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Close Brothers, one of the UK’s biggest providers of car loans, has slumped to a £103m loss as it deals with the fallout of the motor finance commission scandal, which it estimates will cost it a total of £200m this year.
The lender also scrapped its dividend again. Its shares plunged by 17% on the news.
The company reported an operating loss before tax of £103.8m for the six months to 31 January, compared with a profit of £87m a year earlier, after it set aside £165m for consumer payouts, complaints handling and legal costs in relation to motor finance commissions.
Close Brothers and Lloyds Banking Group are the two largest providers of motor finance and are at the centre of a scandal over how customers were sold car loans.
The total cost to Close Brothers of dealing with the mis-selling allegations will rise to £200m this year, the lender estimates, including professional and advisory fees of £10m, complaints handling and other costs of £22m, as well as the £165m provision.
It said that since the financial watchdog, the Financial Conduct Authority (FCA), announced its review of motor finance commissions in January last year, it had experienced a further increase in inquiries and complaints.
The FCA is investigating “secret” payments known as discretionary commission arrangements (DCAs) on car loans issued between 2007 and 2021.
Car dealerships and brokers had the power to set interest rates on car loans, and earn higher commission along the way. DCAs were banned by the FCA in 2021 because it was concerned that they were incentivising dealers to charge higher interest rates.
Consumers won a landmark case last October against FirstRand Bank and Close Brothers, after the court of appeal ruled it was unlawful for lenders to have paid a commission to car dealers without the borrowers’ knowledge.
Some analysts estimate that the scandal could cost lenders, which also include Santander UK, Barclays and BMW and Ford’s finance arms, a collective £44bn in compensation and other expenses. That would nearly rival the payment protection insurance (PPI) saga, which cost banks £50bn.
The supreme court has granted permission for Close Brothers and FirstRand to appeal against the court of appeal ruling. Close Brothers said all cases would be heard at a hearing scheduled for 1–3 April. The FCA will confirm within six weeks of the supreme court’s decision if it will be proposing a customer compensation scheme and, if so, how it will take this forward.
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After cancelling its 2024 dividend to retain £100m of capital this time last year, Close Brothers will also not pay an interim dividend for the first half of this year. It will decide on whether to reinstate dividends once there is further clarity on the financial impact of the FCA’s review of more finance commissions and the supreme court appeals.
The lender’s capital ratio fell from 12.8% to 12.2%, mainly driven by the £165m provision.
However, the Close Brothers chief executive, Mike Morgan, hailed “robust underlying profit in the banking business” and said it had made “significant progress” on improving its capital position with a pro-forma capital ratio of 13.4% on 31 January after the sale of its asset management arm, despite the impact of the £165m provision.
The lender said that it had stepped up measures to save other running costs, increasing estimated total annual savings to £25m by the end of the current year, up from £20m.
