Close Brothers has warned it expects to set aside up to £165 million in its first half to cover possible legal and compensation costs following recent developments in the car loans commission scandal. The lender said the estimate follows a “thorough assessment” of developments in the saga, but warned there remains “significant uncertainty” over the outcome of appeals and an ongoing review by the Financial Conduct Authority (FCA).
“The ultimate cost to the group could be materially higher or lower than the estimated provision,” it added. Close Brothers said the hit will affect its capital strength, but that it will remain above regulatory requirements, adding it is “well placed to absorb the impact of the estimated provision”. Close Brothers is at the centre of a looming crisis facing the motor finance industry, with major lenders in the sector on the hook for potentially billions of pounds’ worth of compensation over motor finance deals with hidden commission payments.
The Court of Appeal in London ruled last October that it was unlawful for car dealers to receive commission on motor finance from lenders without a customer’s informed consent. The court decision opened the door for a potential fresh wave of complaints from consumers who think they may have been mis-sold car finance in previous years. Close Brothers disagrees with the ruling and has said it intends to appeal in the Supreme Court.
But it has been boosting its capital strength ahead of a possible big compensation bill and last September agreed to sell its wealth management division for about £200 million. The group said: “We have completed preparations for a significant risk transfer of assets in motor finance and continue to analyse any adjustments to the timing and structure of a potential transaction in light of the Court of Appeal judgment and our ongoing appeal to the Supreme Court.
“The group continues to evaluate a range of additional potential management actions to further optimise risk weighted assets, including potential risk transfer of other portfolios, a continuous review of our businesses and portfolios and other tactical actions.”. Close Brothers added that it expects its underlying earnings to drop to £75 million for the six months to January 31, down from £94.4 million a year ago.
