Close Brothers has affirmed its capacity to withstand a significant financial blow from the City regulator's motor finance compensation initiative, though speculation is mounting that another courtroom confrontation could be imminent. The FTSE 250 financial institution disclosed to markets on Wednesday morning that it anticipates the Financial Conduct Authority's redress scheme will cost approximately £320 million.
Financial Impact and Regulatory Framework
This projected expense aligns closely with the firm's earlier estimate of around £300 million in potential liabilities. The scheme is expected to reduce the bank's CET1 ratio, a crucial indicator of financial stability, by 25 basis points, bringing it down to 14 percent. Importantly, this figure still exceeds the bank's internal target range of 12 to 13 percent, suggesting a resilient capital position.
Uncertainty Surrounding Legal Challenges
However, considerable ambiguity persists regarding possible legal disputes over the redress program. Close Brothers emphasized that the final outcome remains contingent upon further legal, regulatory, or industry developments, including potential challenges to the scheme by various stakeholders. Following the FCA's release of the final rules, which split the redress into separate segments for pre-2014 and post-2014 agreements, analysts predict additional legal battles ahead.
The inclusion of transactions dating back to 2007 in the compensation plan continues to be a major point of contention within the industry, fueling ongoing debates about the motor finance scandal's scope and accountability.
Analyst Predictions and Industry Reactions
Benjamin Toms, an equity analyst at RBC, commented that it is highly probable that at least one, if not multiple, interested parties will seek judicial review of the scheme through administrative courts. Toms noted that this reaction was likely anticipated by the FCA, as evidenced by its decision to implement two distinct schemes.
Lloyds Banking Group, which owns Black Horse, the UK's largest motor finance lender, recently reaffirmed its £2 billion in provisions but also cautioned about future uncertainties. In a statement, Lloyds indicated that the ultimate resolution may vary depending on potential actions by various parties, including legal proceedings and customer complaints.
Historical Context and Future Steps
During Lloyds' third-quarter results presentation last October, finance chief William Chalmers declined to rule out a legal challenge if the scheme did not align with the bank's expectations. Close Brothers, which was one of two banks that previously escalated the motor finance dispute to the Supreme Court, has not dismissed the possibility of further legal confrontations.
The group stated it will continue to monitor legal, regulatory, and industry developments closely and is evaluating its next steps. This update follows a critical report from short-seller Viceroy, which accused Close Brothers of under-provisioning and systematically misrepresenting its exposure to the motor finance scandal.
Mike Morgan, CEO of Close Brothers, previously defended the bank's practices, asserting strong disagreement with the report and emphasizing the company's commitment to operating at the highest standards, which he described as non-negotiable.
