Close Brothers has declared that it can "comfortably" absorb costs of approximately £320 million allocated for compensating customers mis-sold car loans, leading to a significant surge in its share price. The lender's shares jumped by nearly a fifth on Wednesday morning following this announcement, which reassured investors about the firm's financial resilience.
Financial Impact and Shareholder Response
The provision for the motor finance issue is broadly in line with previous estimates, according to the company. Close Brothers had been closely reviewing the details of the Financial Conduct Authority's motor finance compensation scheme, which were finalized last week. The firm now estimates the cost of the scheme to be around £320 million, a slight increase from the £294 million projected at the end of January.
This expense can be "comfortably absorbed by existing capital resources, leaving the group well-positioned to continue delivering its strategy," the company stated. The higher provision reflects adjustments made to the FCA's redress scheme compared to initial proposals shared last year.
Compensation Scheme Details
The FCA estimates that approximately 12.1 million motor finance agreements are eligible for compensation under its scheme, with average payouts expected to be £829. For Close Brothers, the scheme covers about 720,000 loans written by the lender between April 2007 and November 2024.
The banking group anticipates average payouts to be around £500 per customer, which is lower than the watchdog's average. This difference is attributed to relatively smaller loan sizes and lower commission levels in its portfolio, the firm explained.
Ongoing Review and Future Considerations
Despite the current estimates, Close Brothers emphasized that its provision remains under review and is dependent on "any potential further legal, regulatory or industry developments." This includes any "legal challenge of the scheme," indicating that the final costs could be subject to change based on external factors.
The announcement comes amid broader industry scrutiny over motor finance practices, with the FCA's scheme aiming to address historical mis-selling issues. Close Brothers' ability to manage this financial hit without significant disruption highlights its strategic planning and capital strength in a challenging regulatory environment.
