Close Brothers faces key assembly over automobile finance scandal
- Commissions paid between banks and brokers on car deals may be unlawful
- Such arrangements were not clearly flagged to the customer
- Case centered on ‘discretionary commission arrangements’
Close Brothers has until Friday to appeal a court ruling that has sent shockwaves through the motor finance sector and beyond.
The bank – founded in 1878 – was rocked by a verdict from the Court of Appeal, which ruled last month that commissions paid between banks and brokers on car deals may be unlawful because they were not clearly flagged to the customer.
The case centered on ‘discretionary commission arrangements’ used by the motor finance industry before they were banned in 2021.
The shock judgement has raised fears lenders could be on the hook for up to £16billion in compensation payouts, which would make it the biggest misselling scandal since payment protection insurance (PPI) which cost banks £50billion. There are also concerns the contagion could spread to other forms of consumer credit such as home and car insurance.
The news sent shares in Close Brothers into a deeper tailspin. They have fallen by almost three-quarters this year to value the bank at just £324m.
Shock: Close Brothers was rocked by a verdict from the Court of Appeal, which ruled that commissions paid between banks and brokers on car deals may be unlawful
Car finance accounts for about a fifth of loans made by the lender, which has 3m customers and 4,000 employees.
Analysts at RBC Capital Markets reckon the final redress bill for the bank could be £640m in the event of a ‘bad outcome’.
Close Brothers, which holds its annual shareholders’ meeting on Thursday, has sold its wealth management arm as part of a £400m plan to conserve capital.
The bank says it intends to appeal to the Supreme Court, but has yet to do so.
The Financial Conduct Authority is concerned that the car finance market will collapse if banks stop making loans to customers. But it also fears the freeze could extend to other areas where kickbacks are paid, such as car and home insurance, potentially causing another credit crunch.
Lloyds, which owns motor finance provider Black Horse, has set aside £450m to cover the potential cost of an investigation into car finance deals.
And Santander has delayed its results because of uncertainty about the court verdict.
DIY INVESTING PLATFORMS
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
