Close Brothers Group has unveiled measures to save approximately £400million to enhance its capital position amid a regulatory review into the motor finance.
The merchant banking firm revealed last month it would axe dividends for the current fiscal year and not restart payments until the Financial Conduct Authority’s probe into car finance lenders has concluded.
FTSE 250-listed Close Brothers also intends to ‘optimise’ its risk-weighted assets through ‘selective’ loan book growth and a ‘significant’ risk transfer of assets, alongside further cost-cutting measures.
Drive safely: The FCA started an investigation into car finance lenders in January following a surge in complaints from motorists concerning discretionary commission arrangements
Close Brothers believes the proposal will bolster its common equity tier one capital ratio – a common measure of a bank’s financial strength – by £400million by the end of the 2025 financial year.
The FCA started an investigation into car finance lenders in January following a surge in complaints from motorists concerning discretionary commission arrangements.
Until they were banned in 2021, 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.
Close Brothers has not recognised any provision related to the review, but the Royal Bank of Canada recently estimated that the firm could pay about £200million in overall compensation.
Adrian Sainsbury, chief executive of Close Brothers, said it ‘would be premature to predict the outcome or estimate the potential impact on the group’.
He added: ‘The board, however, recognises the paramount importance of preparing the group for a range of outcomes from this review. As part of this, the board is taking a number of decisive actions to strengthen our capital position materially.’
RBC predicts the motor finance industry will have to spend between £6billion and £16billion reimbursing customers, while Jefferies thinks it could be £13billion.
Analysts have said the FCA probe could resemble the payment protection insurance scandal, which caused the biggest consumer redress scheme in UK history.
Close Brothers also announced its half-year results on Tuesday, which showed its loan book increased by 4 per cent to £9.9billion in the six months ending January.
Its adjusted operating profits also jumped to £94.4million, against £12.6million in the same period the prior year, when the company incurred a major impairment charge linked to losses at legal finance specialist Novitas.
However, the firm revealed that its marketmaking division, Winterflood, remained impacted by subdued retail trading activity.
Close Brothers Group shares were 6.9 per cent higher at 357.4p just after midday on Tuesday, although they have more than halved since the FCA opened its review.
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