Close Brothers earmarks £400m for FCA’s motor finance probe

Close Brothers Group has unveiled measures to save around £400m to improve its financial position amid a regulatory review of car finance.

The merchant banking firm revealed last month it would scrap dividends for the current financial year and not resume payments until the Financial Conduct Authority’s investigation into car finance lenders is complete .

FTSE 250-listed Close Brothers also intends to “optimize” its risk-weighted assets through “selective” loan book growth and “significant” asset risk transfer, as well as new cost reduction measures.

Close Brothers estimates the proposal will boost its Common Equity Tier 1 capital ratio – a common measure of a bank’s financial strength – by £400 million by the end of the 2025 financial year.

The FCA launched an investigation into car lenders in January following a rise in complaints from motorists about discretionary commission arrangements.

Until they were banned in 2021, DCAs allowed car dealers and brokers to choose the interest rate on a car buyer’s financing contract, incentivizing them to charge their customers higher rates.

Close Brothers has not recognized any provisions related to the review, but the Royal Bank of Canada recently estimated the company could pay around £200 million in overall compensation.

Adrian Sainsbury, chief executive of Close Brothers, said it “would be premature to predict the outcome or estimate the potential impact on the group”.

He added: “The board, however, recognizes the paramount importance of preparing the group for a range of outcomes from this review. As part of this, the Board of Directors is taking a number of decisive steps to significantly strengthen our capital position.

RBC predicts the car finance industry will need to spend between £6bn and £16bn repaying customers, while Jefferies estimates this could be as high as £13bn.

Analysts said the FCA investigation could resemble the Payment Insurance scandal, which gave rise to the largest consumer redress scheme in UK history.

Close Brothers also announced its half-year results on Tuesday, which showed its loan book grew by 4 per cent to £9.9 billion in the six months to January.

Its adjusted operating profits also jumped to £94.4 million, from £12.6 million in the same period a year earlier, when the company suffered a large impairment charge linked to losses in specialist in legal finance Novitas.

However, the company revealed that its market making division, Winterflood, remained affected by subdued retail trading activity.

Close Brothers Group shares were 6.9 per cent higher at 357.4p just after midday on Tuesday, although they have fallen by more than half since the FCA opened its review.