The merchant bank Close Brothers has “systematically misrepresented” its exposure to the motor finance scandal and will have to double the amount it has set aside to compensate customers, a prominent short-seller has claimed.
Viceroy Research, which rose to fame following its exposés of Wirecard and Home Reit, estimates that Close Brothers will probably have to pay out somewhere between £572 million and £1.23 billion as part of the redress scheme — much more than its existing provision of £300 million.
Close Brothers said it “strongly disagrees” with Viceroy’s report in a statement issued after trading on the London market closed on Monday. It added that its “provisioning approach in relation to [motor finance compensation] is in accordance with UK-adopted international accounting standards and follows a robust governance process”.
The report came ahead of the merchant bank’s results on Tuesday, in which it reported a £65.5 million loss for the six months to the end of January. It reported a £102.2 million loss for the same period last year. The bank also said it would cut 600 jobs in the coming 18 months, reducing its headcount to 2,000, as it attempts to reduce costs and simplify the business.
In its “blue sky” scenario, Viceroy claimed that Close Brothers was “at risk of regulatory intervention”, but in its worst-case scenario, the company would need to be restructured, leaving shareholders “substantially wiped out”.
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The short-seller, which profits from declines in its targets’ share prices, suggested that Close Brothers had not already set aside more money because further provisions would weaken its balance sheet to the point where it would be likely to fail regulatory stress tests.
Shares in Close Brothers closed down 57¾p, or 13.9 per cent, to a nine-month low of 357½p on Monday. The shares fell a further 2.5 per cent to 348p in early trading on Tuesday
Tracing its roots to 1878, Close Brothers offers everything from invoice finance to funding for property developers. It also provides motor finance and, while it is not the industry’s biggest player, its operations in this area are large relative to the overall group. Car loans accounted for £2 billion of its £9.5 billion loan book last July.
The car loan scandal erupted two years ago when the Financial Conduct Authority began a review of motor finance. It centres on the industry’s failure to properly disclose commissions paid by lenders to motor dealers for arranging finance on vehicle purchases.
The FCA is due to publish a final redress scheme this month. In October, the regulator estimated that lenders would have to repay about £11 billion in total, with individuals receiving about £700 per motor finance agreement, on average.
Viceroy said it had reviewed “the FCA’s consultation paper, court transcripts, and independent claims” before deciding to target Close Brothers.
Whereas most investors make money when a company’s share price goes up, short-sellers profit when their target’s share price goes down. They borrow shares from another investor, immediately sell them on the market and then buy them back later to return them. Their profit is the difference between what they originally sold them for and what they repurchase them for.
In its 20-page report, Viceroy claimed that Close Brothers used discretionary commission arrangements — the sort the FCA banned in 2021 — in 93 per cent of its motor finance contracts between 2007 and 2021. The industry average was closer to 61 per cent, it estimated.
Close Brothers offers everything from invoice finance to funding for property developersDavid Davies for The Jockey Club/PA Wire
Viceroy also described Close Brothers as being one of the “earliest and most aggressive adopters” of such commission arrangements, meaning it had more “early vintage” loans which would carry higher interest repayments to customers.
That, coupled with the potential for some of those customers to pursue their claims through the courts rather than the FCA, is largely why Viceroy believes the cost to Close Brothers will be at least double the £300 million it has forecast.
To raise funds in anticipation of a hefty compensation bill, the lender has sold off its asset management arm and Winterflood, the market maker, and scrapped its dividend.
Viceroy claimed that Close Brothers has “exhausted all available measures to sustain its capital base” and that if it had to increase its provision to more than £620 million its capital buffer would fall “dangerously close to the regulatory minimum”.