When Two Friends Fall Out Over a Mere $145 Billion

(Bloomberg Opinion) -- Lloyds Banking Group Plc is on track to launch its wealth management joint venture with Schroders Plc in June. But after the lender lost an arbitration case with Standard Life Aberdeen Plc, the exercise will end up costing more than anticipated.

About a year ago, Lloyds announced it was pulling 109 billion pounds ($145 billion) of assets that SLA managed on behalf of Lloyds’s Scottish Widows unit, saying the 2017 merger of Standard Life and Aberdeen created a “material” competitor to the lender’s own insurance business. SLA cried foul and called in its lawyers; on Tuesday, it declared victory in the dispute.

With an average fee margin of about 11 basis points, the mandate is hardly a big earner for SLA. But with assets under management shrinking to 551.5 billion pounds last year from 608.1 billion pounds at the end of 2017, the prospect of a further 100 billion pounds walking out of the door was clearly unpalatable to the Scottish money manager.

Lloyds could leave the contract running until its scheduled expiry in three years’ time. But it has pledged to hand 80 billion pounds of the disputed assets over to Schroders as part of the pair’s plan to turn their mooted wealth management venture into one of the top three U.K. financial planning businesses within five years. The balance of the funds is pledged to BlackRock Inc.

So a settlement is clearly needed that allows both sides to walk away from the agreement gracefully. SLA could expect to earn about 110 million pounds in annual revenue from the mandate. It’s worth it to Lloyds to compensate its erstwhile partner for that lost income as well as negotiating damages for taking the business away, rather than risk seeing the start of its wealth management adventure with Schroders spoiled by the adjudicator’s verdict.

 “It’s always difficult when friends fall out,” was how Martin Gilbert, the then co-chief executive of SLA, described the legal tussle in May. For the sake of maintaining harmony at the start of its relationship with Schroders, Lloyds should pay to break the terms of its contract with SLA -- and get the negotiations done and dusted as soon as possible.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."

©2019 Bloomberg L.P.