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Close Brothers shares plunged after a short seller accused the UK specialist lender of not setting aside enough money to cover potential liabilities from the car finance mis-selling scandal, leaving investors facing losses.
Viceroy Research estimated on Monday that Close Brothers could have to pay out between £572mn and £1.23bn to compensate customers who were sold car loans through so-called discretionary commission arrangements — far more than the £300mn the lender has set aside.
The short seller said Close Brothers had “systematically misrepresented” its exposure to the UK’s mis-selling scandal and faced a potential wipeout of most of its equity value if the group breached its minimum regulatory capital requirements, and was forced into a major restructuring.
Viceroy claimed that in such a scenario, Close Brothers would be forced into writedowns and a suspension of some of its bonds. It said its calculations were based on Close Brothers paying redress for about 90 per cent of its loan book related to the probe.
Close Brothers shares fell 14 per cent on Monday, extending their decline this year to 32 per cent and giving it a market capitalisation of £538mn.
On Monday, Close Brothers said it “strongly disagrees” with Viceroy’s conclusions. It added: “Our provisioning approach in relation to this matter is in accordance with UK-adopted international accounting standards and follows a robust governance process.”
The lender has been among the hardest hit as the scandal has periodically hammered shares of Britain’s biggest banks, which have been forced to book billions of pounds in provisions to cover potential compensation costs.
Viceroy did not disclose the size of its short position. As a short seller, it stands to potentially benefit from a drop in Close Brothers shares.
Viceroy said its case was premised on Close Brothers’ exposure to the Financial Conduct Authority’s redress scheme being “structurally . . . far higher than peers” because it used discretionary commission arrangements for longer than competitors.
Viceroy said Close Brothers had set aside an inadequate amount to cover potential losses from the mis-selling scandal so that it would avoid breaching regulatory capital rules that govern how much common tier 1 equity financial institutions have to hold on their balance sheet.
The motor finance dispute centres on commissions paid by lenders to car dealerships through discretionary commission arrangements, which UK courts and regulators said were not sufficiently disclosed to consumers and incentivised charging them higher interest rates.
In October, the FCA set out the terms of a compensation scheme, which it estimated would cost about £11bn to lenders, having overturned a previous ruling that threatened to saddle banks with £44bn in costs.
Close Brothers has been embarking on a wide-reaching restructuring plan under chief executive Mike Morgan to bolster its finances, including selling its asset management business and cancelling dividends.
Viceroy said the restructuring meant Close Brothers had limited tools to retain its CET-1 ratios if it were forced to increase provisions.
Viceroy was founded in 2016 by Fraser Perring, a British analyst. Perring co-authored a report alleging money laundering and fraud at German payments group Wirecard, which filed for bankruptcy in 2020. The firm gained further prominence after targeting Tesla and the financing company Grenke.