Close Brothers plunges as short seller claims it understated UK car finance risks

Shares in Close Brothers fell sharply after Viceroy Research published a note warning the lender had “systematically misrepresented” its exposure to a motor finance mis-selling scandal and that provisions may need to be substantially increased.

Close Brothers shares fall after Viceroy warning

The FTSE 250 bank’s stock dropped as much as 12 per cent during afternoon trading following the note from Viceroy Research, a group known for past exposés. Viceroy said the bank will have to “at least” double its existing provisions after its examination of the watchdog’s redress scheme, and in a bear case predicted the lender could face regulatory intervention or a restructuring that would leave shareholders “substantially wiped out. “

Potential capital hit and mechanics cited by short seller

Viceroy argued that an amplified provisioning requirement could erode Close Brothers’ capital to such an extent that a switch on £200m of the bank’s debt would be triggered, meaning that debt could be cancelled or converted into new shares. The note warned that in a worst-case scenario a hole of £1. 2bn could materialize in the lender’s financial safety net.

The context for the warnings is a bank exposure of £300m tied to the car finance mis-selling saga, after Close Brothers increased its provisions by a further £135m in October. Viceroy said the bank is an outlier on the use of discretionary commission arrangements with figures cited in the note, and predicted a substantial uplift in provisioning needs when the watchdog’s scheme is finalised.

Regulatory process, company response and next steps

The Financial Conduct Authority is due to set out the full details of an industry-wide redress scheme later this month following a Supreme Court dispute over discretionary commission arrangements. The Court of Appeal earlier found many of the commission deals unlawful, and while lenders won on two of three appeals at the highest court, the watchdog has moved to an industry-wide approach on redress on the grounds of unfairness.

Close Brothers issued a statement saying it “strongly disagrees” with Viceroy’s findings and that its provisioning approach “is in accordance with UK-adopted international accounting standards and follows a robust governance process. ” The Viceroy note comes ahead of Close Brothers providing markets with an update on its financial results on Tuesday morning.

The immediate market reaction and the short seller’s scenarios leave the bank facing increased scrutiny over its motor finance exposures and how potential further provisions would interact with regulatory capital rules. The story remains centered on the forthcoming FCA redress scheme and the lender’s scheduled update to markets.