Close Brothers Group, a prominent banking group with a motor finance arm, has recently announced plans to fortify its finances by £400 million and streamline its operations. This strategic move is in response to the potential investigation into the mis-selling of car finance products. The group has acknowledged the importance of preparing for various potential outcomes of the inquiry.
Following the example set by Lloyds, Close Brothers has taken a proactive approach by setting aside funds to address potential costs associated with customers who may have been overpaying on their loans. The Financial Conduct Authority (FCA), the UK’s financial regulator, is currently examining the impact of concealed discretionary commission arrangements within the motor finance industry.
This controversial practice, which enabled brokers such as car dealers to inflate interest rates on car loans to earn higher commissions, was prohibited in 2021. However, Close Brothers has emphasized that it would be premature to speculate on the results of the regulator’s review, as the findings are not expected to be disclosed until later this year.
Adrian Sainsbury, the Chief Executive of Close Brothers, stated, “The FCA’s review of the motor finance industry is ongoing and it would be premature to predict the outcome or estimate the potential impact on the group.” He further articulated, “The board, however, recognizes the paramount importance of preparing the group for a range of outcomes from this review. As part of this, the board is taking a number of decisive actions to strengthen our capital position materially.”
In line with its financial reinforcement strategy, the bank has committed to tighter cost management measures, with the aim of generating approximately £400 million in additional capital by the end of the 2025 financial year. As part of its cost management efforts, Close Brothers has opted to suspend dividend payouts to shareholders for the current fiscal year. Unlike Lloyds, the bank has refrained from setting aside a specific provision, citing the early stage of the investigation and the inability to accurately gauge potential costs linked to the issue.
Should the FCA identify a substantial number of customers warranting compensation, it may opt to institute a formal compensation scheme. Despite the significant increase in operating pre-tax profit for the six-month period ending in January, which saw a 700% surge compared to the previous year, Close Brothers remains vigilant amidst the ongoing motor finance issue.
Henry Farris, a partner at Withers law firm, expressed his belief that the motor finance matter is likely to persist for a considerable duration. He remarked, “Close Brothers’ announcement is further evidence of how seriously the banking sector is taking the FCA probe, following the suspension of dividends and the steps taken by Lloyds.” Farris also underscored the potential necessity for a larger provision across the sector if analysts’ projections regarding the scale of the problem prove accurate.
As Close Brothers Group proactively fortifies its finances and aligns its operations with regulatory considerations, the banking sector awaits the anticipated conclusions of the FCA’s review of the motor finance industry. The forthcoming months are poised to unfold critical developments as the industry navigates the implications of the probe.
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