Brussels orders Royal Bank of Scotland to sell insurance arm as price of state aidWritten by: Guðmundur Jónsson on 30th October 2009
 
European commission demands Royal Bank of Scotland sell Direct Line, Churchill and Green Flag insurance businesses Royal Bank of Scotland will be forced to sell the insurance businesses Direct Line, Churchill and Green Flag as part of a package of measures to reduce its balance sheet by 40%, it emerged tonight. The European Union’s competition commissioner, Neelie Kroes, has focused on RBS shedding its insurance division, while the Treasury wants the bank to withdraw from much of the wholesale banking businesses that triggered the bank’s near collapse. Sources close to the negotiations said the EU wanted a “pound of flesh” in return for government support. A deal is expected to be finalised early next week after a flurry of negotiations between the bank, Treasury officials and EU staff in Brussels. An announcement will be combined with a resolution of discussions over state aid for Lloyds Banking Group, which has already indicated that the EU wants a limited fire-sale of businesses that will leave the bank largely untouched. Ministers have supported the demand that RBS sell its insurance arm. The chancellor, Alistair Darling, wants to increase competition by splitting off profitable businesses and reduce the risks that remain from owning a bank that is “too big to fail”. The former RBS boss Sir Fred Goodwin attempted a sale of Direct Line and Churchill in the spring of 2008 after the bank first hit trouble. He held an auction for the business, which is famous for its red phone on wheels, but pulled out after it failed to generate sufficient interest. The bank wanted about £5bn for the two units but within weeks of advertising the sale, Bear Stearns collapsed and the credit crunch entered a second phase that culminated with the bankruptcy of Lehman Brothers. Last week the Dutch bank ING was forced to sell its life insurance business for €7bn (£6.3bn) as the price of continued government support. RBS has already sold a $2.3bn stake in Bank of China that it bought as part of a spending spree by Goodwin and is due to sell further businesses acquired as part of its ill-fated purchase of ABN Amro. The government expects the bank to sell other overseas businesses and focus its efforts on generating profits in the UK. A Treasury spokesman said: “We’ve always been clear that RBS would need to be scaled back significantly both for the benefit of the taxpayer and the consumer. “The taxpayer cannot be expected to still be on the hook for the exotic deals that brought down the bank, while the consumer needs to see greater choice in the marketplace for financial products.” RBS was rescued with £20bn of government funds and is due to receive support worth another £20bn under the government’s Asset Protection Scheme. A deal on the APS has yet to be hammered out and may take several more weeks to reach a conclusion. Lloyds Banking Group was also scheduled to take part in the APS, but is expected to announce a deal with shareholders to raise private funds to cover £260bn of poorly performing loans.
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