Close Brothers shares soar as bank ‘well positioned’ for £320m motor finance hit
Close Brothers has insisted it is “well positioned” to absorb the financial hit from the City watchdog’s motor finance redress scheme but added to speculation another legal battle could be on the horizon.
The FTSE 250 lender told markets on Wednesday morning that it estimates the cost of the Financial Conduct Authority’s (FCA) redress scheme would come in at £320m, falling broadly in line with the £300m the firm had estimated it was on the hook for.
Shares soared on the news, with the bank notching a whopping 20 per cent gain on open to 478p.
The scheme is anticipated to hit the bank’s CET1 ratio – a key metric indicating its financial health – by 25 basis points, taking it to 14 per cent. This remains ahead of the bank’s 12 to 13 per cent target.
But some ambiguity does remain around potential legal challenges to the scheme.
Close Brothers said the final outcome will be “dependent upon any potential further legal, regulatory or industry developments (including any legal challenge of the scheme by various parties)”.
Following the FCA’s publication of the final rules for the redress, analysts forecast more legal battles on the horizon after the scheme was split into two separate parts for pre-2014 and post.
The inclusion of deals going back to 2007 in the redress holds onto a major industry contention for the motor finance scandal.
Another legal row ‘highly likely’
Benjamin Toms, equity analyst at RBC, said: “We think that it is highly likely that at least one, if not multiple, of the many interested parties will ask the administrative courts to review the scheme.”
Toms added this reaction was likely “envisaged by the FCA” through its introduction of two schemes.
Lloyds Banking Group – the owner of the UK’s largest motor finance lender Black Horse – stood by its £2bn in provisions last week but also warned of uncertainty on the horizon.
“The ultimate outcome may also differ dependent upon potential actions by various parties, including legal proceedings and complaints,” a statement from Lloyds said.
Following the bank’s third-quarter results last October, finance boss William Chalmers refused to rule out a legal challenge from Lloyds, should the scheme not be adapted as Lloyds sees fit.
“I shan’t comment any further on what we’ll do beyond the consultation process itself,” he said.
Close Brothers – which was one of two banks that took the motor finance battle to the Supreme Court – stopped short of ruling out a further legal showdown.
“The group will continue to closely monitor any further legal, regulatory and industry developments and is considering its next steps,” a statement said on Wednesday.
The update from Close Brothers follows a blistering note from short-seller Viceroy, which accused the bank of under-provisioning and “systematically misrepresenting” its exposure to the motor finance scandal.
Mike Morgan, the chief executive of Close Brothers, previously told CityAM: “We strongly disagree with this report. You know, we operate to the highest standards… it’s non-negotiable.”