Close Brothers warns of £640m loss if car loan scandal spreads

Close Brothers could take a financial hit nearly twice the brewery’s stock market value. car loan scandal Analysts have warned that this situation is spreading to other areas of consumer finance.

The lender, which has a market capitalization of £339 million, could face a bill as high as £640 million if the precedent set by a landmark court decision affects its premium finance business, RBC Capital Markets estimates.

Court of Appeals in a case involving “secret” auto financing deals Decision was made on October 25 that a broker cannot legally receive a commission from a lender without obtaining the client’s fully informed consent to payment.

Shares in Close Brothers are trading at a three-decade low as the decision raises the prospect of the Financial Conduct Authority (FCA) introducing new regulation. multi-billion pound compensation plan in its review of the now-banned discretionary commission arrangements (DCAs).

Close Brothers, which is considered the bank relatively most exposed to investigation, temporarily stopped writing new vehicle loans as it digested the decision. Many other auto loan providers have followed suit.

This precedent can extend beyond auto loans and apply to a number of industries. consumer finance commissionsThe lawyers argued. Metro Bank temporarily suspended asset finance loans to review the court’s decision.

“One possible interpretation is that the decision is broad enough to cover any broker’s commission in any finance arrangement where the borrower has not given informed consent to the payment of the commission,” said Benjamin Toms, an analyst at RBC.

He predicted that if the High Court upheld the automotive finance decision and applied a “broad interpretation”, Close Brothers could face a worst-case “liability” of up to £250 million in premium finance.

The 146-year-old commercial bank provides premium finance to one in seven families and one in 20 businesses in the UK. website.

Premium finance enables more than 20 million people in the UK to obtain third-party installment loans for non-life insurance products. like engine financingBanks pay commissions to brokers for acting as intermediaries.

“We believe it is unlikely that the amount of these commissions will generally be disclosed to the customer,” Toms said.

Premium financing is also under regulatory review by the FCA We start market review Last month amid concerns that consumers may not be getting fair or competitive deals.

RBC has now priced a £100 million provision for premium funding into Close Brothers’ commission risk model; this totals £420 million.

The “downside scenario”, combining car and premium financing, would result in the bank’s profits taking a hit of around £640m. This estimate includes compensation, interest and administrative costs.

Toms said the figures showed “there may be a bleaker road ahead.” RBC maintained its outperform rating on Close Brothers’ shares but added a “speculative risk” qualifier to reflect the greater unpredictability of its earnings.

Close Brothers declined to comment. Its shares traded mostly flat on Tuesday.