Close Brothers to take £165m hit from motor finance scandal

(Sharecast News) - Merchant banking group Close Brothers has revealed that it is to put £165m aside to cover costs associated with the mis-selling of motor finance, following last year's Court of Appeal judgment. The provision, which includes estimates for operational and legal costs, as well as the potential remediation for affected customers, will reduce the company's CET1 capital ratio to 12.0%, down 150 basis points from 13.5% on 31 December. Close Brothers said the hit would be recognised in its second-half results.

However, Close Brothers said that recent actions to improve its capital position will mitigate the impact. These include the sale of its wealth management arm for £200m in September, which is expected to close in the coming weeks and will increase the CET1 capital ratio by around 100 basis points.

Along with "selective loan book growth actions" and "additional cost management initiatives", the CET1 capital ratio should increase back up to around 13% by the end of its financial year (31 July).

"The group's financial strength and ongoing organic capital generation, coupled with the benefits of management actions to build capital, leave us well placed to absorb the impact of the estimated provision," Close Brothers said.

In January 2024, the Financial Conduct Authority launched an investigation into historical motor finance discretionary commission arrangements, after lenders paid commissions to car dealerships without the knowledge of borrowers. A Court of Appeal judgment, which ruled in favour of the claimants in October, has been appealed against by Close Brothers, which is now waiting on a Supreme Court decision.