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Close Brothers Stock Flags amid Scrutiny from UK FCA

Close Brothers Stock Flags amid Scrutiny from UK FCA

by Starling Insights

Starling Insights Editorial Board

Feb 08, 2024

Observations

UK bank Close Brothers has lost one-third of its value since the start of 2024. According to Bloomberg, the Close Brothers' share price has flagged amid ongoing reviews by the Financial Conduct Authority (FCA) into two markets in which the bank operates.

In January, the FCA launched an investigation into auto lenders' use of "discretionary commissions," which incentivized finance brokers and dealers to raise interest rates on auto loans until the practice was banned in 2021. The probe, which will look at lenders' conduct as far back as 2007, may cost the industry up to £13 billion. 

RBC Capital has since downgraded the bank's ratings due to its exposure to the auto lending scandal as well as for offering insurance premium financing where a loan is taken out to pay the premium on an insurance policy. The FCA has called insurance premium financing a "poverty premium," indicating its intention to crack down on the practice.

"Management are under pressure here," said RBC analyst Benjamin Toms of Close Brothers. “They will have to weigh up keeping income investors happy against making sure that capital is robust enough to potentially take a large hit from motor finance.”

In our 2022 Deeper Dive"The Costs of Misconduct," we discuss the massive fines and societal impact stemming from misconduct in the financial sector, and whether they can be treated even tacitly as “costs of doing business.”

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