Comment: Sale of Swip has more drama than a soap

Bill Jamieson
Bill Jamieson
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‘SCOTTISH Widows in sale talks” has been one of the longest-running stories in the financial sector: EastEnders, but without as yet the dramatic drumbeat theme tune.

Last week brought news that Aberdeen Asset Management, headed by the indefatigable Martin Gilbert, is in talks to buy part of the Edinburgh-based insurance and pensions giant from the Lloyds Banking Group.

Scottish Widows Investment Partnership (Swip) has funds under management of £145 billion, Aberdeen Asset Management looks after £209.6bn, so if the talks bear fruit it would create one of Europe’s biggest fund-management companies.

It would also mark the final collapse of bancassurance: the belief that a partnership between a bank and an insurance firm would yield huge and compelling benefits for the companies and their customers.

It is well worth exploring why the Lloyds Bank-Scottish Widows tie-up, one of the biggest ventures in bancassurance, did not work out in the manner expected. Far from being a deal cemented in business logic and laden with the low-hanging juicy fruits of synergetic benefits, it yielded little and its break-up has long been mooted. Why did it fail to convince?

It could not be blamed on lack of pedigree. When the tie-up was unveiled, Lloyds TSB was one of the UK’s most successful and conservatively-run banks. Scottish Widows, Scotland’s first mutual life office, had grown since 1815 to become, according to Ipsos research, the UK’s most trusted life, pensions and investment provider.

It was in 1999 – after a fevered period that saw Scotland’s distinguished mutual life offices shamelessly abandoned in the Gadarene rush for Plc riches – that Scottish Widows agreed a sale to Lloyds TSB for £7bn, with a slice of the proceeds used to enhance terminal bonuses.

The parents of this partnership can fairly argue that it has done well enough and the fact that it has endured for 14 years can be cited as evidence to rebut charges of failure.

But the results are a far cry from expectations at the time and even if the “opportunity cost” – what Scottish Widows might have achieved had it maintained its independence – cannot be calculated with any precision, there are many in the post-crash world who would have much preferred to have their savings in a mutual institution.

The merger did not work either as a compelling proposition for savers or as a rewarding and cost-effective distribution channel. Lloyds had no pedigree as an ­investment house, having run for years a trio of minor and mediocre unit trusts. To be fair, other banks have found it difficult to build credibility in long-term savings management. Culture clashes made it ­difficult to retain top-level investment managers and often resulted in management exits and defections. So it proved at Scottish Widows, where its revolving doors seemed to be in perpetual motion as fund managers came and went.

As for the benefits of having Scottish Widows products sold through the fantastic distribution channel of Lloyds TSB high street branches – well, financial regulation compelled branch managers to offer consumers a choice of insurance and investment providers. Indeed, a culture grew up that, if anything, discriminated against the in-house product.

I always remember many years ago, when applying for a top-up mortgage from my bank, the branch manager spinning a large desk rolodex to choose the life company with which I could have an endowment loan. After a few minutes of form-filling we adjourned to the pub for a liquid lunch. That was how much business was done in those days. How much worse it is for consumers now – the rolodex still spins but we don’t get the lunch.

Bank branches as a distribution channel proved a chimera: they did not work nearly as effectively as first assumed and bank branch staff could never seriously present themselves as investment advisers without extensive and continuous training. The arrangement just did not work to the benefit or the standing of Scottish Widows.

However, Scottish Widows has been successful in attracting group and institutional business – management of company and local authority pension funds – and this will be attractive to Aberdeen.

Any takeover, if agreed, would be at a price around £500 million and likely to be funded through an issue of Aberdeen shares, with Lloyds Banking Group retaining a 10 per cent stake.

Aberdeen said its dividend policy would not be affected – a vital point for shareholders. The shares rallied strongly on ­reports of the Swip talks last week and – at 459.1p – yield 2.9 per cent.

Ten years on from the split capital investment trust debacle, Aberdeen has transformed itself into a global, highly-credible fund management business, with some excellent investment performances, particular in the Far East and in the smaller companies sectors. A key question that an acquisition of Swip will pose is over the commitment of management time in achieving the benefits and efficiencies that such a deal would offer.