Close Brothers Sets Aside £165 Million Pounds For Car Finance Scandal Compensation

A major upheaval in the UK car finance sector has emerged as Close Brothers, one of Britain’s largest motor finance providers, announced plans to allocate up to £165 million for potential legal and compensation costs stemming from the ongoing car loans commission scandal.

The lender’s estimate follows a meticulous evaluation of a landmark legal case, though the company acknowledges substantial uncertainty regarding appeal outcomes and the Financial Conduct Authority’s (FCA) investigation. Close Brothers has cautioned shareholders that actual costs could deviate significantly from current projections.

This significant provision arrives in the wake of Close Brothers’ decision to suspend dividend payments and initiate a £400 million capital raise to strengthen its financial position. The company maintains its capital ratio will remain above regulatory thresholds despite these developments.

The scandal centres on ‘secret’ commission payments, technically known as discretionary commission arrangements, applied to car loans between 2007 and 2021. These arrangements permitted car dealerships and brokers to manipulate interest rates on car loans, subsequently earning higher commissions. The FCA banned this practice in 2021 due to concerns over dealer incentivisation leading to inflated interest rates.

The issue gained prominence following a pivotal court ruling last October against FirstRand Bank and Close Brothers, where the court of appeal deemed undisclosed commission payments to car dealers unlawful. This verdict could trigger industry-wide compensation payments estimated between £8 billion and £13 billion.

The FCA’s December deadline for determining further action looms large over the sector, with potential outcomes including a mandatory customer compensation scheme. Major institutions including Lloyds Banking Group have already established substantial provisions, with Lloyds setting aside £450 million for potential penalties.