Close Brothers Faces Uncertainty Ahead of Trading Update Amid Motor Finance Market Chaos

Highlights: 

• Legal Uncertainty: Close Brothers Group (LSE:CBG) could face substantial financial liabilities following an Appeal Court ruling on undisclosed car loan commissions. 
• Potential Mis-selling Claims: The case opens the door for widespread mis-selling compensation claims, possibly rivaling the scale of the PPI scandal. 
• Strategic Adjustments: Close Brothers has already sold its asset management arm and may consider further divestments or suspending dividends as it navigates the crisis. 

Close Brothers Group PLC (LSE:CBG) is gearing up for its next trading update amid growing uncertainty in the motor finance sector. The financial services firm finds itself embroiled in a potential legal quagmire, following a recent Appeal Court ruling that could have far-reaching implications for the industry. 

Legal Setback Sparks Market Concerns 

Just a few weeks ago, Close Brothers and Firstrand Bank faced a significant legal defeat as the Appeal Court ruled against them in cases concerning the non-disclosure of commissions on car loans. The ruling is seen as broadening the scope of an ongoing investigation by the Financial Conduct Authority (FCA) into similar deals across the sector. 

The verdict could open the door for mis-selling claims from anyone who purchased a car with a loan over the past 15 years. Industry commentators warn that the potential financial fallout could mirror the scale of the payment protection insurance (PPI) scandal, which cost banks tens of billions in compensation. 

Financial Impact: A Looming Liability? 

City estimates suggest that if the Appeal Court ruling is upheld, Close Brothers could face claims amounting to hundreds of millions of pounds. Analysts at Canadian bank RBC have projected a potential liability of £320 million for Close Brothers, though this figure could escalate depending on the outcome of any subsequent legal proceedings. 

Close Brothers has reportedly appealed the ruling, and the FCA has urged the Supreme Court to expedite its decision to provide clarity. Until a final judgment is reached, the uncertainty casts a shadow over Close Brothers’ upcoming trading update and its financial outlook. 

Strategic Adjustments and Balance Sheet Bolstering 

In anticipation of potential financial strain, Close Brothers has already taken steps to strengthen its balance sheet. The company recently agreed to sell its asset management division for £200 million, a move aimed at shoring up its financial position. This divestment follows increasing speculation that the firm may need to explore further strategic options, including winding down its motor and premium finance loan books. 

RBC analysts have also suggested that Close Brothers might consider suspending dividend payments in 2025/26 as a precautionary measure. This would be a significant step, given the company’s history of consistent dividend payouts, but could become necessary to navigate the financial uncertainty arising from the legal challenges. 

Industry-Wide Implications 

The implications of the recent court ruling extend beyond Close Brothers. The motor finance market, a critical revenue stream for many lenders, now faces heightened scrutiny. The FCA’s investigation into the sector could potentially lead to widespread regulatory changes, increasing compliance costs and altering the landscape for motor finance providers. 

If the mis-selling claims gain momentum, it could lead to a wave of compensation payouts reminiscent of the PPI scandal. For Close Brothers, this adds another layer of complexity as it prepares to update investors on its trading performance and strategic plans in the coming week. 

Looking Ahead: Navigating Legal and Market Uncertainty 

Close Brothers’ upcoming trading update is likely to be overshadowed by the ongoing legal uncertainty. Investors will be closely watching for any new developments regarding the appeal and any signals from the FCA on potential regulatory actions. 

In the meantime, the company’s management faces the challenge of maintaining investor confidence while navigating a volatile and unpredictable market environment. The outcome of the legal proceedings will be pivotal in determining the future financial health of Close Brothers and its strategic direction in the coming years. 

As the industry awaits further clarity, Close Brothers’ response to the crisis will be critical in shaping its recovery strategy. Whether through asset sales, legal appeals, or strategic realignments, the firm must address the immediate risks while positioning itself for long-term stability.