Close Brothers Shares Jump 17% as Bank Assures Investors Over Car Finance Scandal Costs
Shares in Close Brothers, a specialist UK lender, experienced a significant surge of 17% on Wednesday following the bank's announcement that it can comfortably absorb its share of a massive £9.1bn compensation bill related to the motor finance scandal. This positive market reaction came shortly after one of its competitors, FirstRand, revealed plans to sell its UK operations due to the financial strain from the same regulatory scheme.
Compensation Details and Financial Impact
Close Brothers stated that it expects the final terms of the Financial Conduct Authority's (FCA) compensation scheme to cost approximately £320m. This figure is described as broadly similar to previous estimates and the £294m the bank has already set aside. The additional £26m required can be managed using existing capital resources, according to the bank, which positions the group to continue executing its strategic plans without disruption.
The FCA's compensation scheme, finalized last week, aims to resolve the car finance scandal where drivers were overcharged on loans due to commission payments between lenders and car dealers. On average, victims are expected to receive payouts worth around £830.
Market Confidence and Rival Challenges
Close Brothers' update has alleviated investor concerns about the bank's ability to withstand the scandal's financial impact. This reassurance is particularly notable after short seller Viceroy Research claimed last month that Close Brothers might need to at least double its provisions, estimating potential costs between £572m and £1.07bn.
In contrast, rival FirstRand, a South African group operating in the UK as Aldermore and MotoNovo, announced it would sell its UK businesses. FirstRand cited frustration with the FCA scheme, labeling it deeply flawed, and stated it would need to raise an extra £510m to cover compensation costs, bringing total provisions to £750m. This move includes slashing earnings forecasts and offloading its UK operations.
Strategic Moves and Workforce Adjustments
To strengthen its financial position, Close Brothers has already divested its broker and asset management businesses. Additionally, the bank is on track to reduce its workforce by about 600 employees, representing roughly a quarter of its staff, as part of cost-cutting measures.
FirstRand expressed in a trading statement that it had consistently raised concerns with UK regulators about the sustainability of motor finance lending under the redress scheme. The group is now seeking an orderly transition for its Aldermore business, which employs 1,500 staff across offices in London, Reading, Manchester, and Cardiff. An Aldermore spokesperson emphasized that the business remains financially robust and continues to operate normally, though questions about potential winding down if a buyer is not found were not addressed.
This development highlights the varying responses within the UK banking sector to the FCA's compensation scheme, with Close Brothers emerging as a resilient player while others reconsider their market presence.
