Close Brothers Shares Surge as Bank Confirms It Can Absorb Compensation Costs
Shares in Close Brothers, a specialist UK lender, experienced a significant surge on Wednesday, climbing by 17% in early afternoon trading. This sharp increase followed the bank's announcement that it could "comfortably absorb" its portion of a £9.1bn compensation bill related to the ongoing motor finance scandal. The Financial Conduct Authority (FCA) recently finalised this compensation scheme, aimed at addressing overcharges on car loans due to commission payments between lenders and dealers.
Compensation Details and Financial Impact
Close Brothers disclosed that it expects the final terms of the FCA's compensation scheme to cost approximately £320m. This figure is described as "broadly similar" to previous estimates and aligns closely with the £294m the bank has already set aside. The additional £26m required can be "comfortably absorbed by existing capital resources," according to the bank, which stated this leaves the group "well positioned to continue delivering its strategy." This update has alleviated investor concerns about the bank's ability to withstand the financial fallout from the scandal.
Contrast with Rival FirstRand's Response
In a stark contrast, rival South African group FirstRand announced it would be selling its UK operations, which trade as Aldermore and motor lender MotoNovo. FirstRand expressed frustration with the FCA compensation scheme, labelling it "deeply flawed." The group indicated it would need to raise an extra £510m to cover compensation costs, bringing its total provisions for the motor finance scandal to £750m. This move includes slashing earnings forecasts and offloading the UK business, citing sustainability concerns in the UK motor finance lending market.
Background on the Motor Finance Scandal
The FCA's compensation scheme, finalised last week, is designed to resolve the car finance scandal where drivers were overcharged for loans due to undisclosed commission arrangements. The regulator estimates that victims will receive payouts averaging £830. Close Brothers' ability to manage these costs comes after it has already taken steps to strengthen its balance sheet, including selling its broker and asset management businesses and planning to cut 600 staff, about a quarter of its workforce, to reduce expenses.
FirstRand's decision highlights the varying impacts of the scandal across the banking sector. While Close Brothers appears resilient, other lenders are reassessing their UK presence. Aldermore, which employs 1,500 staff across offices in London, Reading, Manchester, and Cardiff, has not commented on potential winding down if a buyer is not found, but a spokesperson emphasised that the business remains "financially robust" and continues to operate normally.
