Shares in one of Britain’s oldest investment banks have fallen to their lowest level in almost three decades following an investigation into the car finance market.
On a tough day for the company and its investors, Close Brothers tumbled 22.5 per cent, or 89.6p, to 308.4p after it scrapped its dividend and warned of ‘significant uncertainty’ over the regulatory investigation into the sector.
Shares in the group, which dates back to 1878, has fallen by 60 percent since the Financial Conduct Authority (FCA) launched an investigation last month into the possible mis-selling of car loans.
That has wiped out £690m of value and left the stock at its lowest level since 1996.
Concerns are growing that Close Brothers and others in the sector, including Lloyds, Barclays and Santander, could face a hefty bill if FCA rules stipulate that customers will have to pay too much for car loans between 2007 and 2021.
Investigation: Close Brothers tumbled 22.5% after it scrapped its dividend and warned of ‘significant uncertainty’ over regulatory investigation into the sector
The cases concern ‘discretionary commission schemes’ used by the car finance industry before they were banned in 2021.
Martin Lewis, the consumer champion behind Money Saving Expert, has warned that lenders could face a bill similar to the £50bn in costs and compensation they paid over the mis-selling of payment protection insurance (PPI).
Russ Mould, investment director at AJ Bell, said: ‘The banking industry has a habit of becoming embroiled in scandals.
Just as the dust settles on one scandal, along comes another, and the cycle has been repeating itself for decades.
‘It appears we are on the verge of another one and the potential fines and compensation could be enormous.’
In an update yesterday, Close Brothers said: ‘There is significant uncertainty about the outcome of the FCA review, and the timing, scope and magnitude of any potential financial impact on the group cannot be reliably estimated at this time.
‘The board considers it wise for the group to further build up its capital strength.
‘Therefore, the group will not pay dividends for the current financial year and the reinstatement of dividends in the 2025 financial year and beyond will be assessed once the FCA has completed its process and any financial impact on the group has been assessed.’
City analysts at Berenberg said: ‘This is clearly a major blow to Close Brothers, which has historically prided itself on a sustainably growing dividend.’
Car loans make up around a fifth of loans at Close Brothers – almost £2 billion.
Although this pales in comparison to the £15bn of loans provided by Lloyds, City analysts believe its size means it is better placed to absorb the bill.
Shares in Lloyds, owner of Black Horse, Britain’s largest car finance provider, have fallen by around 12 percent since the launch of the FCA investigation.
Announcing the investigation on January 11, the FCA said: ‘If we find that there is widespread misconduct and that consumers have been victimized, we will determine how best to ensure that those entitled to compensation obtain an appropriate settlement in an orderly, consistent and efficient manner.”
Analysts at Royal Bank of Canada believe the sector could face a £16 billion bill, with Close Brothers at risk for a £200 million hit and Lloyds £2 billion.
Close Brothers stressed that ‘there can be no certainty as to any financial impact resulting from the FCA’s investigation’ and said the ‘business continues to perform well’.
The company expects profits of £94 million for the six months to the end of January, compared with £117.5 million in the same period a year earlier.