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Close Brothers has warned it will not pay a dividend this year and future payouts are under review as the UK lender braced for a possible hit from a regulatory probe into motor financing deals.
The Financial Conduct Authority last month said it would investigate commissions on car financing deals dating back a decade, saying the agreements gave lenders and dealers incentives to lift the interest rate levied on customers.
In a statement on Thursday, Close Brothers said there was “significant uncertainty about the outcome of the FCA’s review, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present”.
Close Brothers is among the lenders exposed to potential historic mis-selling of motor finance deals, alongside Lloyds Bank that owns Black Horse, the UK’s largest car finance lender.
Shares in Close Brothers, which have fallen sharply since the FCA announced its probe, were down 11 per cent in early trading.
Given the need to plan for a range of outcomes, Close Brothers said it “will not pay any dividends on its ordinary shares for the current financial year, and the reinstatement of dividends in the 2025 financial year and beyond will be reviewed once the FCA has concluded its process”.
The FCA began its probe after a surge in customer claims on deals struck before 2021, when the regulator banned discretionary commission arrangements, where car dealers were able to set the interest rates in customer contracts.
Analysts at Royal Bank of Canada estimate that Close Brothers will be hit with a £200mn redress bill. Lloyds has the largest exposure to the sector, with RBC estimating the high-street bank could suffer a £2bn hit.
Experts have said the FCA probe carried echoes of the payment protection insurance scandal. The PPI scandal dates back to the 1990s when banks mis-sold a type of insurance product to millions of customers. Banks were later hit with billions of pounds worth of fines and customer compensation claims.
The FCA first said it was investigating interest-linked deals offered by motor finance companies in January. It later clarified the scope of its probe that it said would look at deals dating back to 2007, leading analysts to revise their estimates for potential compensation.
Jefferies estimates the industry could face a total bill of £13bn, while RBC believes that figure could go up to £16bn.
