7:18 am, February 16, 2024
Shares in banking group Close Brothers tumbled yesterday after the firm scrapped its dividend amid fears over its liabilities for historical motor finance commissions.
Close Brothers Group shares fell 22.5% on Thursday – or 89p – on the news and follow a month where its value has more than halved.
The group’s market cap has dropped £700m in the past month with £130m evaporating yesterday.
In an update to the stock market, Close said the group will not pay a dividend for the current financial year, saving it around £100m to set aside.
The board said it was also taking further actions to ‘build capital strength’.
Close said: ‘The reinstatement of dividends in the 2025 financial year and beyond will be reviewed once the FCA has concluded its process and any financial consequences for the group have been assessed.’
The FCA is conducting an investigation into historical discretionary commission payments paid to car dealers. It banned the practice in 2021 and is currently reviewing the situation with an update due in the third quarter of this year.
Martin Lewis, the consumer champion, has set up a tool to help the public lodge complaints with lenders and last week said more than 250,000 had used it in just a few days. He believes claims for ‘mis-sold motor finance’ could be as big as the PPI scandal.
Close Brothers has a wide lending portfolio, but motor finance makes up nearly a fifth of it at £1.95bn.
The bank added: ‘There is significant uncertainty about the outcome of the FCA’s review, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present.
‘In accordance with the relevant accounting standards, the board has concluded that it is currently not required or appropriate to recognise a provision in the group’s half-year 2024 results in relation to this matter.
‘Our business continues to perform well, and we are confident in the strength of our business franchise.’
Brokers have mixed opinions, though. Shore Capital told investors it was leaving its guidance unchanged and said despite the further share price fall it ‘retains a neutral stance pending further clarity from the FCA’s review’.
The Times reported comments from UBS analysts that said Close Brothers’ liability from the motor finance inquiry could be between £30m and £830m.
While RBC Capital believes the industry could be facing a bill between £6bn and £16bn. Lloyds, through its Black Horse Motoring Finance division, could face a £2bn hit.
The FCA has also launched a probe into the sale of Gap insurance. Car Dealer broke the news that the watchdog was effectively banning the product by asking insurers to voluntarily withdraw it from sale while it investigated further.
Last week, the FCA said 80% of the Gap insurance market had now been withdrawn. The City regulator said it had ‘identified concerns with the design of Gap insurance across all distribution channels’ and wants firms to make changes.
The FCA is said to be concerned with the value dealers add to the sale of the product, the high commissions earned and the retail pierce. Its investigation will take three to six months.
