Close Brothers Group plc's share price plunged more than 21% on Thursday after the company announced it will cancel dividend payouts on its ordinary shares for the current financial year. The decision comes as the firm braces for potential compensation costs related to the Financial Conduct Authority's ongoing motor finance review.

The Board of Close Brothers will decide whether to pay dividends again from 2025 and onwards after the FCA completes its review and “any financial consequences for the group” have been determined, the Board disclosed in an unscheduled trading update released yesterday.

Shares of Close Brothers dropped from £392 to £308.40 yesterday, extending a sharp decline of more than 61% since last month’s announcement of the FCA’s review into historic claims of unfair costs tied to discretionary motor finance commissions. The financial watchdog also said it will ensure that consumers receive compensation if the investigation uncovers widespread misconduct.

Furthermore, the price of Close Brothers shares has been at a record low this week.

FCA to Look Into 2007-2021 Cases

The FCA has been conducting an investigation into discretionary commission arrangements in the motor finance sector for years, as these schemes have prompted brokers and car dealers to increase customers' interest rates to secure higher payments.

Last month, the financial watchdog confirmed it will investigate finance deals made between April 2007 and January 2021. This period spans from when the Financial Ombudsman Service (FOS) gained jurisdiction over consumer credit complaints to when discretionary commissions were abolished.

Close Brothers Motor Finance, the group’s independent vehicle finance company, was established in 1988, and has been serving the motor industry for over 30 years. 

Motor finance accounts for 20%, or a fifth, of Close Brothers Group’s £9.5 billion total loan book. The FTSE250-listed company reported a £1.9 billion motor finance loan book in its Annual Report for the year ended 31 July 2023.

The Board expressed that there is “significant uncertainty” regarding the results of FCA’s review, and the potential financial impact for the company from the investigation “cannot be reliably estimated” as of this time. However, it sees the need to prepare for “a range of possible outcomes” and said it will continue to maintain its “long-standing priority” of ensuring a strong balance sheet and observing prudence in managing financial resources.

The Board also explained that it has concluded that it is “currently not required or appropriate” to include a provision in its Half-Year 2024 results related to the FCA’s investigation based on relevant accounting standards.

The Board disclosed that it aims to further strengthen its capital and support its customers and business franchise. The decision to cancel paying dividends this year is in line with this goal.

Moreover, the Board highlighted that its business “continues to perform well” and expressed confidence in the strength of its business franchise. Specifically, its Banking division brought in £112 million of adjusted operating profit (AOP) for the six months ended 31 January 2024.

Projected £200m in Compensation Payments vs. Close Brothers

Auto lenders in the UK are expected to face as much as £16 billion in compensation payouts after the FCA confirmed its crackdown on historic commission deals that go as far as 2007, according to analysts at investment bank RBC last month. This estimate is an increase from RBC’s £8 billion projection last week, back when the financial watchdog was just announcing its intention to review the issue. 

On the other hand, Jefferies estimates that the industry could be facing around £13 billion, an increase from its previous forecast of £4 billion.

Close Brothers is seen to be the firm with the largest relative impact on this matter, with an expected compensation payout against it to be almost £200 million, an estimate that has almost doubled from RBC’s previous analysis.

RBC analysts have also estimated the potential compensation payout to be £2 billion, an increase from its previous estimate of £1.1 billion, for the parent of Black Horse, the UK’s largest auto lender. Jeffries, on the other hand, forecasted £1.8 billion.

Barclays Partner Finance could be hit with as much as £250 million. It has been offering motor finance from 2010 to 2019.

Santander UK is expected to deal with compensation payouts amounting to £850 million.