Car finance scandal: lender sets aside £165m for possible compensation costs | Close Brothers

One of the UK’s biggest providers of motor finance has warned it expects to set aside up to £165m in the first half of its financial year to cover possible legal and compensation costs as a result of the car loans commission scandal.

Close Brothers said it had come up with the estimate after a “thorough assessment” of the long-running case, although it warned there was still “significant uncertainty” over the outcome of appeals and the investigation by the Financial Conduct Authority (FCA).

“The ultimate cost to the group could be materially higher or lower than the estimated provision,” the lender said in a statement to investors.

The provision comes after Close Brothers cancelled its dividend and announced plans to raise £400m to shore up its balance sheet.

In Wednesday’s statement, it said it expected its capital ratio to be affected, although this would remain above regulatory requirements, leaving it “well placed to absorb the impact of the estimated provision”.

Close Brothers, along with Lloyds, are the two largest providers of motor finance, which stand at the centre of a scandal over how customers were sold car loans.

Over the past year, the FCA has received a rising number of complaints from consumers over car finance, and launched an investigation into “secret” commission payments, or discretionary commission arrangements, on car loans issued between 2007 and 2021.

The practice meant car dealerships and brokers had the power to set interest rates on car loans, and earn higher commission along the way. DCAs were banned by the FCA in 2021 because of concerns they were incentivising dealers to charge higher interest rates.

Consumers won a landmark court case last October against FirstRand Bank and Close Brothers, after the court of appeal ruled it was unlawful for lenders to have paid a commission to car dealers without the borrowers’ knowledge.

The decision could pave the way for companies to be made to pay billions of pounds in compensation to borrowers as part of the FCA’s investigation into whether commission arrangements made between 2007 and 2021 were harmful to consumers.

The FCA will decide by December whether to take any further action, which could include launching a customer compensation scheme funded by the lenders that sat behind the arrangements.

The watchdog has already warned car lenders including Close Brothers, Lloyds and Santander to hold back cash for potential payouts, which some analysts believe could add up to £8bn-£13bn.

Lloyds Banking Group, which is the most exposed among UK high street lenders, has already put aside £450m for potential fines.

The supreme court has also granted permission for Close Brothers and FirstRand to appeal against the court of appeal ruling.

The FCA has previously said it planned to formally intervene in the case to share its expertise with the supreme court. Meanwhile, the chancellor, Rachel Reeves, made a rare attempt to intervene last month, after the Treasury submitted an application to the court arguing it should be able to contribute evidence to a case that could “cause considerable economic harm” and make car loans harder to get and more expensive.