The recent decision by Close Brothers to scrap dividend payouts for the current financial year, coupled with a sharp decline in shares, underscores the profound challenges the company confronts following the Financial Conduct Authority’s (FCA) motor finance review.

Close Brothers, a stalwart in the UK’s financial landscape, has seen its shares plummet by more than 61% since the FCA’s announcement, making it evident that the spectre of potential compensation costs looms large.

The investigation focuses on historical claims of unfair costs related to discretionary car finance commissions, with the FCA pledging to ensure consumers receive compensation if evidence of widespread misconduct is uncovered.

FCA pauses complaint deadline over commission arrangement disputes

Shares in Close Brothers have more than halved this year alone, reaching record-low prices. The recent 8.4% drop in shares, triggered by the decision to withhold dividends and the uncertainty surrounding the FCA review, reflects the seriousness of the situation.

Analysts estimate the potential impact on the motor finance sector at up to £16 billion, with Close Brothers and Lloyds identified as particularly exposed. Close Brothers, in particular, could face compensation payouts of up to £200 million, according to recent analyses, reported in the finance press.

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Motor finance constitutes a substantial portion, approximately a fifth, of Close Brothers’ £9.5 billion loan book as of July 2023, according to Bloomberg.

FCA‘s motor finance probe sparks misconduct risk concerns in UK banking sector: Fitch Ratings

The company, in an unscheduled trading update today, acknowledged the “significant uncertainty” regarding the FCA’s review and the potential financial implications. The Board, adopting a prudent approach, opted not to recognise a provision in the group’s half-year results, emphasising the need to plan for a range of possible outcomes.

Close Brothers aims to fortify its capital strength while continuing to support customers and preserve its business franchise. The decision not to pay dividends for the current financial year aligns with this strategy, with a reassessment planned for the 2025 financial year and beyond after the FCA concludes its process.

While these measures indicate a proactive stance by Close Brothers, the situation highlights the broader challenges facing financial institutions grappling with regulatory scrutiny and the uncertainties that follow.

Close Brothers emphasises that its business continues to perform well, with the banking division generating £112 million of adjusted operating profit in the six months to January 31, 2024.

However, the overarching narrative remains shaped by the unfolding FCA review and its potential financial repercussions.