Claims Close Brothers “systematically mispresented” redress exposure

Close Brothers is under attack from analysts at Viceroy Research who have put out a report claiming the lender has “systematically misrepresented” its exposure to the FCA’s forthcoming motor finance consumer redress scheme and will need to at least double its existing provision of £300 million, a view which the company strongly refutes.

Viceroy said its own review of the FCA’s consultation paper, court transcripts, and independent claims suggests that Close Brothers’ redress exposure ranges from £572 million to £1.07 billion.

Ahead of the publication of Close Brothers half year results on 17 March, Viceroy announced it has taken a short position on the company’s shares, which were down 14% on the day, taking the decline this year to 32% and giving  it a market capitalisation of £538 million.

DCA overhang

The independent financial analysis company said its own research indicated that Close Brothers was among the earliest and most aggressive adopters of discretionary commission arrangements (DCAs). It alleged that while other lenders curtailed DCA-linked products after 2015, Close Brothers continued to rely on these arrangements as a core revenue driver well into the 2020s.

Based on this analysis, Viceroy claimed that 93% of Close Brothers motor-finance contracts between 2007 and 2021 included DCAs, compared to a motor finance industry average of 61%. In addition, as an early adopter of this model, the earlier vintages of CBG’s loan book carry greater exposure to interest under the FCA’s hybrid redress methodology, inflating compensation values relative to newer loans

Viceroy alleged that Close Brothers had not set aside as much as it needed to meet potential compensation claims “because further provisions will breach CET1 regulatory capital restrictions and can create an equity wipeout event”.

Viceroy also claims that Close Brothers has exhausted all available measures to sustain its capital base, including the sale of key subsidiaries, Risk Weighted Asset reductions, and dividend cancellations.

In a statement in response to these allegations, Close Brother said it strongly disagrees with the report, and stated: “Our provisioning approach in relation to this matter is in accordance with UK-adopted international accounting standards and follows a robust governance process.”