Close Brothers shares sink as infamous short-seller warns of motor finance ‘wipeout’
Shares in Close Brothers plummeted on Monday after a group notorious for short-selling warned the bank had “systematically misrepresented” its exposure to the motor finance scandal.
The FTSE 250 bank nosedived as much as 12 per cent during afternoon trading after Viceroy Research, a group famed for its exposés of Wirecard and Home Reit, warned the bank will have to “at least” double its existing provisions following “examination” of the watchdog’s redress scheme.
Viceroy, which benefits from a decline in its targets’ share price, said in a “blue sky” scenario, Close Brothers could face regulatory intervention, while in its worst case the lender would need to be restructured — leaving shareholders “substantially wiped out”.
The CET1 capital restrictions dictate banks must maintain a minimum ratio of risk-weighted assets (RWA) or face restrictions on dividends, share buybacks, and bonus payments.
The bank is currently on the hook for £300m in the car finance mis-selling saga after hiking its provisions by another £135m in October.
“We believe Close Brothers has systematically misrepresented its exposure to the Financial Conduct Autority’s forthcoming motor finance consumer redress scheme,” the authors of the note said.
In a bear case, Viceroy predicts the bank’s financial safety net could completely disappear and turn into a £1.2bn hole.
This would drop their capital so low that a switch is flipped on £200m of the bank’s debt, meaning the bank stops owing that money to its lenders and instead either cancels the debt entirely or turns it into new company shares to try and stay afloat.
The bombshell note comes ahead of Close Brothers providing markets an update on its financial results on Tuesday morning.
Close Brothers awaits final redress
The Financial Conduct Authority (FCA) is tipped to lay out the full details of its industry-wide redress scheme later this month, following fierce backlash to its initial proposals.
The watchdog said it would conduct on an industry-wide redress scheme following a Supreme Court battle in the summer of last year into the use of discretionary commission arrangements (DCAs) in the car finance industry.
The deals – which included ‘secret’ commission paid by lenders to car dealerships without consumer knowledge – were found to be unlawful by the Court of Appeal in October 2024. But Close Brothers and Firstrand took their legal battle to the highest court in the land last year, where Justices sided with lenders on two out of three appeals.
This opened the door for the City watchdog to introduce a redress scheme on the grounds of “unfairness” – the criteria the sole appeal was upheld on after finding the 55 per cent commission was outsized.
Analysis from Viceroy suggests Close Brothers serves as an industry outlier on the use of DCAs with at 61 per cent, compared to an estimated 93 per cent of Close Brothers’ motor-finance contracts.
Close Brothers issued a statement on Monday following the report stating it “strongly disagrees” with Viceroy’s findings.
“Our provisioning approach in relation to this matter is in accordance with UK-adopted international accounting standards and follows a robust governance process,” the statement said.
Backlash to the FCA’s initial proposals outlined last October has mounted over the last months with banking giants Barclays, Lloyds and Santander all taking a swing at the City watchdog.
Close Brothers accused the FCA’s assessment of “unfairness” as not aligning with the top Court’s ruling in August.
In October the bank said “it does not believe the redress methodology proposed by the FCA appropriately reflects actual customer loss or achieves a proportionate outcome.”