Shares in Close Brothers Group, a banking group, experienced a significant downturn yesterday following the company’s decision to suspend its dividend amidst concerns regarding its potential liabilities stemming from historical motor finance commissions.
Close Brothers Group shares plummeted by 22.5% on Thursday, equivalent to 89p, marking a stark decline over the past month where its value has decreased by more than half. The group’s market capitalization has dwindled by £700m over the past month, with £130m vanishing just yesterday.
In an announcement to the stock market, Close Brothers stated that it would not be paying a dividend for the current financial year, resulting in savings of approximately £100m that will be set aside. Additionally, the board revealed plans to take further measures to bolster its capital strength.
Regarding future dividend payouts, Close Brothers stated, “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 Financial Conduct Authority (FCA) is currently conducting an investigation into historical discretionary commission payments made to car dealers. This practice was banned by the FCA in 2021, and the ongoing review is expected to provide updates in the third quarter of this year.
Martin Lewis, a prominent consumer advocate, has launched a tool to assist the public in lodging complaints with lenders. In just a few days, over 250,000 individuals have utilized this tool. Lewis believes that claims related to “mis-sold motor finance” could potentially reach the magnitude of the PPI scandal.
Close Brothers, with a diverse lending portfolio, has motor finance accounting for nearly a fifth of its total lending at £1.95bn. The bank acknowledges the significant uncertainty surrounding the outcome of the FCA’s review and the potential financial impact it may have on the group.
Brokers’ opinions on the matter vary. Shore Capital has maintained its guidance unchanged and retains a neutral stance awaiting further clarity from the FCA’s review. UBS analysts estimate Close Brothers’ liability from the motor finance inquiry to range between £30m and £830m, while RBC Capital suggests the industry could face a bill ranging from £6bn to £16bn.
In addition to the motor finance probe, the FCA has initiated an investigation into the sale of Gap insurance. The watchdog’s request for insurers to voluntarily withdraw Gap insurance from sale has led to an 80% withdrawal from the market. The FCA’s concerns revolve around the value dealers add to the sale of the product, high commissions earned, and retail prices. The investigation is expected to span three to six months.
