Co-op hopes to appease watchdog with £219m sale

Co-operative Banking Group has agreed to sell its fund management and insurance businesses in a £219 million deal that is expected to boost its chances of securing more than 630 Lloyds branches.

The bank is offloading its Co-operative Insurance Society (CIS) and asset management divisions to fellow mutual Royal London, owner of Edinburgh-based pensions firm Scottish Life.

Chief executive Barry Tootell said: “As member-owned organisations, we have much in common with Royal London, which has a track record of delivering strong performance for policyholders and a real focus on delivering good customer service.

“We believe this is the best outcome for our policyholders and members.”

The proposed takeover comes amid reports that the Financial Services Authority (FSA) is concerned over the capital strength of the Co-op, which last year agreed to buy 632 branches from Lloyds Banking Group for £750m. European regulators ordered Lloyds to sell the branches in return for the state aid it received in 2008, and the group said earlier this month that it was “absolutely committed” to the Co-op sale, although the option of a stock market flotation remained on the table.

The Co-op is expected to give a progress report on the Lloyds transaction when it announces its annual results tomorrow.

A spokesman said the firm had reached an initial agreement to sell its CIS and fund management arms to Royal London in July 2011 – before it struck the deal with Lloyds – because it wanted to invest in its banking business, and was pleased to have found a buyer that is also owned by its members, rather than shareholders.

Royal London is paying £39m up front, with the remaining £180m due once the CIS funds are transferred over.

When the sale is completed, the mutual will leapfrog Resolution and Lloyds to become the UK’s fifth-largest with-profits fund manager, and chief executive Phil Loney is understood to be keen to seal further deals in this arena.

He said: “This acquisition will be both a great opportunity and a perfect fit for our business. It brings together two like-minded organisations and builds on our experience of similar transactions and our strong customer-centric focus.

“The increased scale of our asset management operations and introduction of over two million new customers will enable us to develop further efficiencies to support our profitability in the coming years.”

Around 170 Manchester-based staff will transfer to Royal London, which also owns insurance firms Bright Grey and Scottish Provident. The mutual, which will publish its annual results on 28 March, said its funds under management will swell from about £50 billion to £70bn, while its customer base will jump from four million to six million.

The acquisition is Royal London’s largest since it absorbed Royal Liver in 2011. That deal led to 110 job losses as work was transferred from Liverpool to Wilmslow in Cheshire, but a spokesman said it was too early to tell whether there would be any cuts among the 170 Co-op staff.

CIS, formed in 1867, has two million life and savings customers, while Co-operative Asset Management looks after about £20bn in assets for pension funds, life companies and other institutional clients.

The deal is subject to clearance from the FSA and the approval of Royal London members at an extraordinary general meeting, due to be held by the middle of the year.