Close Brothers and the Rising Cost of Compliance in Motor Finance

The UK automotive finance sector is navigating a seismic shift in regulatory expectations, with compliance costs ballooning as a result of landmark court rulings and FCA interventions. For firms like Close Brothers Group, the financial and operational implications of these changes are profound. As the industry grapples with a potential £8.2 billion to £9.7 billion ($11 billion–$13 billion) redress liability for mis-sold motor finance products, the question of long-term resilience looms large, according to a Bloomberg report. This analysis examines how Close Brothers is responding to these pressures and what this means for its future viability.

Regulatory Reckoning and Financial Strain

The October 2024 Court of Appeal ruling, which deemed undisclosed commissions in motor finance unlawful, has triggered a crisis of confidence. Lenders are now legally obligated to disclose commission arrangements to borrowers, a shift that mirrors the fallout from the Payment Protection Insurance (PPI) scandal, according to a GTLaw analysis. For Close Brothers, the immediate fallout has been stark. In its first-half 2025 results, the firm reported a £103 million operating loss, driven by a £165 million provision for redress costs, according to its half-year results. This provision, coupled with elevated legal and advisory expenses, has pushed total expected costs to £200 million, as reported by City A.M..

The financial strain is compounded by a 14% drop in Close Brothers' share price, reflecting investor concerns over liquidity and profitability. According to the Bloomberg report noted above, the firm now anticipates a "material increase" in its redress provisions, signaling further headwinds. These developments underscore the vulnerability of automotive lenders to regulatory overreach, even as broader industry trends-such as declining interest rates and growing EV adoption-suggest long-term growth potential, according to a Lenvi analysis.

Strategic Resilience: Capital Strengthening and Cost Management

Close Brothers has responded to these challenges with a dual strategy of capital preservation and operational efficiency. To bolster its balance sheet, the firm sold its asset management division, increasing its pro-forma CET1 capital ratio to 13.4%, as set out in its half-year results. This move, combined with a £5 million annualized cost-cutting initiative, has positioned the company to absorb short-term shocks, the Bloomberg coverage noted. CEO Mike Morgan has emphasized the robustness of the core banking business, stating that the firm remains committed to "sustainable growth" once regulatory uncertainties resolve, a point he made in the half-year results.

However, resilience is not without trade-offs. The resumption of motor finance lending, while a positive step, has been cautious. Close Brothers has updated its documentation to ensure full disclosure of commission payments but has warned of higher operational costs tied to compliance, as reported by City A.M. These adjustments, while necessary, risk eroding profit margins in a sector already pressured by low-interest margins and competitive pricing.

The Supreme Court's Pivotal Role

The ultimate trajectory of Close Brothers-and the industry-hinges on the Supreme Court's April 2025 ruling on the Court of Appeal's decision, a point the company reiterated in its half-year results. A reaffirmation of the fiduciary duty framework could force lenders to revise commission structures entirely, potentially triggering further redress claims. Conversely, a more lenient interpretation might mitigate financial exposure. Either way, the ruling will shape the sector's compliance landscape for years to come.

Long-Term Outlook: Balancing Risk and Opportunity

While the immediate outlook for Close Brothers is clouded by regulatory costs, the firm's capital-strengthening measures and cost discipline provide a buffer. The FCA's broader regulatory strategy-aimed at reducing compliance burdens for financial services firms-could also offer relief in the medium term, as noted in the GTLaw analysis. However, the firm's ability to thrive will depend on its capacity to innovate. For instance, leveraging digital tools to streamline disclosure processes or adopting AI-driven risk models could offset rising costs while enhancing customer trust, as the Lenvi analysis suggests.

Investors must weigh these factors against the backdrop of a volatile market. The UK motor finance sector is poised for growth, driven by stabilizing used car prices and expanding EV infrastructure, a trend set out by Lenvi. Yet, without structural reforms to commission practices, the specter of mis-selling could persist, undermining long-term profitability.

Conclusion

Close Brothers' experience highlights the dual-edged nature of regulatory change: while compliance costs threaten short-term stability, they also compel firms to adopt more transparent and resilient practices. The firm's capital-strengthening efforts and cost management initiatives are commendable, but their success will ultimately depend on the Supreme Court's ruling and the FCA's enforcement approach. For investors, the key takeaway is clear: resilience in UK automotive finance requires not just financial fortitude, but a proactive commitment to aligning with evolving regulatory expectations.