Shares in lender Close Brothers have tumbled by as much as 19 per cent after short seller Viceroy Research said the firm will have to at least double its £300million provision for Britain’s car finance scandal.
Viceroy said the firm had ‘substantially misrepresented’ its exposure to a scheme designed by the City watchdog to compensate motorists over the scandal.
It said that even in a best case ‘blue sky’ scenario the money set aside would have to rise to £572million. But Viceroy’s base case is for a £999million hit and in a ‘bear scenario’ this would reach £1.23billion.
Viceroy said the impact on Close Brothers’ finances could trigger an intervention by regulators or even a restructuring in which shareholders are ‘substantially wiped out’.
It set out the claims in a note declaring that it was ‘short’ on Close Brothers – meaning it is betting against the company’s share price and stands to gain from its shares falling.
They fell by as much as 19 per cent after the report was published before later clawing back some of the damage to close the day down 14 per cent.
The claims centre on the lender’s exposure to a car finance scandal compensation scheme
The publication of the report left insiders at the lender stunned as it prepared to announce half-year results on Tuesday.
It centres on a scheme designed by the Financial Conduct Authority (FCA) under which 14million motor finance deals between 2007 and 2024 will be subject to compensation worth an average £700 each.
The scheme’s total cost has been estimated at £11billion. The FCA is expected to publish its final rules on how it will operate by the end of this month.
In October, Close Brothers increased its provision for the scandal from £165million to £300million but has said that the ultimate cost ‘could be materially higher or lower’. Together with other lenders it has questioned the fairness of the FCA’s plans.
Larger rival Lloyds Banking Group has set aside £1.95billion while Santander has taken a £478million hit and Barclays says it is on the hook for £325million.
Viceroy said that having already sold its asset management business as well as broker Winterflood while also axing its dividend and cutting costs, Close Brothers had ‘limited avenues’ to shore up its finances if provisions increase.
The short-seller said: ‘Although Close Brothers represents only a small fraction of the UK motor finance market by volume, its exposure to the FCA’s redress scheme is structurally and proportionally far higher than peers.’
Viceroy said that the lender was ‘among the earliest and most aggressive adopters’ of discretionary commission arrangements (DCAs) – which allowed car dealers to earn bigger commissions from banks if they sold car finance at pricier rates.
Close Brothers said in a statement that it ‘strongly disagrees with the report’ adding: ‘Our provisioning approach in relation to this matter is in accordance with UK-adopted international accounting standards and follows a robust governance process.’
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