Close Brothers 17% Surge|9bn Car Finance Scheme Blocked by Courts

The Share Price Rose When Car Buyers Lost

Close Brothers Group surged almost 17% on 3 July after a court ordered the FCA to suspend parts of its £9.1 billion motor finance compensation scheme.

That is an unusual thing: a lender's shares rising on news that its own customers must wait longer for compensation.

Millions of UK drivers who took out car finance between 2007 and 2024 were overcharged because of discretionary commission arrangements that inflated interest rates — a practice the articles describe as "the worst consumer finance scandal since PPI."

The FCA had expected average payouts of £829 per claim, covering around 12.1 million loans, with total costs including administration reaching £9.1 billion.

A court challenge brought by Volkswagen Financial Services, Mercedes-Benz Financial Services, Crédit Agricole Auto Finance and Consumer Voice has suspended those calculations and payments until a hearing in December 2026 or February 2027.

The bottleneck for Close Brothers is not whether customers were harmed — it is which mechanism pays them out, and at what cost to lenders.

Under the FCA's centralised scheme, Close Brothers faces a capped, calculable liability. If the court overturns that scheme, the FCA's own chief Nikhil Rathi told MPs the alternative — individual complaints — could cost the industry an additional £6 billion and take three years.

The 17% jump is not a signal that the problem has been resolved. It is a signal that the worst case has been deferred.

What Close Brothers' £320m Provision Actually Covers

Close Brothers disclosed it expects total motor finance redress costs of approximately £320 million — up from a £294 million provision set aside in January.

That figure covers 720,000 loans written between April 2007 and November 2024, with management assuming an average payout of around £500 per customer — below the FCA's industry-wide estimate of £829, reflecting what Close Brothers describes as smaller loan sizes and lower commission levels in its book.

The company expects around 75% of eligible customers to claim. A 5% change in that take-up rate moves the total cost by roughly £18 million in either direction.

Broker Panmure Liberum called the new figure "only modestly higher" than existing provisions and said it should provide "significantly more confidence that the doomsday scenario has been ruled out."

But that confidence is model-specific. Analysts at UBS noted it is "difficult for any bank to be certain on the total take-up rate."

The divergence matters. Panmure's conclusion rests on Close Brothers' own assumptions — £500 average payout, 75% take-up — holding under the FCA's final framework. If the court upholds the scheme but the take-up rate proves closer to the FCA's industry-wide assumptions rather than management's internal ones, the provision gap widens before a single payment is made.

Implemented in isolation, the £320 million hit would reduce the group's CET1 capital ratio by around 25 basis points to 14.0%, which remains above its medium-term target range of 12% to 13%.

The capital buffer looks comfortable on paper. The question is whether the paper assumptions survive December.

The Court Risk the Provision Does Not Price

The £320 million figure assumes the FCA's centralised redress scheme remains in force.

If the December 2026 or February 2027 court hearings overturn it, everything changes. The FCA has been explicit: should the scheme be struck down, the alternative is individual complaints lodged directly with lenders, adjudicated through the Financial Ombudsman Service if disputed.

FCA chief Nikhil Rathi told MPs that the individual-complaints route could cost the industry an additional £6 billion beyond the centralised scheme and take three years to resolve.

For Close Brothers, that is not a tail risk — it is the binary the share price is parked on.

The Court of Appeal has already confirmed that omnibus claims, which bundle similar complaints together, can be brought over motor finance grievances. That ruling extends the period of legal uncertainty rather than resolving it.

Shore Capital's Gary Greenwood argued the delay offers "no meaningful new information on the eventual scale of industry compensation costs." His upgrade to buy rests on that logic: if the uncertainty is unchanged, the 7.9% underperformance against the FTSE All Share over the past month is unwarranted.

The buried assumption in that argument is that the market is pricing an unchanged risk. But a court that has already forced the FCA to suspend its own scheme is not a neutral process — it is an active legal challenge by Volkswagen Financial Services and others who believe the centralised framework overreaches.

The monitoring variable is not the provision size. It is whether the court on which that provision rests remains intact.

Capital Headroom and the Decision Posture

Shore Capital calculates that Close Brothers retains approximately £374 million of core capital headroom above its minimum regulatory requirement — enough to absorb the £320 million provision without breaching capital targets.

The shares trade at 0.5 times forecast tangible net asset value. Management targets a return on tangible equity above 10% by the 2028 financial year; Shore Capital's own forecasts sit slightly below that goal. A 10% return on tangible equity, if achieved, would justify a valuation of around 655p, against the current price of around 408p.

That looks like a contrarian entry. But the 0.5x discount exists precisely because the earnings path cannot be modelled until the court decides.

No counter-evidence from the pool undermines the capital adequacy picture — the 14.0% CET1 ratio is above target ranges and the provision is manageable under the centralised scheme. The real risk is not that the provision is wrong under the FCA scheme. It is that the FCA scheme does not survive.

For holders, the position is defensible on capital grounds: the existing provision plus £374 million of headroom covers the scheme-based scenario. The trigger to worry is the court overturning the scheme at the December or February hearing, which would shift the liability calculus entirely.

For those watching from outside, the entry setup requires the scheme to survive. If the court upholds the FCA's framework at the December 2026 or February 2027 hearing, the 0.5x discount compresses and 655p becomes a credible target. If the court strikes down the scheme, the liability is no longer £320 million — and the share price reflects a very different company.