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London-based bank Close Brothers said it expected to set aside £165mn to cover the costs of a probe and related court ruling into the potential mis-selling of car finance loans.
The bank said on Wednesday that the provision, which it would book in its upcoming half-year statement, included estimates for legal costs as well as potential compensation for affected customers.
Close Brothers last year suspended its dividend and launched a £400mn capitalisation plan after the Financial Conduct Authority said it was investigating historic car finance commissions for potential mis-selling.
The FCA review was focused on discretionary commissions on car financing deals, a practice that was banned in 2021 and which the watchdog said had given dealerships an incentive to charge customers a higher interest rate.
The potential fallout was compounded when the Court of Appeal ruled in October that it was illegal for banks to pay any type of commission to car dealers without the customer’s informed consent.
The ruling, which car loan providers have been granted permission to appeal against at the Supreme Court, led analysts to raise their estimates for the total hit for the sector to up to £44bn.
As part of its capitalisation plan, Close Brothers sold off its asset management business. The bank said on Wednesday that it expected the sale to complete in coming weeks. The bank had previously said it was “premature to predict the outcome or estimate the potential impact on the group” of the car finance probe, and that it was not obliged to book a provision.
Lloyds Banking Group, which owns Black Horse, the UK’s largest car finance provider, last year set aside £450mn to cover the potential fallout.
Shares in Close Brothers have rebounded after the Treasury sought permission to intervene in the Supreme Court case in a bid to protect lenders. The Financial Ombudsman said this month that it would start charging claims management companies for bringing cases, in a boost to car finance lenders.
Close Brothers shares were up 1 per cent on Wednesday morning.
The stock rose last month due to “improving sentiment around motor finance risk following the Supreme Court’s decision to review the Court of Appeal’s prior judgment”, and the Treasury’s comments that “any proposed redress should be proportionate to the harm incurred by the customer”, said Gary Greenwood, an analyst at Shore Capital.
