Close Brothers and FirstRand Navigate Car Finance Compensation Landscape

The UK financial landscape is currently undergoing significant changes due to a £9.1 billion compensation scheme established by the Financial Conduct Authority (FCA) in response to the car finance scandal. This scandal involved lenders overcharging drivers for loans through commission payments to car dealers. The FCA's scheme aims to compensate affected consumers, with average payouts estimated at £830 per agreement.

Birmingham MailThe Guardian

Close Brothers, a specialist lender, reported a surge in its shares by 17% following its announcement that it could "comfortably absorb" an estimated £320 million in compensation costs related to the scandal. This amount aligns closely with the £294 million already set aside, indicating that the bank is well-prepared to manage the additional financial burden. Close Brothers has taken proactive measures to strengthen its balance sheet, including selling its broker and asset management businesses and planning to reduce its workforce by 600 employees, approximately 25% of its staff.

The Guardian

In stark contrast, FirstRand, a South African banking group, announced its decision to exit the UK market, selling its operations under the Aldermore and MotoNovo brands. The group cited the FCA's compensation scheme as "deeply flawed" and expressed concerns over the financial viability of continuing operations in the UK. FirstRand indicated it would need to raise an additional £510 million to cover compensation costs, bringing its total provisions to £750 million. The bank's leadership emphasized that the business case for maintaining a UK consumer finance entity no longer fit within its risk appetite.

The Guardian

FirstRand's criticisms highlight broader concerns regarding the FCA's approach to the compensation scheme. The bank described the compensation process as "disproportionate and unfair," particularly after the FCA revised its estimates, reducing the number of car loans deemed unfair from 14.2 million to 12.1 million. This revision means fewer consumers will receive compensation, raising questions about the adequacy of the scheme for those affected.

Birmingham Mail

Nikhil Rathi, the FCA's chief executive, stated, “There’s nothing stopping lenders moving tomorrow now they’ve seen the rules,” indicating that lenders are expected to adapt quickly to the new regulatory environment. Meanwhile, Close Brothers reassured investors that its financial strategy remains intact despite the compensation obligations, stating that it is "well positioned to continue delivering its strategy."

Birmingham Mail

There are discrepancies in the reported numbers regarding the total compensation costs and the number of loans affected. While Close Brothers estimates its compensation costs at £320 million, FirstRand's total provisions amount to £750 million. Additionally, the FCA's reduction of unfair loans from 14.2 million to 12.1 million raises questions about the overall impact of the compensation scheme on consumers.

Birmingham Mail

As the compensation scheme unfolds, both Close Brothers and FirstRand will continue to navigate its implications. Close Brothers aims to maintain its market position, while FirstRand's exit raises concerns about the future of consumer finance in the UK. The ongoing developments will be closely monitored by industry stakeholders and regulators alike.

The Guardian