(Reuters) -British lender Close Brothers’ shares plunged nearly 18% on Tuesday after the company raised its estimate for legal costs this year as it grapples with uncertainties around claims related to motor finance regulations, which are being challenged by the industry.
The company’s shares hit their lowest level since January 2024 and were the biggest loser on London’s small-cap index after Close Brothers also flagged margin pressures.
Last week, Britain’s Financial Conduct Authority said it would likely consult on an industry-wide scheme to compensate motor finance customers if the Supreme Court ruled that lenders and brokers should have been more transparent about commissions.
London’s Court of Appeal ruled in October that it was unlawful for car dealers to receive commission from banks without a customer’s informed consent. This order has been challenged in the Supreme Court, with a hearing expected on April 1.
Close Brothers, which focuses on lending to small businesses, said it expects costs associated with handling those complaints and other legal expenses to be about 22 million pounds ($28.56 million) for the fiscal year ending July 31.
It had previously projected those costs to be about 10-15 million pounds.
It said it has set aside 165 million pounds for possible claims, unchanged from its estimate last month, with total direct and indirect costs associated with motor finance claims to be about 200 million pounds.
Close Brothers has made efforts to manage its capital by limiting lending, disposing of its wealth business following a strategic review, not paying a dividend and cutting costs wherever possible.
“The business is well capitalised post the disposal of (its wealth business) and other capital measures … but the wildcard remains motor finance where … a wide range of possible outcomes could still come to pass,” Panmure Liberum analysts said in a note.
Close Brothers forecast its net interest margin for the full year would be around 7%, lower than the 7.3% reported for the first half, after it reported on Tuesday a 15% fall in adjusted operating profit for the six months to January 31 due to higher costs.
($1 = 0.7702 pounds)
(Reporting by Pushkala Aripaka in Bengaluru; Editing by Janane Venkatraman and Susan Fenton)
