Yahoo Finance Car finance investigation forces merchant bank to scrap £100m dividend
One of Britain’s oldest merchant banks has been forced to scrap a £100m dividend over a City watchdog investigation into the possible mis-selling of car finance.
Close Brothers said investors would receive no payouts this financial year owing to “uncertainty” surrounding the Financial Conduct Authority (FCA) review.
Shares in the FTSE 250 listed group fell as much as 30pc following the announcement. Close Brothers’ share price is now down more than 60pc so far this year over fears about exposure to the FCA investigation.
The FCA is currently reviewing possible consumer harm over the historic mis-selling of car finance used to fund the purchase of second hand motors.
The regulator is due to decide whether compensation is owed to thousands of drivers by September.
As a significant player in the motor finance market, Close Brothers is bracing for a hit if the FCA finds that customers are owed redress.
The company sold motor finance through a network of 4,000 dealerships across the country.
The FCA investigation is going back to as early as 2007, leaving lenders uncertain about the size of the potential impact.
A dividend, which analysts say is worth £100m, will not be paid to shareholders as a result, Close Brothers said.
The company, led by chief executive Adrian Sainsbury, will decide whether to reinstate the dividend next year once the FCA review concludes.
“There is significant uncertainty about the outcome of the FCA’s review, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present,” Close said over the dividend cut.
“It is a long-standing priority of the group to maintain a strong balance sheet and prudent approach to managing its financial resources.”
Loans made to people buying second hand cars at dealerships boomed from 2011 onwards, rising to over £40bn by 2022.
Close Brothers, along with other banks like Lloyds, Barclays and Santander, were involved in the sale of these loans via dealerships.
BMW and Mercedes also offered the products.
These loans often allowed the car dealerships to get paid commissions if they inflated the interest rates on the loans sold to customers to buy a car.
According to an 2019 FCA study, a £10,000 loan paid back over four years would have led to the consumer paying £1,100 more in interest than if the commission structure had not been in place.
The watchdog estimated that consumers were paying over £500m more per year overall, which would have flowed as commissions to the dealerships.
The FCA subsequently banned the sale of commissions in 2020.
However, the Financial Ombudsman Service recently started upholding consumer complaints on commissions paid.
This has forced the FCA to act because the FOS move could potentially open the floodgates to thousands of other claims.
The FCA suspended any further complaints in January to investigate the issue further.
If a compensation scheme is established by the FCA, Close could be forced to take part and pay redress to customers.
