

The Labour party has demanded also that Chancellor of the Exchequer Osborne explain why he had pressed Brussels to spare the Co-op Bank from tough new capital requirements, according to a report in the Financial Times.

The paper said Osborne had sought more lenient treatment amid hopes that the Co-op would buy the Lloyds branches and emerge as a strong challenger to Britain's biggest banks.