Winterflood, a subsidiary of Close Brothers, is being sold off by the company as it streamlines its operations in anticipation of a ruling on car finance.
Close Brothers Sells Asset Management Business Amid Motor Finance Scandal
Close Brothers, a British financial services company, has announced the sale of its asset management business and a focus on its core lending activities. The move comes amidst ongoing concerns about the lender's exposure to potential compensation payments due to a motor finance commissions scandal.
The shares of Close Brothers have remained around 13% lower over the last year and more than 70% below their April 2021 peak. However, the company's shares added more than 9% on Friday morning to 450.6p. The current recommendation on Close Brothers' shares is HOLD with a fair value of 370p, which is below the current share price.
The motor finance commissions scandal involves mis-sold PCP (personal contract purchase) agreements, a widespread issue in the UK's motor finance sector. Close Brothers is one of the lenders most affected by this ongoing scandal. In response, the company is overhauling its insurance premium finance business, shifting focus to commercial lines and distancing itself from personal lines insurance premium finance, which includes loans related to motor and home insurance premiums.
The restructuring is part of Close Brothers' efforts to improve returns amid the reputational and financial impact of the scandal. The company has sold market maker Winterflood as part of a simplification drive. The sale of Winterflood, a leading equity market maker in the UK, offering trading services to various financial institutions, is set to complete early next year for just under £104million.
The broader motor finance scandal is expected to lead to significant payouts due to mis-sold PCP agreements. A pending UK Supreme Court ruling could potentially unlock billions in compensation payments for customers who were mis-sold these finance products. This implies that Close Brothers, alongside other lenders, may face substantial claims and compensation liabilities once the ruling is made.
While specific figures for the compensation related directly to Close Brothers have not been reported yet, the broader market expectation is for large-scale payouts due to these mis-selling claims. The excess capital, if available, may be reinvested in faster and higher returning parts of the business or returned to shareholders.
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Investors considering the current state of Close Brothers might decide to hold their investments, given the ongoing motor finance scandal and the company's focus on its core lending activities. Moreover, the restructuring initiatives undertaken by Close Brothers suggest potential future investments in areas with faster and higher returns, influenced by the excess capital generated from any subsequent compensation claims stemming from the motor finance scandal.
With Close Brothers' shares currently trading above the fair value recommendation and a potential for large-scale payouts due to the scandal, there exists both an opportunity for reinvestment and a prospect for shareholder returns once the compensation claims are settled.
