Close Brothers Group PLC (LSE:CBG) shares jumped almsot 17% after the merchant bank said it expects to face costs of about £320 million from the UK motor finance redress scheme.
This new estimate compares with an existing provision of £294 million set aside as of January and reflects the Financial Conduct Authority’s policy statement last week on compensating customers for historic commission arrangements on car loans.
The company said no changes have yet been made to its existing provision, which remains under review.
The FCA redress scheme covers around 720,000 loans written by the company between April 2007 and November 2024. Of these, Close Bros said about 640,000 relate to discretionary commission arrangements, with a further 80,000 potentially captured under other criteria set by the regulator.
Management has assumed an average payout of about £500 per customer, which is below the FCA's industry estimate of £829, reflecting smaller loan sizes and lower commission levels in its book.
The group expects around 75% of eligible customers to claim. A 5% change in that rate would move the total cost by roughly £18 million.
Implementation costs are estimated at £66 million, excluding £14 million already incurred. Payments are expected to run from summer 2026 to the end of the 2027 calendar year.
If taken in isolation, the £320 million hit would reduce the group’s CET1 capital ratio by around 25 basis points to 14.0%. That remains above its medium-term target range of 12-13%.
The company said it will continue to monitor legal and regulatory developments, including potential challenges to the scheme, before making any final adjustments.
Broker Panmure Liberum said the new total is "only modestly higher" than the carrying value of the provision, "so can be easily absorbed into existing capital resources".
Previously trying to determine the impact was "largely a guessing game", the broker added, but the new figure is based solely on the updated FCA framework published last week, providing "significantly more confidence that the doomsday scenario has been ruled out, which should reduce the noise and volatility surrounding the shares allowing the company to finally begin to move on".
With the company stating it is currently considering its next steps, with no provision changes recognised at this stage, Panmure said its main takeaway is that "this should provide the market with confidence that the company will have to avoid an equity raise to fund the redress scheme".
Analysts at UBS said that while it is difficult for any bank to be certain on the total take-up rate, they think the provision "should be taken positively" in light of the much larger provision top-up by FirstRound announced yesterday, and reports from Viceroy Research published before and after the FCA finalised its scheme design.
Further provision requirements are "likely modest", said the analysts, which last month upgraded Close Bros to a 'buy' rating on the basis that the valuation was discounting "too much" motor provision requirements.
The shares rose 16.8% to 455p on Wednesday morning, the highest since early March.
** UPDATE: Adds share price and broker comments **