Viceroy Research alleged that Close Brothers had substantially misrepresented its exposure to a compensation scheme designed by the Financial Conduct Authority (FCA), according to the Daily Mail. In a best-case scenario, Viceroy said provisions would need to rise to £572m, while its base case is for a £999m hit and a bear scenario could reach £1.23bn. The impact could trigger regulatory intervention or even a restructuring where shareholders are substantially wiped out, Viceroy claimed. The short seller set out these claims in a note declaring it was short on Close Brothers, meaning it is betting against the company's share price and stands to gain from its decline.
The scheme centers on FCA plans to compensate motorists for 14 million car finance deals between 2007 and 2024, with an average payout of £700 each and a total estimated cost of £11bn, according to the Daily Mail. The FCA is expected to publish its final rules by the end of this month. Close Brothers increased its provision for the scandal from £165m to £300m in October but has said the ultimate cost could be materially higher or lower, according to the company.
Although Close Brothers represents only a small fraction of the UK motor finance market by volume, its exposure to the FCA's redress scheme is structurally and proportionally far higher than peers.
Broader industry impact shows larger rival Lloyds Banking Group has set aside £1.95bn, while Santander has taken a £478m hit and Barclays says it is on the hook for £325m, the Daily Mail reported. Viceroy Research said Close Brothers was among the earliest and most aggressive adopters of discretionary commission arrangements, which allowed car dealers to earn bigger commissions from banks if they sold car finance at pricier rates, according to the Daily Mail. Having already sold its asset management business and broker Winterflood while axing its dividend and cutting costs, Close Brothers has limited avenues to shore up its finances if provisions increase, Viceroy claimed.
The publication of the report left insiders at the lender stunned as it prepared to announce half-year results on Tuesday, according to the Daily Mail. Close Brothers declined to comment.