Shares in one of Britain’s oldest merchant banks crashed to their lowest level for nearly 30 years as it reels from an investigation into the car finance market.
On a brutal day for the company and its investors, Close Brothers tumbled 22.5 per cent, or 89.6p, to 308.4p after it scrapped its dividend and warned of ‘significant uncertainty’ over the regulatory probe into the industry.
Shares in the group, which dates back to 1878, are down by 60 per cent since the Financial Conduct Authority (FCA) last month launched an investigation into the potential mis-selling of car loans.
That has wiped £690million off its value and left the stock at its lowest level since 1996.
Concerns are mounting that Close Brothers and others in the industry, including Lloyds, Barclays and Santander, face a hefty bill if the FCA rules customers were charged too much for car loans between 2007 and 2021.
Investigation: Close Brothers tumbled 22.5% after it scrapped its dividend and warned of ‘significant uncertainty’ over the regulatory probe into the industry
The cases surround ‘discretionary commission arrangements’ used by the motor finance industry before they were banned in 2021.
Martin Lewis, the consumer champion behind Money Saving Expert, has warned that lenders could face a similar bill to the £50billion in costs and compensation they paid over the mis-selling of payment protection insurance (PPI) scandal.
Russ Mould, investment director at AJ Bell, said: ‘Banking has a habit of being embroiled in scandals.
Just as the dust settles on one scandal, along comes another, and that cycle has been repeating for decades.
‘It looks like we’re on the cusp of a new one and the potential fines and compensation could be huge.’
In an update yesterday, Close Brothers said: ‘There is 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.
‘The board considers it prudent for the group to further build capital strength.
‘Therefore, the group will not pay any dividends 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 and any financial consequences for the group have been assessed.’
City analysts at Berenberg said: ‘Clearly, this is a significant blow for Close Brothers which has historically prided itself in a sustainably growing dividend.’
Car loans make up about a fifth of lending at Close Brothers – almost £2billion.
Although this is dwarfed by the £15billion of loans Lloyds made, City analysts think it is in a better position to absorb the bill due to its size.
Shares in Lloyds, which owns Black Horse, the UK’s largest car finance lender, are down around 12 per cent since the FCA probe was launched.
Announcing the investigation on January 11, the FCA said: ‘If we find there has been widespread misconduct and that consumers have lost out, we will identify how best to make sure people who are owed compensation receive an appropriate settlement in an orderly, consistent and efficient way.’
Analysts at Royal Bank of Canada believe the industry could face a bill of £16billion, with Close Brothers in line for a £200million hit and Lloyds £2billion.
Insisting ‘there is no certainty regarding any potential financial impact as a result of the FCA’s review’, Close Brothers said that the ‘business continues to perform well’.
The company expects profits of £94million for the six months to the end of January, compared with £117.5million in the same period a year earlier.
