Business unit sold to try to bolster cash position before potentially huge regulator penalties
Merchant Bank Close Brothers has taken a significant step to try to strengthen its capital base as it prepares for the potential financial fallout from an ongoing FCA probe into motor finance practices. The merchant bank, which offers a number of property finance lending options, has agreed to sell its wealth management unit to Oaktree Capital Management in a deal valued at up to £200 million. The sale, announced alongside the group’s full-year results, is part of a broader strategy to bolster its financial position as it faces a share of potentially multi- billion-pound fines.
The Financial Conduct Authority (FCA) is investigating historical loan sales in the UK motor finance industry, a sector in which Close Brothers has substantial exposure. Analysts predict the investigation could lead to significant compensation claims, potentially on a scale similar to the Payment Protection Insurance (PPI) scandal. RBC estimates that the financial services industry could face costs between £6 billion and £16 billion in reimbursements to customers, while Jefferies projects a possible £13 billion hit.
“The FCA’s review of historical motor finance commission arrangements announced in January introduced significant uncertainty for the group,” said Adrian Sainsbury, Close Brothers’ CEO. Sainsbury has been at the bank for over a decade, having joined from ANZ.
The group has already suspended dividend payments since the announcement of the probe and has focused on conserving capital. This deal is expected to generate approximately £172 million in upfront cash proceeds, which the bank plans to use to "improve its position to navigate the current uncertain environment," according to Close Brothers.
The wealth management sale is part of a £400 million capital plan by the century and a half old bank initiated earlier this year. Close Brothers' chairman, Mike Biggs, emphasised the importance of the sale, stating that it “represents competitive value for our shareholders, allowing us to simplify the group and focus on our core lending business.” The transaction is expected to boost the group’s capital ratio by around 100 basis points, enhancing its financial resilience ahead of any potential liabilities stemming from the FCA investigation.
This deal comes at a critical time for Close Brothers as the FCA investigation continues to loom large. The probe, initially launched in January, focuses on the now-banned practice of discretionary commissions on car loans. Regulators are concerned that these commissions incentivized lenders and dealers to charge consumers higher interest rates. While the FCA’s findings were expected in September, an update has been delayed until May of next year due to challenges in collecting data from the companies involved.
Despite the challenges posed by the motor finance probe, Close Brothers reported a 50% increase in adjusted operating profits to £170 million for the year ending in July. This was primarily driven by the non-recurrence of impairment charges linked to its specialist lender, Novitas. However, pre-tax profits fell 35% to £142.2 million due to costs related to the FCA review and rising employee expenses.
Close Brothers has yet to make provisions for potential redress costs from the motor finance investigation but disclosed that it has already spent nearly £7 million on “complaints handling and other operational costs” and expects this figure to rise to between £10 million and £15 million in the coming financial year.
With the sale of its wealth management division, Close Brothers aims to focus more intently on its core lending business. The bank offers bridging and short term housing finance, as well as developer lending. Oaktree’s managing director, Federico Alvarez-Demalde, expressed excitement over the acquisition, noting that the asset manager intends to maintain the “client-centric culture” for which Close Brothers’ wealth management business is known.
