Close Brothers has announced it will allocate up to £165 million in its first-half accounts to cover potential legal and compensation costs linked to the growing car finance commission scandal.
The FTSE 250 lender disclosed the provision in an unscheduled update, warning that the final costs could be “materially higher or lower” depending on the outcome of legal appeals and a review by the Financial Conduct Authority (FCA).
The scandal centres on hidden commissions in motor finance deals, with industry-wide implications. Lloyds Banking Group, which offers car loans through its Black Horse brand, has already set aside £450 million for potential compensation, while Santander UK has made a £295 million provision. Analysts estimate Lloyds’ total exposure could reach £1.3 billion when it updates investors next week.
Close Brothers’ share price fell 6.4% to 341¾p following the announcement, while Lloyds’ shares rose 1.75% to nearly 64p as analysts suggested the provision could provide some reassurance to other lenders.
The controversy stems from an October Court of Appeal ruling that found it unlawful for car dealers to receive commission from lenders without a customer’s informed consent. This decision opened the door to a wave of compensation claims from consumers who may have been mis-sold car finance agreements.
However, the industry received a potential reprieve after the Treasury applied to give evidence to the Supreme Court, which will review the ruling in April. Close Brothers, which is contesting the ruling, has been shoring up its financial position in anticipation of a possible compensation bill, including selling its wealth management arm for £200 million last September.
Despite the provision, Close Brothers stated that it remains above regulatory capital requirements and is “well placed to absorb the impact.” The bank is also evaluating further measures to optimise risk-weighted assets and reduce exposure.
Analysts had previously estimated a motor finance provision of £155 million this year, followed by £188 million in 2025 and £145 million in 2027. Some, such as Shore Capital, have issued higher forecasts, with a top-end projection of £450 million in total provisions.
In its latest trading update for the six months to the end of January, Close Brothers expects adjusted operating profit to drop to £75 million, down from £94.4 million a year ago.
The Supreme Court’s verdict in April will be pivotal in determining the scale of the industry’s financial exposure, with billions potentially at stake.
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Close Brothers sets aside £165m amid car loan commission scandal