By Steve Slater
LONDON, Nov 28 (Reuters) - Britain's Co-operative Bank said it has lost current account customers as aresult of a scandal involving its former chairman and a schemethat makes it easier for people to switch bank accounts.
The bank, which acknowledged the damage to its reputation,said its retail deposits and liquidity remained stable and itwas too early to identify any significant trends.
British police last week arrested the former Co-op Bankchairman Paul Flowers as part of an investigation into thesupply of illegal drugs.
Finance minister George Osborne has ordered an inquiry intothe bank, just as its mutually owned parent attempts to pushthrough a rescue plan that passes control of the lender to agroup of hedge funds.
Co-op Bank said its recent troubles, competition from otherbanks and the introduction of seven-day account switching mayhave contributed "to an increase the bank has seen in theswitching out of current accounts."
Investigations are likely to mean the bank will incur morecosts than expected as it is subjected to more scrutiny fromregulators and takes up management time, the bank said.
The update was included in a statement that detailedtechnical changes to the deal that will see bondholders take a70 percent stake in the bank and the Co-operative Group keep 30 percent.
It also emerged that Aurelius Capital Management, one of thetwo biggest hedge funds involved in the restructuring of thebank, has sold its investment.
Aurelius has sold its stake to another hedge fund, PerryCapital, two people familiar with the matter said. Aurelius andPerry could not immediately be reached for comment.
Co-op tweaked the terms of its offer to bondholders toreflect changes in the value of bonds being traded. Thebondholders will still exchange their debt, invest 125 millionpounds, and get a 70 percent stake.
These technical changes aim to prevent an "unintendedconsequence" whereby professional investors would have been ableto buy small numbers of bonds that allowed them to buy largenumbers of deeply discounted shares in the bank, creating anarbitrage opportunity, a person familiar with the bank said.