Close Brothers, the FTSE 100 lender, has reported a staggering £104 million loss for the first half of 2025, primarily due to significant provisions set aside for the motor finance scandal. This loss contrasts sharply with the previous year when the bank recorded a profit of £88.1 million during the same period. The financial turmoil has prompted shares to tumble by 14 percent as investors respond to the alarming figures.
The leading banking group made substantial provisions, totaling £165 million, to address anticipated payouts related to motor finance misconduct. This provision aimed at covering potential legal and compensation costs has already begun to weigh heavily on the bank's operational income, which fell by one percent to £390 million. The group's net interest margin has also reduced, decreasing by 30 basis points to 7.2 percent from 7.5 percent.
Mike Morgan, who became the company’s chief executive in January, reiterated the resilience of Close Brothers’ banking model amid these financial challenges. He stated, “The group’s performance reflects the strength and resilience of our business model, with strong underlying profit in our Banking business.” He emphasized the need to focus on operational efficiency and sustainable growth as the firm navigates through these turbulent waters.
Close Brothers' current turmoil stems from the fallout of the October Court of Appeal ruling which deemed it unlawful for banks to pay commissions to car dealerships without the informed consent of consumers. This landmark decision has opened doors for numerous consumer complaints from those who might have been mis-sold car finance deals with hidden commissions.
After the ruling, Close Brothers decided to make the provision, which reflects both operational and legal costs associated with handling complaints. The bank has already incurred £8.4 million for these complaints, and it predicts this figure could rise to £22 million by year-end due to the continuing impact of pending legal cases. The firm has stated, “We estimate the group’s total operating expenses for this financial year will be impacted by approximately £200 million due to the motor finance commissions uncertainty.”
Broker Peel Hunt has pointed out the considerable uncertainty surrounding Close Brothers' future, emphasizing the outcome of the upcoming Supreme Court case. This hearing, scheduled for April 1-3, 2025, will determine whether the recent court rulings will uphold or overturn the previous decisions related to commission structures. The Financial Conduct Authority (FCA) has suggested it may establish a sector-wide redress scheme should the Supreme Court rule against the lenders.
Adding to the complexity, Close Brothers has been restructuring its operations to boost capital strength and offset potential compensation bills. To this end, the company successfully sold its Close Brothers Asset Management division for approximately £200 million, which has reportedly bolstered their capital position. Following this sale, Close Brothers now anticipates cutting costs by around £25 million for the entire financial year, surpassing their previous target of £20 million.
The lender is implementing significant changes, including slashing its IT workforce by about 30 percent and reducing physical office space for its banking division by one-third by the end of the 2024-25 financial year. Analysts from Panmure Liberum have cautioned, though improved, costs remain too high for the group and urge more strategic focus on broader issues beyond just motor finance.
Given the current financial climate, Close Brothers announced it will not issue any interim dividends due to the increased uncertainty surrounding motor finance. Shares plummeted 14 percent on March 18, dropping to 296 pence—the lowest point seen since the bank faced backlash over its commission practices. Morgan affirmed the need for increased operational efficiency, stating his ambition to refocus the company on delivering consistent returns once the controversies are resolved.
Other banking entities, including Lloyds Banking Group and Santander UK, have also reported extensive provisions to counter potential compensation claims arising from mis-sold finance deals; Lloyds has set aside £450 million, and Santander has accounted for £295 million.
With the Supreme Court ruling impending, the financial industry holds its breath, recognizing the broader consequences this could have not only for Close Brothers but for the entire motor finance sector. The impending verdict could influence banks and consumers alike, determining the future of commission structures and consumer rights within this highly significant sector.
Close Brothers faces significant pressures to restore its market position as it grapples with these mounting legal challenges and operational difficulties, but its management remains committed to working through these challenges effectively.
