Close Brothers to Sell Wealth Management Unit to Oaktree for £200 Million Amid Motor Finance Probe

Close Brothers Group plc has agreed to sell its wealth management division to Oaktree Capital Management, L.P., in a deal valued as much as £200 million, the company announced in a press release on Thursday (19 September 2024). The sale, expected to be finalised early next year, comes as the lender seeks to strengthen its financial position ahead of the results of the Financial Conduct Authority's regulatory investigation into the motor finance industry.

Established in May 1991, Close Brothers Asset Management (CBAM) has built its brand for over 30 years through strategic acquisitions, establishing a strong regional presence and attracting top talents in the wealth management industry.

The £200-million equity value of the deal represents 27 times CBAM’s 2024 statutory operating profit after tax, and includes £28 million in contingent deferred preference shares, Close Brothers disclosed.

The FTSE 250 bank also said that it intends to reserve all upfront cash proceeds from the sale amounting to around £172 million, which comprise the following:

• A cash of around £146 million that Oaktree will pay to Close Brothers; and
• A dividend of around £26 million that CBAM will pay to Close Brothers.

Close Brothers related that it would need to keep investing to help the wealth management unit to grow faster, which include buying other companies to remain competitive as the market undergoes consolidation.

The Group further explained that selling CBAM at this time “allows Close Brothers to realise a competitive valuation” and boost its capital position while focusing on its “core lending business.”

The sale is part of the Group’s plan, launched in March, to bolster its capital position by around £400m to prepare for potential Close Brothers finance claim compensation costs associated with the financial watchdog’s review into historic mis-sold car loans.

The purchase deal is expected to boost Close Brother’s Common Equity Tier 1 (CET1) capital ratio by around 100 basis points, the bank’s chairman Mike Biggs said. He further stated that this marks “significant progress” in achieving the plan to strengthen the company’s capital. 

As at 31 July 2024, CBAM’s gross assets were valued at £192.0 million. In the 2024 financial year, the profit after tax from the assets involved in the purchase deal was £7.4 million.

Federico Alvarez-Demalde, managing director at Oaktree Capital, said that the wealth manager is “delighted” to partner with Close Brothers in this purchase deal. He further stated that they have watched CBAM grow for many years and “hold the franchise in high regard.”

Moreover, Oaktree Capital intends to “preserve and nurture” CBAM’s reputation for its “client centric culture,” according to Alvarez-Demalde.

Oaktree Capital operates as a global investment manager focusing on alternative investments. As of 30 June 2024, it has $193 billion in assets under management.

FCA’s Review into Historical Motor Finance Practices

The FCA announced in January its intention to investigate the motor finance deals that were entered into by car buyers with finance brokers between April 2007 and January 2021, which essentially covers the duration from when the Financial Ombudsman Service (FOS) were assigned to handle consumer credit complaints, to when discretionary commissions were banned.

The watchdog’s investigation stems from growing concerns that discretionary commission deals have encouraged dealers and lenders to raise interest rates without fully disclosing this information to customers, whether intentionally or not.

In response, Close Brothers cancelled paying out dividends on its ordinary shares for the current financial year to help strengthen its capital and support its business franchise in preparation of the potential percussions resulting from the review.

The Group may pay out dividends again starting in 2025, when the consumer watchdog completes its review, and after “any financial consequences” that could affect the lender have been assessed.

Adrian Sainsbury, Close Brothers Chief Executive, said that the regulator’s review into historical car finance commission deals “introduced significant uncertainty,” further stating that the Group makes it their top priority to protect their “valuable franchise” and to further boost their capital position amid the industry-wide investigation.

Stock analysts said that FCA’s review could potentially hit lenders in the UK’s motor finance industry with compensation costs running from £13 billion to £16 billion.

Analysts at RBC predict that Close Brothers will be hit with almost £200 million in compensation costs related to the watchdog’s investigation.

Close Brothers is a lender assessed by analysts to have the largest relative impact regarding the industry-wide investigation, considering that it’s a leading finance company with more than 30 years of experience in providing vehicle finance.

Moreover, motor finance accounts for a fifth, or around 20%, of Close Brothers Group’s total loan book, which amounted to £10.1 billion, as presented in their fiscal year ended 31 July 2024 results. Of this total, £2.0 billion is specifically attributed to motor finance.

Despite not yet setting aside a provision for the potential redress costs related to auto loan investigation, Close Brothers reported in its annual results that it has already incurred £6.9 million in the current financial year for “complaints handling and other operational costs associated with the FCA’s review.” This affected the Group’s pre-tax profits (excluding Novitas), which dropped to £142.0 million this year from £218.6 million last year, reflecting a 27% year-on-year change.

Close Brothers also estimated these costs to be in the £10-15 million range for the next year.

On 30 July 2024, the FCA announced that it would postpone its update on the status of its investigation to May next year, citing struggles in gathering relevant and timely data from companies.