(Bloomberg) -- Lloyds Banking Group Plc and Standard Life Aberdeen Plc are set to settle a dispute over the bank’s decision to pull its 109 billion-pound ($136 billion) contract from the asset manager.
Lloyds would pay Standard Life 140 million pounds in cash as compensation and leave 30 billion pounds of the total under their management for three years, according to a person familiar with the matter, who asked not to be identified because the talks are private. The settlement is expected to be completed later this week.
In a sign of how important the assets were to the manager, Standard Life fought hard to keep the contract and challenged the legality of Lloyds’s decision to pull the funds. An arbitration panel ruled in March in the asset manager’s favor, but Lloyds maintained at the time that it still planned to move the funds.
“It’s slightly surprising that the proposed settlement leaves Standard Life Aberdeen hanging onto some assets,” said David McCann, analyst at Numis Securities Ltd. “But this still isn’t a good outcome. They lost the majority of the money.”
The asset management industry has been battling with fee compression and outflows for years as investors shift into cheaper funds that track indexes. The amount of assets in passive funds are poised to exceed actively managed ones by 2021, according to estimates from Moody’s Investors Service. The shift has put the pressure on many asset managers, with scale viewed as one of the few options for survival.
Standard Life Aberdeen’s own merger was intended to create a heavyweight capable of competing with low-fee passive money managers that have grabbed an increasing share of the market in recent years. But the merged company has suffered more than 70 billion pounds of outflows since its 2017 tie-up.
The settlement is “a respite but no solution to the challenge of fund withdrawals,” Charles Graham, a senior analyst for Bloomberg Intelligence, wrote in a note on Tuesday. “The assets in dispute were expected to generate more than 100 million pounds of annual revenue during the mandate.”
The arrangement between the two companies was a legacy of Aberdeen’s acquisition of Scottish Widows Investment Partnership from Lloyds in 2014. The lender, which said the Standard Life merger created a competitor to its own insurance unit that breached the contract, announced last year that it was ending the arrangement and looking for alternative managers.
Standard Life Aberdeen has plummeted 25% since Lloyds said in February 2018 it would pull its Scottish Widows mandate. The shares rose 2% in London trading at 9:54 a.m. Lloyd’s shares increased 0.3%.
Schroders earlier won the mandate to manage about 80 billion pounds of the total, with the remainder going to BlackRock, the world’s largest asset manager. Representatives for BlackRock weren’t immediately available to comment. A spokeswoman for Schroders declined to comment on the settlement terms.
Although a tribunal ruled in favor of Standard Life Aberdeen, saying Lloyds didn’t have the right to end the deal, few analysts expected Lloyd’s to stick with the Scottish asset manager.
Standard Life is reporting first-half earnings on Aug. 7, the first since Keith Skeoch took over as sole chief executive officer in March. The company scrapped its dual-leadership structure and bumped Martin Gilbert down to vice chairman. The move was intended to streamline reporting lines and facilitate the next stages of the merger, which is 75% complete, the company said in a statement in March.
Sky News reported the news earlier.
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