By William James and Matt Scuffham
LONDON (Reuters) - British police have arrested the former chairman of the Co-operative Bank as part of an investigation into the supply of illegal drugs, ratcheting up pressure on the 141-year-old bank as investors mull plugging a $2.4 billion capital shortfall.
Prime Minister David Cameron has questioned why Paul Flowers, a one-time local Labour politician and Methodist preacher with no banking qualifications, was judged suitable for the chairmanship during a period when the bank nearly collapsed.
Finance minister George Osborne ordered an inquiry into the bank, just as its parent Co-operative Group seeks approval from bondholders and preference shareholders for a rescue plan that gives a group of hedge funds control of a bank which once promoted its ethical credentials.
The publication of a video by the Mail on Sunday which the newspaper said showed Flowers arranging to buy crack cocaine and crystal meth propelled the Co-op into a political storm over the executive's links to leaders of the opposition Labour party.
Police said a 63-year-old man was arrested in the Merseyside area of northern England late on Thursday and taken to a police station to assist detectives with their enquiries.
Flowers has not yet directly addressed the allegations of drug use, but after the video appeared he released a statement through the Methodist Church saying he had a difficult year.
"This year has been incredibly difficult, with a death in the family and the pressures of my role with the Cooperative Bank. At the lowest point in this terrible period, I did things that were stupid and wrong. I am sorry for this, and I am seeking professional help, and apologize to all I have hurt or failed by my actions," the statement said.
He quit his post as deputy chairman of Co-op Group in June - at the same time as he quit the bank - and the BBC has reported this was because of concerns about his expenses and competence.
Flowers could not be reached for further comment and local media, who have dubbed him the "Crystal Methodist", reported he was in hiding. He has been suspended indefinitely by the Church, which said it did not know where he was.
The Co-op scandal has stoked a political row between Cameron's ruling Conservatives and the opposition Labour Party, which has suspended Flowers.
"Why weren't alarm bells rung earlier, particularly by those who knew? Why was Reverend Flowers judged suitable to be chairman of a bank?" Cameron asked in parliament on Wednesday. He said the government's priority was to safeguard the bank without using taxpayers' money.
Flowers, who worked in local politics for Labour, approved a donation of 50,000 pounds ($80,700) to the office of its finance spokesman Ed Balls and sat on a business advisory group reporting to its leader, Ed Miliband.
Miliband said there were no close links between him and Flowers and he was confident his party had always acted correctly on the issue.
Britain's finance ministry ordered an independent inquiry into the Co-op bank. The investigation has been jointly agreed with the Prudential Regulation Authority and the Financial Conduct Authority, the Treasury said.
Parliament's Treasury Select Committee is already looking into the collapse of Co-op Bank's bid for 632 Lloyds Banking Group <LLOY.L> branches.
"It is incredibly important that whoever comes in to do this investigation is somebody who can be seen to be absolutely politically impartial," Mark Garnier, a legislator belonging to the ruling Conservative party and a member of the select committee, said.
Separately, Britain's accounting watchdog said it was scrutinizing financial reports from the bank, though it has not yet launched a formal investigation.
The failure of British regulators to raise concerns about Flowers' lack of experience has stunned the public, especially given Flowers admitted this month he only spent four years working in banking straight after school and never completed exams to become a banker.
Bewildering members of the select committee when he was questioned by them on November 6, Flowers said Co-op bank had assets of 3 billion pounds when the true figure was 47 billion.
"I have some experience, but I would judge that that experience was largely out of date in relation to the needs of contemporary banking," Flowers said.
(Writing by Guy Faulconbridge; Editing by David Holmes and Erica Billingham)