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TLDR:
UK merchant banking group Close Brothers has warned that its annual dividend may be at risk following an investigation by the Financial Conduct Authority (FCA) into whether commission payments made on car loan volumes comply with regulations. A spokesperson for the bank stated that although Close Brothers will “vigorously” fight any changes to its business model that result from the investigation, “there can be no certainty that the outcome will not have a material impact on the group”. The probe comes as part of the FCA’s wider investigation into motor finance providers, which has identified that some customers are being sold credit they cannot afford, while another investigation is examining marketed special offers to consumers that may not meet the regulator’s regulations.
Key points:
- Close Brothers has warned that its annual dividend may be at risk following an investigation by the FCA into its car finance business.
- The FCA is probing whether commission payments made on car loan volumes comply with regulations.
- The investigation comes as part of the regulator’s wider probe into motor finance providers.
Campaigners have raised concerns about the transparency of car financing deals, which they argue can mask increasingly expensive borrowing. The FCA has stated that outstanding car loans total £58.7 billion (USD75.9 billion), a 15.6% annual rise, and the FCA’s executive director of strategy and competition, Chris Woolard, has warned that “we are concerned that there may be a lack of transparency, potential conflicts of interest and irresponsible lending in the motor finance industry”. Regulation is required, he added, to ensure that consumers do not suffer harm from this market. The FCA is also concerned that some customers may be taking on high-interest loans to finance the purchase of a car, leading to the risk of a potential financial crash.
Close Brothers employs 3,200 people across its businesses, which provide specialised lending, wealth management and securities trading services, and reported adjusted pre-tax profit of £238.1m for the past year. It is set to announce its interim dividend on 28 February.
In 2016, the FCA reached an agreement with large number of car loan providers and brokers, including the UK arms of Santander and Honda, regarding compensation relating to historical lending practices. Lloyds Bank has also set aside a £110m provision for its car loans business in anticipation of remediation proposals to customers.
Car finance grew by 12% to £32bn in 2016, with vehicles being increasingly bought on credit. Figures recently released by the Finance & Leasing Association revealed that 87% of new private cars were bought on credit in 2017, compared with 75% in 2014. Almost all dealerships (91%) in the UK offer some form of finance, with 6 out of 10 of all private buyer new cars being purchased through a finance product.
Verdict has published a report on the future of mobility, which can be downloaded here.
