Close Brothers has announced plans to cut around 600 jobs, equivalent to about a fifth of its workforce, as the lender accelerates a major cost-cutting program in response to increasing pressure from the mis-selling scandal in the motor finance sector.
The restructuring, confirmed by chief executive Mike Morgan, will reduce headcount to around 2,000 over the next 21 months and is aimed at restoring investor confidence following a re-examination of the group’s potential compensation liabilities. The move comes amid increased market volatility after short seller Viceroy Research claimed the lender’s total compensation bill could be as high as £1.23 billion, far exceeding the company’s current provision of £300 million.
Close Brothers shares came under sustained pressure, falling sharply to start the week and continuing to fall as investors digested the extent of the potential exposure. The lender is widely seen as one of the UK’s financial institutions most affected by the car finance scandal relative to its size, with car loans making up around £2bn of its £9.5bn loan portfolio.
The scandal, which first emerged two years ago, revolves around lenders failing to adequately disclose the commissions paid to car dealers for arranging financing. The Financial Conduct Authority is expected to present its final compensation scheme shortly. Previous estimates suggested the industry’s total bill could reach £11 billion.
Morgan defended the bank’s approach to estimating its liabilities, insisting the £300m provision reflected a probability-weighted valuation in line with accounting standards and was supported by legal and audit advice. However, the refusal to disclose detailed assumptions behind this number has fueled investor skepticism and opened the door to more aggressive outside estimates.
The chief executive rejected Viceroy’s analysis but acknowledged that the final outcome was uncertain. He said the ultimate cost could be “significantly higher” or “significantly lower” depending on how the regulator structures compensation and how many borrowers make claims.
Against this backdrop, Close Brothers is working aggressively to transform its cost base. The group has already sold its winter flood brokerage and asset management businesses, scaled back growth plans and suspended its dividend to conserve capital. The latest measures focus on streamlining operations in core areas, including retail lending and commercial finance, where the majority of job losses are expected to decline.
The restructuring will incur upfront costs of around £25m but is expected to result in annual savings of £60m by the end of 2027. The company said it will centralize shared services, reduce reliance on third-party providers and reduce real estate and operational costs as part of a broader increase in efficiency.
Artificial intelligence will also play a growing role in the transformation, with the bank aiming to deploy AI tools “rapidly” to reduce costs and improve customer experiences. The move reflects a broader trend in the financial services sector, where companies are increasingly turning to automation and digitalization to address increasing regulatory and operational pressures.
Despite the cost-cutting program, Close Brothers reported mixed interim results. The group posted a statutory loss of £65.5 million in the six months to January, an improvement on the loss of £102.2 million a year earlier. Adjusted operating profit fell from £80.5m to £65.2m, reflecting ongoing headwinds.
The core capital ratio improved to 14.3 percent and was therefore well above the regulatory requirements, which provides some reassurance with regard to the strength of the balance sheet. But analysts warn that a significantly higher compensation bill could erode that buffer and significantly impact shareholder value.
The situation is drawing comparisons to the Payment Protection Insurance (PPI) scandal, which ultimately cost Britain’s banks more than £50 billion, went well beyond initial provisions and left investors wary of underestimating liabilities in cases of mis-selling.
Morgan insisted that lessons from the PPI episode had influenced the bank’s current approach, arguing that regulatory scrutiny and accounting standards were now far more stringent. Still, the combination of regulatory uncertainty, investor skepticism and operational restructuring highlights the scale of the challenge facing the lender.
With the FCA’s final decision imminent and market confidence fragile, Close Brothers is entering a critical phase that will determine both the ultimate financial impact of the scandal and the success of its efforts to restore credibility with shareholders.
