Close Brothers Reveals £400-Million Plan Amid FCA Motor Finance Probe

Close Brothers Group plc laid out its plans to boost its capital position with a total of around £400 million by the end of the 2025 financial year, the Group disclosed on Tuesday (19 March 2024) in a statement announcing its Half Year Results for the Six Months Ended 31 January 2024. The plan is in preparation for the potential impact of the Financial Conduct Authority’s review of historical motor finance deals.

The £400-million plan included Close Brothers’ scrapping of dividend payouts on its ordinary shares, which the Group announced last month, in response to the FCA’s announcement that it will look into the discretionary commission arrangements (DCAs) in motor finance deals which were entered into from April 2007 and January 2021.

The Group’s performance during the half-year period showed “continued loan book growth” across their businesses in Banking at “strong margins, and an improved credit performance,” according to Chief Executive Adrian Sainsbury.

Close Brothers has not recorded any provision at this time relevant to the FCA review, as the Board has concluded that there is "no legal or constructive obligation“ within the half-year period.

Speaking about FCA’s investigation, Sainsbury commented that it would be “premature” to predict the outcome or estimate its possible effect on Close Brothers. However, the Board recognises the “paramount importance” of preparing for “a range of outcomes” from the review of the financial watchdog.

Sainsbury also clarified that the £400-million plan is being carried out while continuing to provide “excellent service” to their customers and protect their “valuable franchise.”

The £400-Million Plan

The Board explained that in addition to its decision to scrap dividend payments this year, it has also identified a combination of actions that could boost the company’s Common Equity Tier 1 (CET1) capital by around £200 million. This strategy includes “significant risk transfer” of assets as well as “selective loan book growth to optimise risk weighted assets” complemented by other cost-reducing measures.

The Board further explained that it continues to assess a variety of potential management actions which could boost the company’s available CET1 capital further by another £100 million.

The remaining £100 million, if required, is expected to come from the retention of earnings as the business continues to “organically generate” capital through 2025, according to the Board.

Scrapping of Dividend Payouts

Last month, Close Brothers decided to cancel its dividend payout on its ordinary shares as part of its efforts to boost capital strength to prepare for the outcome of FCA’s investigation into historical discretionary commission deals.

Sainsbury related that with Close Brothers having a long-term progressive dividend track record, the decision to forgo paying dividends for this year “was not made lightly,” further stating that it reflects their “proactive and prudent” strategy to manage their financial resources.

Prior to the scrapping for dividend payouts, the price of Close Brothers shares have already declined sharply by more than 61% since the January announcement that FCA will review historical motor finance deals.

Close Brothers shares dropped to at least 21% in 24 hours after it announced that they’ll forgo dividend payments this year. 

The Board further announced that it will decide whether to reinstate the payments beginning 2025 after the FCA completes its investigation and after any financial consequences for the company have been assessed.

Close Brothers’ Exposure

Earlier this year, the FCA announced that it will investigate discretionary commission models in motor finance deals entered into between April 2007 and January 2021. The Authority intended to provide an update on this matter by September 2024.

FCA’s action has caused “significant uncertainty” for the industry and Close Brothers when it comes to potential remediation action related to the review, Sainsbury related.

The Group’s unit, Close Brothers Motor Finance (CBMF), has been in the motor finance market for several years, during which they have sought to comply with the relevant regulatory requirements, according to Sainsbury, further stating that there are “a range of possible outcomes,” and thus, the Group are taking actions to further strengthen their capital position while prioritising their franchise.

The Group acknowledges that one potential outcome of the FCA’s investigation could be an industry-wide consumer redress scheme. However, the Group also understands that the estimated impact of such a scheme is “highly dependent” on several factors including the DCA models involved, the time period covered, and the appropriate reference commission rates set.

As for the DCA models as a factor for estimating the impact of a redress scheme, the Group highlighted that it has implemented several types of commission models during the period covered by the FCA’s review.

The Group reiterates that at this “early stage,” the potential financial impact for Close Brothers cannot be “reliably estimated.”

Car Finance Claims vs. Close Brothers

Close Brothers also disclosed that it is currently facing a number of car finance claims in courts concerning past commission arrangements with intermediaries on its motor finance products.

As of February 29, 2024, most cases decided in County Court have ruled in favour of Close Brothers, finding no evidence of customer harm and, therefore, no compensation requirement. While only a few cases have reached adjudication so far, additional complaints have been referred to the Financial Ombudsman Service (FOS) for review.

As of this time, the FOS has not issued any final decisions upholding complaints or motor finance claims against Close Brothers.

According to the Group, it has experienced an increase in related complaints following the FCA’s announcement of a review into past motor finance commission arrangements,

The Group further assured that it is closely monitoring how this increase impacts its current complaint-handling processes and is implementing established procedures to ensure adequate resources are in place to respond effectively.

Industry Analysts’ Estimates

Close Brothers is expected to be hit with almost £200 million in compensation costs related to the potential outcome of the FCA’s investigation, according to analysts at investment bank RBC. The Company is seen to be the firm with the largest relative impact on this issue.

Firms in the motor finance industry, in general, are expected to face between £13 billion and £16 billion in compensation payouts, according to estimates from various analysts including those at Jefferies and RBC.

Lloyds Banking Group, parent company of Black Horse, is anticipated to be slapped with compensation payout ranging from £1.8 billion to £2 billion. However, Lloyds has set a £450-million provision related to the FCA’s probe, as disclosed during their presentation of their fourth-quarter and full-year-2023 results last month. Its Financial Chief explained that the £450 million is based on their assessment of a variety of scenarios.

Other analysts’ estimates on compensation payouts include £250 million against Barclays Partner Finance, and £850 million against Santander UK.