Lloyds faces £300m bill after losing £100bn contract fight

It has felt at times as if little has gone right for Standard Life and Aberdeen Asset Management since they announced in March 2017 that they were merging.

There was much carping and grumbling among shareholders at the time about whether this was a deal aimed at creating a company capable of enjoying strong growth or merely a defensive move.

There was also unhappiness that the enlarged business would have joint chief executives: Keith Skeoch from Standard Life and Martin Gilbert from Aberdeen.

Those concerns have been borne out since the merger was consummated in August 2017. The combined Standard Life Aberdeen (SLA) suffered a net outflow of £32.9bn for 2017 as a whole, as investors pulled their money out, with a further £40.9bn going out of the door in 2018.

Much of that was from the flagship GARS fund, from the Standard Life side of the business, with profits falling as a result.

That has obliged the company - which still has 1.2 million retail shareholders as a legacy of Standard Life's days as a mutual - to keep cutting costs and jobs.

Nor did a decision, announced last week, to drop the co-chief executive arrangement satisfy the critics.

Mr Gilbert, who founded Aberdeen in 1983, has become executive vice-chairman and head of the company's investment division, but will continue to be paid the same salary, which has aroused the ire of shareholders.

That is perhaps unsurprising given that shares of SLA have fallen from 407.75p on 14 August 2017, the day the merger was completed, to 266.15p as of Monday night.

The whole active fund management industry is under siege as growing numbers of investors move to 'passive' investments, such as passive funds and Exchange-Traded Funds (ETFs), which simply seek to replicate the performance of a stock index or a sector rather than outperform a benchmark.

Symbolic of the despair among some long-standing supporters was the decision last month of Mitsubishi UFJ Trust and Banking Corporation of Japan, previously the biggest single shareholder, to sell its 6% stake.

Today, though, brought the first unadulterated good news for the company - nicknamed 'Staberdeen' after the merger - in quite some time.

SLA emerged victorious from a legal battle with Lloyds Banking Group that flared up directly as a consequence of the merger.

Lloyds previously had a contract with Aberdeen to manage £109bn worth of assets, dating back to Aberdeen's acquisition of Scottish Widows Investment Partnership from Lloyds in 2014, which was worth around £129m in fee income to Aberdeen each year.

However, in February last year, Lloyds pulled the contract - which was due to terminate in March 2022 - on the grounds that Standard Life was a "material" competitor.

Lloyds also sold its 3.3% stake in SLA.

The matter was referred to an arbitration tribunal from which, today, SLA emerged victorious.

What appears to have clinched its victory was SLA's decision, announced just a week after Lloyds said it was pulling its money, to sell the old Standard Life insurance business to Phoenix Group, the consolidator of 'closed' life insurance assets, for £3.24bn.

SLA acquired a 20% stake in Phoenix, which is shortly to join the FTSE 100, as part of the deal but the sale, crucially, left SLA as a pure asset manager with no businesses in obvious competition with Lloyds.

The verdict has big implications for both companies.

For SLA, it means compensation for the loss of business, which according to some analysts could be worth more than £300m.

Alternatively, Lloyds may decide to leave the money with SLA until the day on which the contract is due to terminate, with the value of the assets under management still around £100bn as at the end of 2018.

But that might create problems for Lloyds because it has already announced that the mandate to manage the money will be split between Blackrock and Schroders.

Deciding that the pair might not now start to run that money until 2022 would be embarrassing, not least because Lloyds has announced a joint venture with Schroders that it hopes will become the third-largest wealth management business in the UK within three years, an ambition that would be scuppered should the Black Horse bank now keep those assets with SLA for a while longer.

There is a case for saying neither side emerges with a great deal of credit from this saga.

The easier option for Lloyds would simply have been to wait for the contract to expire until 2022 rather than announce it was yanking out its money in a way that, with the benefit of hindsight, looks to have been precipitous and hot-headed.

This ruling is either going to cost it money or hinder its ambitions in wealth management.

SLA, meanwhile, has won the legal battle but it is never a good look for a company to be suing its own customers - even when it has the moral high ground. It may make some potential customers wary of doing business with SLA in the future.

Still, after the 18 months or so that SLA has had, it may just be happy to take that risk. A win, after all, is a win.