- The FCA launched an investigation last month into the car finance industry
- Close Brothers could pay £200m in compensation related to investigation
Close Brothers has ruled out paying dividends and warned of “significant uncertainty” over the outcome of an investigation into the car finance industry.
Last month, the Financial Conduct Authority launched an investigation into the historical use of “discretionary commission arrangements” (DCAs) in what some analysts predict could resemble the payment protection insurance scandal.
Close Brothers, which operates Close Brothers Motor Finance, was the only major supplier to decline to comment on the investigation when approached by This is Money recently.
Forecasts suggest the FTSE 250 financial services group could face up to £200m in payouts, with the industry expecting total compensation of up to £16bn.
No reward: Close Brothers will not pay dividends due to “significant uncertainty” over the outcome of an investigation into the auto finance industry
Close Brothers Stock plummeted 17.3 per cent to £3.29 in early trading, meaning they have more than halved since the FCA began its investigation.
Historically, DCAs allowed auto dealers and brokers to choose the interest rate on a car buyer’s financing agreement, incentivizing them to charge customers higher rates.
They were banned three years ago, but many consumers have filed complaints with regulators alleging their request for compensation was unfairly rejected.
As a result, the FCA asked lenders to pause their response to complaints while it investigates the car finance sector.
Close Brothers told investors there was “significant uncertainty over the outcome of the FCA review, and that the timing, extent and magnitude of any potential financial impact on the group cannot be reliably estimated at this time.” .
Will the FCA’s car finance investigation lead to PPI-style payments?
A regulatory investigation into historic loan selling by the UK car finance industry could mirror the PPI scandal and lead to billions of pounds in compensation.
Some analysts fear the Financial Conduct Authority’s surprise review, launched last month, represents a “powder keg” threatening the future of the country’s auto finance sector.
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RBC Capital Markets estimates that Close Brothers could end up paying £200m in compensation related to the investigation, while Peel Hunt predicts a hit of £185m and Shore Capital predicts a payout of £150m.
Close Brothers has chosen not to distribute dividends to shareholders this year.
It will only consider restarting payments in 2025, once the review is completed.
The company said: ‘It is a long-standing priority of the group to maintain a strong balance sheet and a prudent approach to the management of its financial resources.
a solid balance sheet and a prudent approach in managing its financial resources.
“To that end, the board considers it prudent for the group to continue to strengthen its capital, while supporting our customers and our business franchise.”
Despite the fallout from the car finance review, the FTSE 250 business said it was still “performing well”.
The London-based company expects to report adjusted operating profits of around £112 million for the six months ended January.
It added that its asset management division achieved annualized net inflows of 9 percent, while its stockbroking arm Winterflood “remains well positioned for a recovery in investor confidence.”
Founded in 1878, Close Brothers is one of the UK’s leading commercial banking firms, with services ranging from wealth management to vehicle leasing, financing for small and medium-sized businesses and keg and cask leasing for brewers.