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Friday, September 3, 1999 Published at 20:18 GMT 21:18 UK

Business: The Company File

Banks shop for life companies

The Legal &General/Natwest talks are the tip of the iceberg

UK banks are poised to go on a shopping spree for life assurance companies.

The aim for banks is to become all-round providers of financial services, analysts say, and news that NatWest wants to buy Legal & General is just the tip of the iceberg.

The logic for banks is clear: buying an insurance company gives them a foothold in a growing market that they have thus far failed to succeed in on their own.

The long-term savings market is seen as the fastest growing area of financial services.

Stakeholder changes

Competition in long -term savings has become more intense since the government announced plans for a new low-cost pension, the stakeholder pension.To offset this potential loss, insurance companies and banks are banding together to achieve economies of scale.

Borne out of a need to cater for an aging population, the stakeholder pension aims to encourage people to provide for themselves by offering cheaper pensions.

Some analysts estimate that the margin of 5% - 6% on pensions that banks and insurers currently enjoy will fall to 1%. Low interest rates are also deterring customers from putting money in high-street deposit accounts.

"What a lot of people are doing is shifting savings into products offered by life companies. A lot of banks have tried to compete in this area and have not been very successful," one analyst said.

The NatWest/Legal & General deal should generate new revenue for both of them as Legal & General products are pushed through the NatWest customer base.

The acquisition also rehabilitates NatWest in the eyes of the city, following the investment bank losses which led to the sale of NatWest Markets more than two years ago.

First off the block

[ image: Barclays: will they be next?]
Barclays: will they be next?
Lloyds TSB set the ball rolling earlier this year when it bought Scottish Widows. Question marks now hover over those banks that haven't yet declared an interest in a life assurance company.

As trade closed Friday, Barclays and Halifax were both tipped as potential buyers of Norwich Union and Prudential Corp.

Halifax, although it bought mutual insurer Clerical Medical in 1996, is still seen lacking critical mass in the life and pensions industry.

The UK market, where private pension provision is more advanced than elsewhere in Europe, is attractive to European insurers as well. France's AXA and Germany's Allianz are both eyeing the market.

One fear is that industry consolidation could lead to job cuts, but as one analyst pointed out, these mergers are about revenue generation, not cost savings.

"You have got banks lifting insurance companies, the two sectors neatly dovetail," he added.

A giant rip off?

News of the merger follows a report by the Consumers Association which slammed banks for ripping off their customers.

The report said banks offered poor value products that leave their customer out of pocket. If banks have more products on sale, will this not make matters worse?

"In the studies we have done, customers often fare very badly when they buy all their products from one institution," a spokesman for Which said. "It will create a situation where customers will be tempted to buy everything from savings plans through to pensions from one organisation."

With over 30,000 financial products currently on the market on the UK, it is easy to see how consumers could be overwhelmed and prefer to buy everything from one source, he added.

Adrian Graves from the National Association of Bank Customers said the move creates a justification to slow down and reverse closure of high street branches.

"Pensions are very much the type of product customers prefer to discuss face to face," he said.

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