Close Brothers' £135m Provision Hike: Implications for the UK Motor Finance Sector

The UK motor finance sector is navigating a complex landscape of regulatory scrutiny, credit risk pressures, and evolving consumer behavior. Close Brothers Group's recent £135 million provision hike-part of a broader industry trend-underscores the sector's vulnerability to legal and operational challenges. Yet, amid these headwinds, signs of resilience persist, driven by shifting consumer preferences and long-term market dynamics.

Sector-Wide Credit Risk Pressures

A Motor Finance Online report, citing Fitch Ratings, warns that total provisions for mis-selling-related redress could exceed £2 billion in 2025, with Lloyds Banking Group, Santander UK, and Barclays also adding hundreds of millions to their reserves. These costs stem from a 2024 Court of Appeal ruling that found lenders failed to disclose commissions paid to car dealers, heightening the likelihood of customer compensation, according to Fitch. The Financial Conduct Authority (FCA) estimates the sector's redress liability at £8.2–9.7 billion, while UBS projects an additional £400 million in provisions for Close Brothers, as reported in a Reuters article.

Smaller lenders like Close Brothers face disproportionate strain. With a CET1 capital ratio of 13.5% as of December 2024, the group has taken steps to preserve capital, including the sale of its asset management division in a Close Brothers update. However, its lower capital buffers and higher exposure to the motor finance sector leave it more vulnerable than larger peers such as Lloyds, which has already allocated £1.15 billion in total provisions, as reported by Motor Finance Online. The Supreme Court's April 2025 hearing on the case adds further uncertainty, with outcomes potentially reshaping the sector's financial outlook, according to Fitch.

Consumer Behavior: Caution and Demand for Transparency

A Mintel report notes that the sector is projected to grow to over £48 billion by 2025, driven by electric vehicle (EV) adoption and flexible financing options like Personal Contract Purchase (PCP) plans. PCP remains particularly popular among younger buyers, offering low monthly payments and trade-in flexibility, as detailed in the Mintel report.

However, lingering distrust from past mis-selling scandals has tempered demand. A Deloitte report highlights that 61% of consumers remain reluctant to engage with car finance due to concerns over transparency. This skepticism aligns with broader global trends: 88% of consumers now expect brands to demonstrate authenticity, and 60% prioritize ethical practices when making financial decisions, according to an analysis by Global Banking & Finance. The sector's ability to rebuild trust through clearer terms and digital engagement will be critical to sustaining growth, as Mintel also observes.

Used car finance, meanwhile, presents mixed signals. While the value of new business rose 3% year-on-year in May 2025, volumes declined modestly, per FLA statistics. This reflects a broader shift toward affordability checks and longer vehicle retention periods, as consumers navigate inflationary pressures and rising living costs-a trend reported in a Motor Finance Online article on new business volumes.

Assessing Sector Resilience

The interplay of regulatory costs and consumer trends raises questions about the sector's long-term viability. On one hand, the £30 billion redress payout estimated by the FCA-should the Supreme Court uphold the ruling-could strain even well-capitalized banks, as noted by Reuters. On the other, structural factors such as EV incentives and digital transformation offer pathways to recovery. The UK government's Electric Car Grant and investments in EV infrastructure, for instance, are expected to accelerate the transition to sustainable transport, creating new demand for financing, as highlighted by Deloitte.

Close Brothers' strategic response-selling non-core assets and prioritizing capital preservation-highlights the need for agility in this environment, a point made in the Close Brothers update. Yet, the group's CET1 ratio is projected to fall to 13% by year-end, signaling ongoing fragility, according to the same Close Brothers filing. For the sector to thrive, lenders must balance compliance with innovation, leveraging technology to deliver transparent, personalized solutions that align with evolving consumer expectations, as outlined in the Mintel report.

Conclusion

Close Brothers' provision hike is a microcosm of the UK motor finance sector's broader challenges. While regulatory redress costs and credit risks loom large, consumer demand for ethical, flexible financing options suggests a path forward. The sector's resilience will depend on its ability to adapt to these dual pressures-addressing past missteps while embracing innovation. For investors, the key lies in monitoring the Supreme Court's ruling, the pace of EV adoption, and lenders' capacity to rebuild trust in an increasingly skeptical market.