Close Brothers shares surged on Wednesday after the UK bank declared it could “comfortably absorb” its slice of a £9.1bn compensation bill over the motor finance scandal, hours after one of its rivals announced it was selling its UK operations over looming costs.
The specialist lender said it expected the final terms of the Financial Conduct Authority’s (FCA) compensation scheme to cost roughly £320m, a sum that was “broadly similar” to previous estimates and the £294m put aside to date.
Close Brothers said the extra £26m could be “comfortably absorbed by existing capital resources, leaving the group well positioned to continue delivering its strategy”. The news sent its shares up by 17% by early afternoon on Wednesday.
The FCA’s compensation scheme, which was finalised last week, is intended to draw a line under the car finance scandal, in which drivers were overcharged for loans as a result of commission payments between lenders and car dealers. It estimated that victims will be in line for payouts worth £830 on average.
The bank’s market update allayed fears about whether it could survive the scandal, especially after the short seller Viceroy Research claimed last month that Close Brothers would have to at least double its provision for car finance to somewhere between £572m and £1.07bn.
Close Brothers has already sold its broker and asset management businesses in order to shore up its balance sheet, and it is on track to cut 600 staff – about a quarter of its workforce – to reduce costs.
Close Brothers’ update came hours after its rival, the South African group FirstRand, announced it would be selling its UK operations – trading as Aldermore and motor lender MotoNovo – amid frustration over the FCA compensation scheme, which it said was “deeply flawed”.
The group said it would be forced to raise an extra £510m to cover compensation costs – taking its total provisions for the motor finance scandal to £750m – slash its earnings forecast and offload its UK business.
FirstRand said in a trading statement: “The group has consistently shared with all UK regulators its concerns that should the redress scheme result in the level of provisioning that has now transpired, it would be forced to consider whether it can continue to participate in motor finance lending in the UK market on a sustainable basis.”
It said that while “the group has done everything in its power to protect shareholders from a redress scheme that it considers deeply flawed,” it would now be looking to “facilitate an orderly ownership transition” of its Aldermore business.
A spokesperson for Aldermore, which employs 1,500 staff across offices in London, Reading, Manchester and Cardiff, did not respond to questions over whether the business could end up being wound down if it failed to find a buyer.
“The Aldermore Group is a financially robust business that continues to deliver sustainable growth,” the spokesperson said. “We remain operating in our markets as usual, driving significant positive outcomes for our customers.”
