Close Brothers Group, the banking group that owns a motor finance arm, has announced plans to boost its finances by £400 million and reduce costs.
This is in preparation for the potential impact of a major investigation into car finance mis-selling practices. The group stated that it understands the "paramount importance" of preparing for various possible outcomes.
Lloyds was the first UK bank to set aside approximately £450 million to cover potential costs related to customers overpaying on their loans. The Financial Conduct Authority (FCA), the UK's financial regulator, is currently examining the effects of hidden discretionary commission arrangements.
This selling practice, which allowed brokers, including car dealers, to raise interest rates on car loans to earn more commission, was banned in 2021. However, Close Brothers said it would be "premature" to predict the outcome of the watchdog's review, which isn't expected to report its findings until later this year.
"The FCA's review of the motor finance industry is ongoing and it would be premature to predict the outcome or estimate the potential impact on the group," said Adrian Sainsbury, Close Brothers' chief executive.
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He added: "The board however recognises the paramount importance of preparing the group for a range of outcomes from this review. "As part of this, the board is taking a number of decisive actions to strengthen our capital position materially."
The bank announced that it would be managing business costs more tightly, which could provide about £400 million worth of extra capital by the end of the 2025 financial year.
In an effort to manage costs, it has also decided to suspend its dividend to shareholders for the current financial year. Unlike Lloyds, the bank stated that it was not setting aside a specific amount of money for a provision as it was too early to estimate the potential costs related to the issue.
The FCA might decide to establish a formal compensation scheme if it believes that a large number of customers should receive compensation. Close Brothers reported 700% increase in its operating pre-tax profit for the six months ending in January, compared to the same period last year.
Profits in the previous year were affected by one-off costs associated with legal services lender Novitas, which it had previously acquired. Henry Farris, a partner at law firm Withers, said he expects the motor finance issue to continue for a "long time".
"Close Brothers' announcement is further evidence of how seriously the banking sector is taking the FCA probe, following the suspension of dividends and the steps taken by Lloyds."
However, he believes that the provision taken across the sector will need to be "much greater" if analysts' estimations of the scale of the problem are correct.
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