Motor finance scandal costs close brothers dear as firm slumps to £103m loss

Close Brothers, one of the United Kingdom’s leading car loan providers, has reported a staggering operating loss of £103.8 million for the six months leading up to 31 January. This sharp turnaround comes after the lender posted an £87 million profit during the same period last year. The financial hit follows fallout from a motor finance commission scandal, for which Close Brothers has set aside £165 million to cover consumer payouts, complaints handling, and legal costs.

Additional costs related to the scandal are expected to push the total financial damage to £200 million for this year, including £10 million for professional and advisory fees and £22 million for complaints handling. The crisis has also affected Close Brothers’ share prices, which dropped by a significant 17% upon announcement of the losses.

The controversy centres on discretionary commission arrangements (DCAs) once provided by car dealerships and brokers. These agreements, banned by the Financial Conduct Authority (FCA) in 2021, allowed dealerships to set interest rates on loans, potentially inflating consumer costs while increasing commissions. A landmark Court of Appeal ruling last October deemed it unlawful for lenders to pay commissions to brokers without borrowers’ full knowledge, escalating the situation for Close Brothers and its industry peers.

Close Brothers, with about 20% of its loan portfolio tied to car finance, is particularly exposed compared to its competitors. Analysts predict the overall sector may face £44 billion in costs as the case develops—drawing comparisons to the payment protection insurance (PPI) scandal, which cost banks £50 billion. The FCA has announced it is moving closer to formalising a compensation scheme, with a decision expected six weeks after an upcoming Supreme Court hearing scheduled from 1 to 3 April.

In response to these challenges, Close Brothers has cancelled its interim dividend for the second year running. The firm’s executive team has increased cost-cutting efforts, raising projected savings to £25 million by year-end from a previous estimate of £20 million. However, these measures have not been enough to counteract the sharp decline in its capital ratio, now reduced from 12.8% to 12.2% following the substantial £165 million provision. The company has nevertheless managed to improve this to a pro-forma ratio of 13.4% through the recent sale of its asset management arm.

Chief Executive Mike Morgan defended the underlying strength of the banking business, stressing their “robust” performance amidst difficult circumstances. The firm remains committed to navigating through the scandal and stabilising its operations as the legal proceedings progress. Investors, however, remain wary as questions surrounding the eventual financial impact and compensation costs linger.

The uncertainties brought on by the car finance commission scandal have cast a long shadow over the sector, with multiple lenders, including Lloyds, Barclays, and Santander UK, potentially facing similar consequences. Regulators and courts are now taking decisive action to ensure transparency and accountability in the auto finance market, signalling further challenges ahead for the industry.