Close Brothers shares collapse after FCA auto finance probe forces it to scrap dividend

Shares in Close Brothers have collapsed after it scrapped dividend payouts for the current financial year, with the group bracing for potential compensation costs from a motor finance review by the City watchdog.

The news sent the group’s shares down 28 per cent in London on Thursday morning. Close Brothers’ stock has been trading at a record low price throughout this week.

The Financial Conduct Authority (FCA) announced last month that it would review historic claims of unfair costs on discretionary car finance commissions and ensure consumers receive compensation if it uncovers evidence of widespread misconduct.

Shares in FTSE 250-listed Close Brothers, one of the UK’s oldest merchant banking groups, have plummeted more than 62 per cent since the FCA’s announcment.

It has previously been tight-lipped about its exposure, but today the group said in an unscheduled trading update that the “significant uncertainty about the outcome of the FCA’s review, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present”.

Analysts have pegged the hit to the motor finance sector at up to £16bn, with Close Brothers and Lloyds particularly exposed. Close Brothers could face up to £200m in compensation payouts, according to latest analysis.

Auto lending makes up around fifth of its loan book and at £1.95bn as of last July.

The group said its board has concluded that it is currently not required or appropriate to give a provision in the group’s half-year results regarding the probe.

“While there is no certainty regarding any potential financial impact as a result of the FCA’s review, the Board recognises the need to plan for a range of possible outcomes,” it explained.

“The board considers it prudent for the group to further build capital strength, while supporting its customers and business franchise.”

As a result, Close Brothers will not pay any dividends on its ordinary shares for the current financial year.

The group added that “the reinstatement of dividends in the 2025 financial year and beyond will be reviewed once the FCA has concluded its process and any financial consequences for the group have been assessed”.

The board added that it is implementing “a range of actions to further accrete capital”, including optimising risk weighted assets.

Close Brothers noted that its business continues to perform well, with the banking division generating around £112m of adjusted operating profit in the six months to 31 January 2024.

Benjamin Toms, an analyst at RBC, said in a note: “The group sees significant uncertainty around the FCA’s review of discretionary commissions in motor finance. Therefore, the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present.”

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