Close Brothers Group has revealed plans to bolster its finances by £400 million and cut costs as it prepares for the impact of a major investigation into car finance mis-selling practices.
The banking group, which owns a motor finance arm, said it recognises the “paramount importance” of preparing for a range of possible outcomes.
Lloyds became the first UK bank to set aside about £450 million to cover potential costs relating to the issue of customers overpaying on their loans.
The UK’s financial regulator, the Financial Conduct Authority (FCA), is currently reviewing the impact of hidden discretionary commission arrangements, a selling practice which it banned in 2021.
It allowed brokers, including car dealers, to increase interest rates on car loans so they got more commission.
But Close Brothers said it would be “premature” to predict the outcome of the watchdog’s review, which is not due to report its findings until later this year.
“The FCA’s review of the motor finance industry is ongoing and it would be premature to predict the outcome or estimate the potential impact on the group,” Adrian Sainsbury, Close Brothers’ chief executive, said.
“The board however recognises the paramount importance of preparing the group for a range of outcomes from this review.
“As part of this, the board is taking a number of decisive actions to strengthen our capital position materially.”
The bank said the measures included more tightly managing business costs, which could shore up about £400 million worth of additional capital by the end of the 2025 financial year.
It also suspended its dividend to shareholders for the current financial year as part of efforts to manage costs.
Unlike Lloyds, it said it was not setting aside a certain amount of cash for a provision because it was too soon to estimate what the costs relating to the issue could be.
The FCA may decide to set up a formal redress scheme if it thinks that a large number of customers should be compensated.
It came as Close Brothers saw its operating pre-tax profit surge by 700% in the six months to the end of January, compared with the same period a year ago.
Profits in the previous year had been impacted by one-off costs relating to legal services lender Novitas, which it previously acquired.
Henry Farris, a partner at law firm Withers, said he expects the motor finance issue to rumble on for a “long time”.
“Close Brothers’ announcement is further evidence of how seriously the banking sector is taking the FCA probe, following the suspension of dividends and the steps taken by Lloyds.”
But he said he thinks the provision taken across the sector will need to be “much greater” if analysts’ estimations of the scale of the problem are correct.
Shares in Close Brothers were up by 7% on Tuesday morning.