Close Brothers Group, the UK mid-cap lender, finds itself at a critical juncture, forced into a sweeping financial and operational overhaul by the ongoing motor finance scandal. The bank's journey over the past two years reveals a struggle to bolster its defences and improve efficiency in a sector where it has been labelled a notable laggard.
The Scandal That Forced a Strategic Pivot
Nearly two years ago, in the shadow of the Financial Conduct Authority's (FCA) sweeping review into the motor finance industry, Close Brothers' then-chief executive Adrian Sainsbury pledged to take "decisive actions" to secure the bank's future. The motor finance sector represented a significant 20 per cent of its £9.5bn loan book in 2025, making the FCA's probe into discretionary commission arrangements a direct threat.
Sainsbury, who exited in January 2025 for health reasons, stated the board recognised the "paramount importance" of preparing for all outcomes. His successor, finance director Mike Morgan, inherited a plan already in motion: a bold restructuring of capital, starting with the suspension of dividend payments for the 2024 financial year.
A Cost-Cutting Mission Under Market Scrutiny
The core of Close Brothers' response has been a relentless drive to strip out costs and strengthen its balance sheet. Over 20 months, the bank has targeted adding £400m to its CET1 ratio, a key measure of financial resilience. This has involved scaling back premium finance lending, selling its brewery division, and offloading its asset management firm.
By the 2025 full-year results, Close Brothers announced £25m in annual savings and committed to a further £20m per year for the next three years. Yet, analysts remain unimpressed. RBC's Benjamin Toms and Pablo de la Torres Cuevas argue the savings fall short, labelling Close Brothers the "laggard" among mid-cap banks and "one of Europe's least cost-efficient lenders."
They propose a more aggressive path: simplifying its complex structure of 25 business units, a potential 5% headcount reduction, and total savings of around £32m. This, they claim, could drive the bank's cost-to-income ratio down to 56%, beating its current 59% target.
Legal Battles and a £300m Provision
The pressure intensified in October when Close Brothers was forced to almost double its motor finance provisions to £300m, following new FCA details on a contentious customer redress scheme. The bank has been locked in a legal fight, alongside South African lender Firstrand, over the legality of historical discretionary commission arrangements.
Although the Supreme Court handed banks a partial victory in August, siding with them on two of three cases, it opened the door for the FCA's redress scheme on grounds of "unfairness." The uncertainty hammered Close Brothers' stock, with shares sinking over 30 per cent between the Court of Appeal ruling and the Supreme Court hearing.
CEO Mike Morgan has struck an optimistic note recently, telling City AM it was "encouraging" the FCA acknowledged the need for a functioning market. With £700m of risk-weighted assets previously held back, Morgan stated, "We have opened the taps now and it's back on." He expressed hope that "common sense should prevail" on the final redress scheme, expected in early 2026.
The Road Ahead: Restructure or Risk Takeover
The stakes are high. Analysts at Moody's have warned that severe financial penalties from the motor finance scandal could cripple Close Brothers' solvency, potentially making it a target in the sector's ongoing consolidation frenzy. The bank's ability to aggressively manage its costs is now seen as existential.
RBC's upgrade of the stock to 'Outperform' hinges on this very premise. They believe the bank has "more fat that it can trim" and that its capital ratio "can absorb a full top-up for motor finance, incremental restructuring and mid-to-high single digit loan growth."
The message is clear: for Close Brothers to roar back to life and avoid being swept up by rivals, new boss Mike Morgan must not just continue the cost-cutting mission but significantly accelerate it. The coming year will test whether this once-cautious lender can shift into the high gear demanded by the market.
