Close Brothers' Regulatory Struggles and the Shadow of Takeover: Implications for Banking Partners and FSCS Protection

Close Brothers Group, a mid-sized UK bank with a £10 billion loan book, finds itself at a critical crossroads. Regulatory scrutiny over its motor finance practices, coupled with mounting financial pressures, has positioned the bank as a potential takeover target. While the firm's struggles are its own, the ripple effects could extend to its banking partners and the broader financial stability of customers protected under the UK's Financial Services Compensation Scheme (FSCS). Here's what investors need to know.

The Regulatory Crisis Deepens

Close Brothers' troubles stem from a landmark legal battle over unlawful dealer commissions. In 2024, the Court of Appeal ruled that banks could not pay such commissions without customer consent—a practice the firm had long employed. Though Close Brothers appealed to the Supreme Court, analysts at Moody's and RBC Capital Markets warn that even a base-case regulatory penalty could slash its Common Equity Tier 1 (CET1) ratio by 232 basis points. A worst-case scenario—where fines hit £450 million—could drop the ratio below 7%, perilously close to breaching regulatory requirements.

This capital squeeze has already triggered a 15% annual decline in its share price, from 368p in late 2024 to current levels hovering around 310p. The stock's volatility reflects investor anxiety over both the legal outcome and the looming possibility of a takeover.

The Takeover Catalyst: A Consolidating Banking Sector

The UK's banking landscape is shifting. Larger institutions like NatWest and Lloyds have been aggressively consolidating smaller players—Barclays bought Tesco Bank for £600 million, and NatWest acquired Sainsbury's Bank for £1.4 billion. Close Brothers, with its £9 billion deposit base, is now squarely in the crosshairs. Moody's analysts note that a takeover would further reduce competition and bolster the dominance of the “Big Five” banks.

For potential acquirers like NatWest, Close Brothers' loan book and customer relationships could prove valuable. However, the regulatory liabilities attached to the firm—particularly its motor finance scandal—pose a risk. Investors in NatWest or other rivals should scrutinize whether the purchase price adequately accounts for these costs. A could help assess whether the deal's economics hold up.

FSCS Implications: Protecting Depositors in Uncertain Times

While the Close Brothers-Saga Group-NatWest venture structure remains unclear, the broader FSCS framework is critical to understanding customer protections. The FSCS guarantees up to £85,000 per depositor per institution, a limit set to rise to £110,000 by December 2025. For joint accounts held with multiple institutions—including hypothetical ventures—each depositor's share is protected separately.

However, if Close Brothers were to fail or be acquired, customers' deposits would remain protected under the current scheme. The FSCS's recent handling of defaults, such as the £15.4 million payout for London Community Credit Union customers, underscores its ability to act swiftly. Yet, the uncertainty around Close Brothers' future could pressure customers to diversify deposits across institutions to stay within FSCS limits.

Investment Takeaways

1. Avoid Close Brothers' Stock: Until the regulatory outcome is clear, the bank's shares remain a high-risk bet. A CET1 ratio below 7% could trigger a forced sale, but even a takeover might come at a steep discount to current valuations.
2. Monitor Acquirers Cautiously: While NatWest and others may benefit from Close Brothers' assets, investors should demand clarity on how liabilities are allocated. A would help assess its capacity to absorb the deal.
3. FSCS-Protected Deposits Are Safe: Customers with balances under £85,000 can rest easy, but those exceeding this threshold should spread their deposits across multiple institutions. The upcoming £110,000 limit offers further reassurance.

Conclusion

Close Brothers' regulatory woes and capital crunch paint a precarious picture for the bank, but they also reflect a broader trend in UK banking: consolidation is inevitable. For investors, the path forward hinges on whether the firm can resolve its legal battles or find a buyer willing to pay a premium. Meanwhile, customers can sleep easier knowing FSCS protections remain robust—even as the sector reshapes itself.

In the end, the story of Close Brothers isn't just about one bank's survival. It's a cautionary tale for investors and a reminder of the FSCS's role in safeguarding financial stability amid industry upheaval.