The chief executive of the embattled financial institution, Close Brothers, has publicly defended the company’s practices amidst escalating allegations of widespread car finance mis-selling. Mike Morgan asserted that customers were fully aware of the financial commitments they entered into when purchasing vehicles and, crucially, received tangible value for their money throughout the entire transaction.
These statements emerge as the United Kingdom’s financial regulator, the City watchdog, gears up to unveil the specifics of a substantial compensation framework designed to address individuals who were allegedly mis-sold vehicle loans. Close Brothers itself has provisionally estimated a financial impact of approximately £300 million stemming from this issue. However, recent commentary from a prominent short-seller suggests the potential liability for the lender could be as much as four times that figure, raising significant concerns among investors and the wider market.
The Core of the Car Finance Scandal
At the heart of this burgeoning scandal lies the practice of commission payments. For years, lenders have been remunerating car dealerships for facilitating finance agreements with buyers. Critics contend that this system incentivised dealers to steer customers towards more expensive finance packages, often with higher interest rates or less favourable terms, because these deals yielded more lucrative commission payouts for the salesperson.
Mr. Morgan, in his remarks to The Mail on Sunday, pushed back against the notion of widespread deception. “I would contend you knew what you were paying for this car and you got the car,” he stated, implying a fundamental understanding and acceptance of the terms by consumers. He drew a distinction between the current situation and the notorious mis-selling of Payment Protection Insurance (PPI) that plagued the financial sector from the mid-1990s to 2010, a scandal that ultimately cost banks an estimated £50 billion. In contrast to PPI, Morgan argued that “the customer got value throughout this” car finance arrangement.
A Sweeping Compensation Scheme
The Financial Conduct Authority (FCA) is proposing a comprehensive compensation scheme that could significantly reshape the automotive finance landscape. Under this proposed framework, an estimated 14 million car finance deals arranged between 2007 and 2024 may be eligible for payouts. The anticipated average compensation per eligible customer is around £700, bringing the total estimated cost of the scheme to a staggering £11 billion.
Close Brothers’ Financial Strain and Executive Concerns
The pressure on Close Brothers is palpable. In a significant cost-cutting move, the firm recently announced the axing of a quarter of its workforce, amounting to 600 job losses. Mr. Morgan, while defending the company’s past practices, also voiced reservations about the current structure of the FCA’s proposed compensation scheme. He articulated that “The way it’s structured at the moment doesn’t reflect the loss that customers have suffered and is disproportionate.” This sentiment is echoed by some Members of Parliament, who have expressed concerns that drivers might be “short-changed” by the proposed payouts, with some advocating for a higher average compensation of £1,200 per motorist.
Short-Seller’s Scathing Assessment
Adding to the company’s woes, Viceroy Research, a short-selling firm known for its impactful investigations into major financial entities like the German payment giant Wirecard and the social housing landlord Home Reit, has issued a critical report. Viceroy Research alleges that Close Brothers has “substantially misrepresented” its potential exposure to the FCA’s compensation scheme. Their analysis suggests that even in the most optimistic scenario, the funds Close Brothers has set aside would need to increase to £572 million. In a more pessimistic “bear scenario,” their estimate escalates to a formidable £1.23 billion. Close Brothers has vehemently rejected these claims, and the lender’s share price experienced a notable decline of 14 per cent earlier this week, underscoring the market’s sensitivity to these allegations.
