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 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.
The Supreme Court will hear the case in April where it will decide whether to uphold October’s landmark ruling on hidden motor finance commission arrangements.
The ruling reportedly led analysts to raise their estimates for the total cost hit to the sector from the scandal to as much as £44 billion.
Lloyds Banking Group, which is the UK’s largest car finance provider, put by £450 million last year to cover possible compensation and other costs.
And Santander UK revealed a £295 million provision last year following the major court decision in October, which contributed to a 38% drop in the bank’s pre-tax profits to £1.33 billion for 2024.
Analysts said the provision for Close Brothers was lower than feared.
Banking experts at Peel Hunt said the size of the provision was “encouraging” and, while only an estimate, suggests Close Brothers may be able to avoid an equity raise or further division sales.
Close Brothers shares edged up by 1% on Wednesday, having rallied in the past month after it emerged that the Treasury had submitted an application to give evidence in the upcoming Supreme Court case, arguing that any redress should be proportionate.
The Treasury submission argued that the case could damage the industry and make it more difficult and expensive to take out car finance loans.
But Russ Mould, investment director at AJ Bell, cautioned: “The outcome could still be worse than the current provision implies, so it’s too soon for Close Brothers to relax entirely.”
