Close Brothers says can handle costs of motor finance plan

Close Brothers Group said it’s adequately covered against the estimated cost related to the misselling of car loans, marking a boost for the London-listed firm after short-seller Viceroy Research claimed its provisions for compensation were too small.

The specialised lender said in a Wednesday statement that the Financial Conduct Authority’s latest guidance suggests it will face a cost of £320 million ($430 million) related to compensating customers who were mis sold car loans. That’s “broadly similar” to the £294 million provision it detailed at the end of January, which is under review.

Close Brothers shares gained as much as 23% as of 9 am London time on Wednesday.

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While “no provision changes have been recognised,” the £320 million estimate “can be comfortably absorbed by existing capital resources,” according to the statement.

Its analysis comes after the FCA last week narrowed the scope of its motor finance redress plan. Around 12.1 million loans will be eligible across the UK, down from 14.2 million under a previous iteration. The program is set to cost the industry £9.1 billion overall, down from £11 billion in the previous version, but could still face legal challenges.

Close Brothers is viewed as one of the firms most exposed to the motor finance scandal. Banks and car manufacturers have set aside billions of pounds to compensate consumers who unwittingly paid commission when they purchased cars. Claimants are set to be repaid an average of £829, according to the FCA’s final compensation plan.

The FCA has called on banks to move forward with its revised program rather than mount a legal challenge. Lloyds Banking Group Plc, which has disclosed the largest known provision at almost £2 billion, has already said it isn’t planning to set aside more money.

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In contrast, South African lender FirstRand has vowed to exit the UK entirely by closing its motor finance business, while saying on Tuesday it reserved its legal rights.

Other details on how the FCA’s plan will impact Close Brothers:

720,000 UK-regulated motor finance loans written between April 6, 2007 and November 1, 2024 qualify for redress
The firm is expecting to give an average redress payment of £500 per customer, including compensatory interest, lower than the industry average of £829 quoted by the FCA
Average payments expected to be lower because of Close Brothers’ smaller loan sizes and lower commission levels
An estimated claim rate of 75%, in line with the FCA’s assumption
An absolute increase or decrease of 5% in the assumed claim rate would adjust the estimate by £18 million
An estimated delivery cost of £66 million,, excluding £14 million of costs already incurred against the existing provision

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