Close Brothers Can Pay £320 Million Car Finance Payout, Rivals Exit UK Market

Close Brothers will pay £320 million for car finance issues, a slight rise from £294 million. This affects over 12 million car loan agreements.
By Newsroom | Finance, United Kingdom |

Financial Hit Assessed Amid Industry Shake-Up

Close Brothers has declared its capacity to absorb a £320 million financial impact stemming from the Financial Conduct Authority's (FCA) car finance compensation scheme. The company's share price saw a significant upward movement following this assertion, even as a competitor, FirstRand, announced its withdrawal from the UK motor finance sector due to similar pressures. The firm maintains that this cost will be comfortably accommodated without derailing its strategic objectives.

Close Brothers says £320m car finance hit can be ‘comfortably absorbed’ - 1

The announced sum represents a marginal increase from the previously estimated £294 million from January, with the difference attributed to "relatively smaller loan sizes and lower commission levels" within Close Brothers' portfolio. The FCA's finalised scheme, intended to address past overcharging on car loans linked to commission payments between lenders and dealerships, anticipates an average payout of £829 across an estimated 12.1 million eligible agreements. Close Brothers reported that this financial burden would reduce its Common Equity Tier 1 (CET1) capital ratio by a mere 25 basis points, bringing it to 14.0%, a figure still well within its 12-13% medium-term target range. No changes have yet been made to the company's existing provision, which remains under active review alongside ongoing legal and regulatory developments.

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Close Brothers says £320m car finance hit can be ‘comfortably absorbed’ - 2

Industry Ripples and Strategic Adjustments

The FCA's compensation scheme, finalized recently, aims to bring a conclusion to the widespread issues of mis-sold car finance. While Close Brothers expresses confidence in its financial resilience, other entities are making starker decisions. FirstRand, through its Aldermore business, indicated it would explore an "orderly ownership transition," signaling potential divestment or cessation of its motor finance lending activities in the UK market. This move suggests that the financial implications of the FCA's scheme have reached a threshold where some market participants deem continued participation unsustainable.

Close Brothers says £320m car finance hit can be ‘comfortably absorbed’ - 3

Close Brothers itself has undertaken measures to bolster its financial standing, including the divestment of its broker and asset management arms. Furthermore, the company is proceeding with a workforce reduction of 600 employees, representing approximately a quarter of its staff, as part of a broader cost-cutting initiative. The potential ramifications for Aldermore, including the possibility of winding down operations if a buyer is not secured, remain unclear, with spokespersons declining to comment on specific scenarios.

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Frequently Asked Questions

Q: Can Close Brothers afford the car finance payout?
Yes, Close Brothers stated it can cover the £320 million cost from the FCA's car finance compensation scheme. This amount is slightly higher than the £294 million estimated earlier.
Q: How many people are affected by the car finance payout?
The FCA's scheme covers an estimated 12.1 million car loan agreements. The average payout for each agreement is expected to be around £829.
Q: Are other companies affected by these car finance issues?
Yes, FirstRand announced it is leaving the UK motor finance market due to similar pressures. This suggests the costs are making it hard for some companies to continue.
Q: What is Close Brothers doing to manage these costs?
Close Brothers is selling parts of its business and cutting 600 jobs as part of a cost-saving plan. They believe these actions will help them manage the financial impact.
Q: What is the FCA car finance compensation scheme?
The FCA scheme is designed to fix problems where people were charged too much for car loans because of commission deals between lenders and dealers.