Close Brothers is reinforcing its financial position and legal strategy as it prepares for its Supreme Court appeal in April over the payment of motor finance commissions.
The lender has allocated up to £165 million in its first half to cover potential legal and compensation costs. It has also made a significant strategic shift by appointing new legal representation for the case, reflecting the high stakes involved, according to a report in The Independent.
Meanwhile, City A.M. reported that while Close Brothers was represented by Leeds-based law firm Walker Morris in an earlier Court of Appeal case, it has now brought in top-tier London firm Slaughter and May for its Supreme Court appeal. The firm, known for its work on high-profile corporate litigation, charges between £200,000 and £1.5 million for complex cases at the Employment Tribunal level, indicating the significant legal costs Close Brothers may incur in its fight to overturn the ruling.
The company stated that while the provision follows a "thorough assessment" of recent developments, there remains "significant uncertainty" regarding the final cost outcome. "The ultimate cost to the group could be materially higher or lower than the estimated provision," Close Brothers noted.
To prepare for any potential financial fallout, Close Brothers has bolstered its balance sheet by selling its wealth management division for approximately £200 million in September. The company also continues to explore risk transfers of motor finance assets and other portfolios to maintain financial resilience.
"We have completed preparations for a significant risk transfer of assets in motor finance and continue to assess any adjustments to the timing and structure of a potential transaction in light of the Court of Appeal judgment and our ongoing appeal to the Supreme Court," the lender said.
Industry-wide fallout
Close Brothers is among several lenders affected by the growing crisis in the motor finance sector, with firms facing potential liabilities amounting to billions of pounds. The Court of Appeal ruled in October that it was unlawful for car dealers to receive commission on motor finance deals without customers’ informed consent.
This decision has triggered a wave of compensation claims from consumers who believe they were mis-sold car finance.
Close Brothers, which disagrees with the ruling, is seeking to overturn it in the Supreme Court. The upcoming hearing will be closely watched across the financial sector, as the ruling could have broader implications for lenders.
Rising provisions
The financial burden of the scandal extends beyond Close Brothers. Lloyds Banking Group, the UK’s largest motor finance provider, set aside £450 million last year to cover potential compensation costs, while Santander UK allocated £295 million. Santander’s pre-tax profits fell 38% to £1.33 billion for 2024, partly due to these provisions.
Analysts estimate the total cost of the scandal for the sector could reach £44 billion.
Close Brothers reported that its underlying earnings for the six months to 31 January are expected to fall to £75 million, down from £94.4 million a year earlier.
Treasury’s stance
Close Brothers’ share price rose 1% following news last month that the Treasury had applied to provide evidence in the Supreme Court case. The government has argued that any redress should be proportionate to prevent excessive financial strain on the industry and to ensure continued consumer access to car finance.
The Treasury’s submission warned that the case could make motor finance more expensive and difficult to obtain.
However, Russ Mould, investment director at AJ Bell, cautioned that Close Brothers may still face greater-than-expected costs. "The outcome could still be worse than the current provision implies, so it’s too soon for Close Brothers to relax entirely," he told The Independent.
Regulatory concerns
According to City AM, concerns over the motor finance sector’s exposure to historic commission practices had been mounting for months before Close Brothers’ latest announcement. In late 2023, analysts warned that the industry could face an industry-wide reckoning.
Reports suggested that regulators were closely monitoring lenders’ exposure to mis-selling claims, with early estimates indicating a multi-billion-pound impact. The FCA has been under pressure to clarify its position on compensation frameworks amid concerns that excessive payouts could destabilise the sector.
The Supreme Court hearing in April will determine whether to uphold the Court of Appeal’s ruling on hidden motor finance commission arrangements, a decision that could have far-reaching consequences for the UK’s motor finance industry.
"Close Brothers prepares for Supreme Court motor finance showdown" was originally created and published by Motor Finance Online, a GlobalData owned brand.
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