Close Brothers swings to loss on motor finance scandal hit

Close Brothers has revealed it swung to a loss after setting aside £165 million in provisions for the motor finance commission scandal.

Shares in the company slumped by 14% in Tuesday morning trading after it posted a statutory pre-tax loss of £103.8 million for the six months to January 31, against profits of £87 million a year ago.

It came after Close Brothers last month put by the provision to cover possible legal and compensation costs following recent developments in the car loans commission affair.

The firm added on Tuesday that half-year results were also impacted by £8.4 million for complaints handling and other operational and legal costs linked to motor finance commissions.

It warned that it would see a higher-than-expected hit of around £22 million for these additional costs linked to the motor finance scandal over the full-year, due to the financial impact of Supreme Court appeals.

Chief executive Mike Morgan, who took on the top job at Close Brothers in January, said: “Despite the short-term impact of the motor finance commissions uncertainty on our financial performance, our core banking model remains resilient.

“We continue to deliver a robust underlying profit in our banking business.”

Close Brothers is at the centre of a looming crisis facing the motor finance industry, with major lenders in the sector on the hook for potentially billions of pounds’ worth of compensation for motor finance deals with hidden commission payments.

The Court of Appeal in London ruled last October that it was unlawful for car dealers to receive commission on motor finance from lenders without a customer’s informed consent.

The court decision opened the door for a potential fresh wave of complaints from consumers who think they may have been mis-sold car finance in previous years.

Close Brothers disagrees with the ruling and has said it intends to appeal in the Supreme Court.

But the firm has been slashing costs and boosting its capital strength ahead of a possible big compensation bill and last September agreed to sell its wealth management division for about £200 million.

Its latest half-year results showed that it now expects to cut costs by around £25 million over the financial year as a whole, up from the £20 million previous target, which includes moves to cut jobs.

It said it had made “good progress on streamlining the workforce through the consolidation of roles across our businesses and functions, as well as through the management of vacancies”.

The group has also been overhauling its technology team – with its IT staff cut by about 30% since the 2023 financial year – and reducing office space.

The space for its banking division will have been cut by around a third by the end of 2024-25.

Mr Morgan said: “My priorities include focusing on greater simplification, improving operational efficiency, and driving sustainable growth.

“Our goal is to ensure that, once the motor finance commissions uncertainty has been resolved, the group is well positioned to generate strong, sustainable returns.”

Analysts at Panmure Liberum said: “Motor finance is not the only issue to be addressed by the group – costs are coming down but are still too high.”