Close Brothers signals uncertainty over car finance investigation costs as it sells asset manager for £200m

Close Brothers has sold its wealth management business for £200m, a move that has again raised concerns about a potential financial hit following an investigation into the car finance sector.

The group has strengthened its balance sheet as part of a regulator investigation into the historical sale of loans by UK car finance companies, following a surge in complaints from consumers whose claims for damages were rejected.

Many analysts predict the investigation could lead to a new PPI scandal, with banks, building societies and lenders having to pay billions in damages.

RBC estimates the sector owes between £6bn and £16bn in compensation to customers, while Jefferies thinks it could be as much as £13bn.

Close Brothers, which was forced not to pay a dividend this year, said the FCA investigation had “created significant uncertainty”, partly because the “timing, scale and extent of the potential financial impact on the group cannot be reliably estimated at this time”.

That is why the investment bank is increasingly focusing on strengthening its capital position.

Since February, dividend payments have been suspended and the loan portfolio has grown more selectively by ‘optimising’ risk-weighted assets.

The London-listed company also announced on Thursday that it has entered into an agreement to sell Close Brothers Asset Management to Oaktree Capital Management for up to £200 million, following a strategic review.

Close Brothers plans to retain cash proceeds from the deal, worth around £172m, which it says will strengthen its capital base and ‘improve its position to navigate the current uncertain environment’.

Mike Biggs, chairman of Close Brothers, said the sale “represents competitive value for our shareholders, allowing us to simplify the group and focus on our core lending activities”.

Close Brothers made the announcement alongside the publication of its annual results, which showed the company’s adjusted operating profit rose by half to £170m in the year ended July.

Profits were boosted mainly by the elimination of major impairment charges at specialist lender Novitas.

Combined with modest revenue growth, this more than offset the 10 percent increase in operating expenses, driven by higher personnel costs and continued investments in banking operations.

Adrian Sainsbury, CEO of Close Brothers, said: ‘We continue to be pleased with the strong demand for our banking business and see good growth prospects for the group.’

Sainsbury took medical leave on Monday, with Close Brothers’ finance director Mike Morgan taking over his responsibilities in the meantime.

Close Brothers Group shares rose 3.7 percent to 547p on Thursday morning, making them one of the biggest gainers on the FTSE 250 Index.