<
div>
Close Brothers, a leading UK car loan provider, has experienced a significant setback, posting a £103m loss due to the ongoing repercussions of the motor finance commission scandal. This controversy is expected to cost the company up to £200m over the year.
As part of the fallout, Close Brothers has decided against paying a dividend once again. This decision, alongside the financial revelations, caused its share price to decrease by 17%.
In its six-month financial report ending January 31st, the lender highlighted an operating loss before tax of £103.8m. This sharp contrast to the previous year’s profit of £87m can be attributed to the £165m set aside for consumer compensation, addressing complaints, and covering legal expenses related to motor finance commissions.
Close Brothers, alongside Lloyds Banking Group, is at the center of a scandal surrounding how car loans were sold to customers. The scandal’s total cost for Close Brothers is estimated to reach £200m this year, which includes a £10m fee for professional and advisory services, £22m for handling complaints and other expenses, and the addition of a £165m provision.
The motor finance commissions scandal, involving “secret” payments known as discretionary commission arrangements (DCAs), has caused a significant increase in inquiries and complaints since the Financial Conduct Authority’s (FCA) review started in January last year. DCAs, banned by the FCA in 2021, were seen as an incentive for dealers to impose higher interest rates on car loans.
In October 2023, consumers won a landmark case against FirstRand Bank and Close Brothers, which ruled that lenders had unlawfully paid commissions to car dealers without the borrowers’ knowledge. This ruling has potentially significant financial implications for lenders, including Santander UK, Barclays, and the finance arms of BMW and Ford, with some estimates suggesting compensation could total £44bn, an amount nearly equal to the £50bn PPI scandal.
The supreme court has granted permission for Close Brothers and FirstRand to appeal the ruling. Close Brothers stated that all cases would be heard during the scheduled April 1-3 hearing. The FCA plans to announce within six weeks of the supreme court’s decision whether it will propose a compensation scheme for customers and the details of how it will proceed.
Close Brothers also announced it would not pay an interim dividend for the first half of the year, keeping capital that it had previously intended to distribute. This decision aims to maintain a strong financial position in light of the ongoing legal and regulatory challenges.
The lender’s capital ratio decreased from 12.8% to 12.2%, primarily due to the £165m provision for consumer compensation. However, its CEO, Mike Morgan, emphasized the “robust underlying profit in the banking business” and noted the significant progress made in improving its capital position. He highlighted a pro-forma capital ratio of 13.4% on January 31st, following the sale of the asset management arm. Additionally, the company is increasing measures to reduce operational costs, aiming to save £25m by the end of the year, up from the previously planned £20m.
