Close Brothers Allocates £165 Million for Car Finance Commission Scandal

Close Brothers Allocates £165 Million for Car Finance Commission Scandal

Close Brothers, a FTSE 250 lender, has announced a provision of up to £165 million in its first-half accounts to cover potential legal and compensation costs related to the growing car finance commission scandal. The final costs could be "materially higher or lower" depending on the outcome of legal appeals and a review by the Financial Conduct Authority (FCA).

This scandal involves hidden commissions in motor finance deals, with industry-wide implications. Lloyds Banking Group has already set aside £450 million for potential compensation, while Santander UK has made a £295 million provision. Analysts estimate Lloyds' total exposure could reach £1.3 billion.

Close Brothers' share price fell 6.4% following the announcement, while Lloyds' shares rose 1.75%. The controversy stems from an October Court of Appeal ruling that found it unlawful for car dealers to receive commission from lenders without a customer's informed consent. This opened the door to compensation claims from consumers who may have been mis-sold car finance agreements.

However, the industry received a potential reprieve after the Treasury applied to give evidence to the Supreme Court, which will review the ruling in April. Close Brothers, which is contesting the ruling, has been shoring up its financial position in anticipation of a possible compensation bill.

Despite the provision, Close Brothers stated that it remains above regulatory capital requirements and is "well placed to absorb the impact." The bank is also evaluating further measures to optimise risk-weighted assets and reduce exposure.

Analysts had previously estimated a motor finance provision of £155 million this year, followed by £188 million in 2025 and £145 million in 2027. Some, such as Shore Capital, have issued higher forecasts, with a top-end projection of £450 million in total provisions.

In its latest trading update for the six months to the end of January, Close Brothers expects adjusted operating profit to drop to £75 million, down from £94.4 million a year ago.

The Supreme Court's verdict in April will be pivotal in determining the scale of the industry's financial exposure, with billions potentially at stake.