* Former Co-op chairman ignites political row in Britain
* PM Cameron asks why Flowers was appointed chairman
* Flowers says had incredibly difficult year
* Accounting watchdog scrutinising Co-op bank accounts
* UK Treasury orders independent inquiry
By William James and Matt Scuffham
LONDON, Nov 22 (Reuters) - British police have arrested theformer chairman of the Co-operative Bank as part of aninvestigation into the supply of illegal drugs, ratcheting uppressure on the 141-year-old bank as investors mull plugging a$2.4 billion capital shortfall.
Prime Minister David Cameron has questioned why PaulFlowers, a one-time local Labour politician and Methodistpreacher with no banking qualifications, was judged suitable forthe chairmanship during a period when the bank nearly collapsed.
Finance minister George Osborne ordered an inquiry into thebank, just as its parent Co-operative Group seeks approval frombondholders and preference shareholders for a rescue plan thatgives a group of hedge funds control of a bank which oncepromoted its ethical credentials.
The publication of a video by the Mail on Sunday which thenewspaper said showed Flowers arranging to buy crack cocaine andcrystal meth propelled the Co-op into a political storm over theexecutive's links to leaders of the opposition Labour party.
Police said a 63-year-old man was arrested in the Merseysidearea of northern England late on Thursday and taken to a policestation to assist detectives with their enquiries.
Flowers has not yet directly addressed the allegations ofdrug use, but after the video appeared he released a statementthrough the Methodist Church saying he had a difficult year.
"This year has been incredibly difficult, with a death inthe family and the pressures of my role with the CooperativeBank. At the lowest point in this terrible period, I did thingsthat were stupid and wrong. I am sorry for this, and I amseeking professional help, and apologise to all I have hurt orfailed 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 reportedthis was because of concerns about his expenses and competence.
Flowers could not be reached for further comment and localmedia, who have dubbed him the "Crystal Methodist", reported hewas in hiding. He has been suspended indefinitely by the Church,which said it did not know where he was.
ALARM BELLS
The Co-op scandal has stoked a political row betweenCameron's ruling Conservatives and the opposition Labour Party,which has suspended Flowers.
"Why weren't alarm bells rung earlier, particularly by thosewho knew? Why was Reverend Flowers judged suitable to bechairman of a bank?" Cameron asked in parliament on Wednesday.He said the government's priority was to safeguard the bankwithout using taxpayers' money.
Flowers, who worked in local politics for Labour, approved adonation of 50,000 pounds ($80,700) to the office of its financespokesman Ed Balls and sat on a business advisory groupreporting to its leader, Ed Miliband.
Miliband said there were no close links between him andFlowers and he was confident his party had always actedcorrectly on the issue.
Britain's finance ministry ordered an independent inquiryinto the Co-op bank. The investigation has been jointly agreedwith the Prudential Regulation Authority and the FinancialConduct Authority, the Treasury said.
Parliament's Treasury Select Committee is already lookinginto the collapse of Co-op Bank's bid for 632 Lloyds BankingGroup branches.
"It is incredibly important that whoever comes in to do thisinvestigation is somebody who can be seen to be absolutelypolitically impartial," Mark Garnier, a legislator belonging tothe ruling Conservative party and a member of the selectcommittee, said.
Separately, Britain's accounting watchdog said it wasscrutinising financial reports from the bank, though it has notyet launched a formal investigation.
The failure of British regulators to raise concerns aboutFlowers' lack of experience has stunned the public, especiallygiven Flowers admitted this month he only spent four yearsworking in banking straight after school and never completedexams to become a banker.
Bewildering members of the select committee when he wasquestioned by them on Nov. 6, Flowers said Co-op bank had assetsof 3 billion pounds when the true figure was 47 billion.
"I have some experience, but I would judge that thatexperience was largely out of date in relation to the needs ofcontemporary banking," Flowers said.
Lloyds (LLOY)
