Air carrier Captain reported a Lithium battery was retrieved from cargo during preflight in order to avoid a Hazmat violation. A security inspection was completed and the flight departed late.

Narrative

As passengers were boarding; one husband asked his wife if she got the battery from the luggage. She said; no; and the passenger came forward to a flight attendant and admitted there was a lithium battery in his luggage in the cargo area. The flight attendant asked the gate personnel if they could retrieve the battery from the bag. Gate personnel indicated it was not their policy; a new policy; to do that. The gate agent said the passengers bag would have to be removed and sent back to baggage claim; forcing the passengers to miss their flight. My first officer; asked me if I minded if he could go retrieve the bag so the passenger could retrieve his battery. I looked in the FOM; and found nothing prohibiting this. My first officer went to the cargo bay; with several ground crew; watching; to include the head security agent. He retrieved the bag; brought it to the gateway; and the passenger was allowed to remove his battery in full view of my first officer; the purser and the gate agent. Shortly after; the head of security who had witnessed the first officer; remove the bag; but did not stop him; came to the cabin door and said a security incident had been committed; and all the passengers had to deplane for a security inspection. I called dispatch and the Chief Pilot; and told them of the situation. A security inspection was accomplished; and the flight departed one hour late.