Close Brothers has announced it is nearly doubling the funds it is setting aside for the car finance compensation scheme, joining other major lenders in challenging the regulator’s proposed plans.
The banking group told investors it is adding approximately £135 million to its existing £165 million provision, bringing the total expected cost to around £300 million.
This follows a similar move by Lloyds Banking Group, which said it would need an additional £800 million to cover the scheme, raising its total provision to £1.95 billion.
The increases come after the Financial Conduct Authority (FCA) outlined its proposed compensation scheme for drivers mis-sold car loans between 2007 and 2024. The regulator estimates that around 14 million unfair car finance agreements are eligible for payouts, averaging £700 each. Overall, it has projected that the total cost to the motor finance industry, including operational expenses, could reach £11 billion.
Close Brothers said its £300 million provision reflects its “best estimate” of the financial impact, noting the “greater likelihood that more historical cases, particularly those involving discretionary commission arrangements (DCAs), would qualify for redress.”
“The group is committed to achieving a fair outcome for customers and providing redress where loss has occurred,” the bank said. “However, it does not believe the redress methodology proposed by the FCA appropriately reflects actual customer loss or achieves a proportionate outcome.”
The bank also criticized the FCA’s approach to assessing unfairness, arguing it does not align with legal guidance from the Supreme Court’s ‘Johnson’ case, which confirmed that the test for unfairness is highly fact-specific. Close Brothers said it would continue engaging with the regulator on these points.
Lloyds made similar comments earlier in the week, expressing concerns that the FCA’s compensation calculations could result in some customers receiving more than 100% of the commission back. The regulator’s methodology proposes compensating consumers with the average of the estimated overpayment, commission paid, and interest, reflecting differences between loans with DCAs and flat-fee arrangements. The FCA estimates that 44% of agreements from 2007 to 2024 were unfair and eligible for compensation.
FCA Chief Executive Nikhil Rathi defended the plan, saying last week: “We believe our scheme is the best way to settle the issue for both consumers and firms, and alternatives would be more costly and take longer.”
Following the announcement, Close Brothers’ shares fell around 3% on Tuesday morning.
