Close Brothers, one of the UK's largest motor finance providers, is preparing to set aside up to £165 million in the first half of its financial year to cover potential legal and compensation costs stemming from a car loans commission scandal.

This scandal has prompted the Financial Conduct Authority (FCA) to warn major car lenders, including Close Brothers and Lloyds, to reserve cash for potential payouts, with sector-wide estimates ranging from £8 billion to £13 billion.

Close Brothers is at the center of this crisis, facing compensation claims due to undisclosed commission payments in car finance deals.

A landmark ruling in October 2024 determined that car dealers cannot receive commission from lenders without customer consent, which may lead to an increase in consumer complaints.

This ruling followed a successful court case by consumers against FirstRand Bank and Close Brothers, declaring the undisclosed commissions unlawful.

Despite the ongoing investigations and appeals by the FCA, the estimates for potential compensation costs remain uncertain.

In anticipation of these costs, Close Brothers has strengthened its capital position by selling its wealth management division for approximately £200 million in September 2024.

The company has also canceled its dividend and plans to raise £400 million to bolster its balance sheet amid these challenges.

Other lenders, such as Lloyds Banking Group and Santander UK, have already set aside significant provisions for potential compensation, with Lloyds reserving £450 million.

Analysts have raised the overall cost estimate for the scandal to as much as £44 billion following the court ruling, indicating a substantial financial impact on the sector.

On February 12, 2025, Close Brothers' shares rose by 1% as the Treasury submitted an application to provide evidence in the Supreme Court case, advocating for proportionate redress.

Close Brothers and FirstRand have been granted permission to appeal the court ruling, with the FCA planning to intervene at the Supreme Court level.