Close Brothers, a leading provider of car finance, has implemented measures to strengthen its balance sheet by up to £400m in response to potential repercussions from the Financial Conduct Authority’s (FCA) ongoing investigation into car finance mis-selling.
The FCA initiated the probe at the beginning of the year, focusing on discretionary commissions payments that allowed car finance brokers and dealers to set their own interest rates for certain customers, a practice that was outlawed in 2021. The regulatory body has disclosed that some car finance firms may have concealed commissions on loans to customers and has pledged swift action.
In view of these developments, Close Brothers has made the strategic decision to bolster its balance sheet by approximately £400m as a precautionary measure. The company, which currently lends £1.9bn in car finance and has already received 25,000 customer complaints, announced the suspension of its dividend and the implementation of other measures to strengthen its core capital by £200m. In addition, plans for growth in 2025 have been scaled back, and the possibility of forgoing dividends in the future is being considered to further conserve funds.
Adrian Sainsbury, the Chief Executive of Close Brothers, emphasized the importance of preparing for various outcomes of the FCA review and outlined the board’s decisive actions to fortify the group’s capital position. Despite the current period of uncertainty, Sainsbury expressed confidence in the company’s ability to navigate challenges and capitalize on future opportunities.
Furthermore, Lloyds Banking Group’s Black Horse finance arm has allocated £450m to cover potential liabilities arising from the investigation. Analysts at investment bank Jefferies have estimated that the total cost to the finance sector could reach as high as £13bn.
Close Brothers’ half-year report for its diverse banking business revealed an increase in operating profits before tax to £93.8m, up from £11.7m in the same period last year. However, the company remains cautious in light of the ongoing FCA review and is taking proactive measures to safeguard its financial stability.
As the FCA investigation continues and the financial implications for car finance providers remain uncertain, the industry is preparing for potential regulatory outcomes. The proactive approach taken by Close Brothers and other financial institutions underscores the importance of prudent financial management and risk mitigation in the face of regulatory scrutiny.
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