- The FCA launched an inquiry last month into the motor finance industry
- Close Brothers could pay £200m in compensation related to the probe
Close Brothers has scrapped dividend payouts and warned of ‘significant uncertainty’ regarding the outcome of a probe into the motor finance industry.
The Financial Conduct Authority last month launched an inquiry into the historical use of ‘discretionary commission arrangements’ (DCAs) in what some analysts predict could resemble the payment protection insurance scandal.
Close Brothers, which operates Close Brothers Motor Finance, was the only major provider to decline to comment on the probe when recently approached by This is Money.
Forecasts suggest the FTSE 250 financial services group could face up to £200millioon in payouts, with the industry looking at total redress of up to £16billion.
No reward: Close Brothers will not pay any dividends due to ‘significant uncertainty’ regarding the outcome of a probe into the motor finance industry
Close Brothers shares plunged 17.3 per cent to £3.29 in early trading, meaning they have more than halved since the FCA began its probe.
Historically, DCAs permitted vehicle dealerships and brokers to choose the interest rate on a car buyer’s finance agreement, incentivising them to charge customers higher rates.
They were outlawed three years ago, but many consumers have lodged complaints with regulators claiming their request for compensation was unfairly rejected.
As a result, the FCA asked lenders to pause their response to complaints while it investigates the motor finance sector.
Close Brothers told investors 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’.
Will the FCA’s motor finance probe lead to PPI-style payouts?
A regulatory probe into the historical sale of loans by the UK motor finance industry could mirror the PPI scandal and result in billions of pounds of compensation.
Some analysts fear the surprise Financial Conduct Authority review, launched last month, represents a ‘powder keg’ that threatens the future of the country’s motor finance sector.
> Read more here
<!- – ad: https://mads.dailymail.co.uk/v8/ua/money/moneymarkets/article/other/mpu_factbox.html?id=mpu_factbox_1 – ->
RBC Capital Markets estimates Close Brothers could end up paying £200million in compensation related to the probe, while Peel Hunt forecasts a £185million hit and Shore Capital predicts a £150million payout.
Close Brothers has chosen not to hand shareholders any dividends this financial year.
It will only consider restarting payments in 2025, once the review has finished.
The company said: ‘It is a long-standing priority of the group to maintain a strong balance sheet and prudent approach to managing its financial resources.
strong balance sheet and prudent approach to managing its financial resources.
‘To that end, the board considers it prudent for the group to further build capital strength, while supporting our customers and business franchise.’
Despite the fallout from the motor finance review, the FTSE 250 business said it was continuing to ‘perform well’.
The London-based company expects to report adjusted operating profits of around £112million for the six months ending January.
It added that its asset management division achieved annualised net inflows of 9 per cent, while its stock brokerage arm Winterflood ‘remains well placed for a recovery in investor confidence.’
Founded in 1878, Close Brothers is one of the UK’s prominent merchant banking firms, with services ranging from wealth management to vehicle hiring, finance for small and medium-sized enterprises, and keg and cask rentals for brewers.
